-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QUtR6ZIW8qm1XTHohLlqKaCifEkrjgQyNjTWDNYsHMCR48n30J6W0ttT61uqqeZ5 Ka2J2HRtyrA9lqba70Giww== 0000950117-05-004784.txt : 20051216 0000950117-05-004784.hdr.sgml : 20051216 20051216113623 ACCESSION NUMBER: 0000950117-05-004784 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20051213 FILED AS OF DATE: 20051216 DATE AS OF CHANGE: 20051216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COOLBRANDS INTERNATIONAL INC CENTRAL INDEX KEY: 0001005531 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 000000000 STATE OF INCORPORATION: A5 FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27476 FILM NUMBER: 051268729 BUSINESS ADDRESS: STREET 1: 8300 WOODBINE AVE 5TH FL STREET 2: MARKHAM ONTARIO CITY: CANADA L3R 9Y7 STATE: A6 BUSINESS PHONE: 5167379700 MAIL ADDRESS: STREET 1: 8300 WOODBINE AVENUE STREET 2: MARKHAM ONTARIO CITY: CANADA L3R 9Y7 STATE: A6 ZIP: L3R 9Y7 FORMER COMPANY: FORMER CONFORMED NAME: YOGEN FRUZ WORLD WIDE INC DATE OF NAME CHANGE: 19960103 6-K 1 a41018.txt COOLBRANDS INTERNATIONAL INC. FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of December, 2005 Commission File No. 000-27476 CoolBrands International Inc. (Translation of registrant's name into English) 8300 Woodbine Avenue, Markham, Ontario Canada L3R 9Y7 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1)____________ Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7)____________ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-____________ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COOLBRANDS INTERNATIONAL INC. Date: December 16, 2005 By: /s/ Aaron Serruya ----------------------------------- Name: Aaron Serruya Title: Executive Vice President INDEX TO EXHIBITS Exhibit 99.1 Registrant's Press Release regarding financial results for the year and fourth quarter of fiscal 2005. Exhibit 99.2 Registrant's Management's Discussion and Analysis. Exhibit 99.3 Registrant's Annual Information Form for fiscal year ended August 31, 2005. Exhibit 99.4 Registrant's Audited Financial Statements for the fiscal years ended August 31, 2005 and August 31, 2004, together with Auditors' Report of BDO Dunwoody LLP. Exhibit 99.5 Unaudited Interim Financial Statements of Registrant for the period ended May 31, 2005. Exhibit 99.6 Unaudited Interim Financial Statements of Registrant for the period ended February 28, 2005. Exhibit 99.7 Unaudited Interim Financial Statements of Registrant for the period ended November 30, 2004. Exhibit 99.8 Form 52-109F2 - Certifications of President and Chief Executive Officer to Registrant's Interim Filings. Exhibit 99.9 Form 52-109F2 - Certifications of Chief Financial Officer to Registrant's Interim Filings Exhibit 99.10 Form 52-109F1 - Certifications of President and Chief Executive Officer and Chief Financial Officer to Registrant's Annual Filing.
STATEMENT OF DIFFERENCES The trademark symbol shall be expressed as.............................. 'TM' The registered trademark symbol shall be expressed as................... 'r' EX-99 2 ex99-1.txt EXHIBIT 99.1 COOLBRANDS INTERNATIONAL, INC. 8300 Woodbine Avenue, 5th Floor Contact: David J. Stein Markham, Ontario, Canada, L3R 9Y7 Telephone: (631) 737-9700(x216) FOR IMMEDIATE RELEASE: December 13, 2005 COOLBRANDS INTERNATIONAL INC. REPORTS FINANCIAL RESULTS FOR THE YEAR AND FOURTH QUARTER OF FISCAL 2005 Company Announces Corporate Governance Enhancements, Including Timetable to End Dual Class Voting Structure CoolBrands International Inc. (TSX: COB.SV.A) today announced its operating results for fiscal 2005 and fourth quarter ended August 31, 2005, and provided details on enhancements to its corporate governance practices. In 2005, the Company adopted generally accepted accounting principles in the United States ("U.S. GAAP") and changed its reporting currency from Canadian dollars to U.S. dollars. For comparative purposes, historical financial statements and amounts disclosed in this press release have been restated to reflect these changes. Operating results For fiscal 2005, net revenues declined to $385,070,000 as compared with $449,938,000 for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was $74,070,000 ($1.32 basic and diluted loss per share) as compared with net earnings of $23,512,000 ($0.42 basic and diluted earnings per share) for fiscal 2004. Net revenues for the fourth quarter of fiscal 2005 decreased to $124,055,000 from $129,052,000 for the same quarter last year, a 3.9% decrease. Net loss for the fourth quarter was $64,093,000 ($1.15 basic and diluted loss per share) as compared with net earnings of $12,484,000 ($0.22 basic and diluted earnings per share) for the same quarter last year. The 2005 results for the fiscal year and fourth quarter were adversely affected by the non-cash pre-tax asset impairment charge of $55,525,000 (Nil in 2004), which resulted from the impairment of goodwill and intangible assets related to the Company's frozen dessert and franchising segments. "Our financial performance for the quarter and full year 2005 reflected the loss of two significant brands, as well as unfavorable industry dynamics throughout the year," said David J. Stein, President, CEO and Co-Chairman of CoolBrands International Inc. "Our strategy is to aggressively rebuild and refocus our brand portfolio, including through further development of Breyers Yogurt, in which we acquired both an established brand in a high growth category, and a platform for further refrigerated products brand introductions." "Our strategy is being implemented in 2006 in the refrigerated category with an all natural reformulation of Breyers Yogurt, and in the frozen category through the introduction of a broad range of new Godiva Ice Cream offerings, a national rollout of Yoplait Frozen Yogurt and Cereal Bars and the launch of an exciting new line of "better for you" frozen snacks for kids featuring popular Disney characters under license from Disney Consumer Products, our newest licensing partner," Mr. Stein added. "The Disney products will be in innovative forms featuring vitamin fortification and will be introduced in early 2006 at retail outlets nationwide in the U.S." "As part of these rebuilding efforts," Mr. Stein further added, "CoolBrands is evaluating the potential disposition of various non-core business assets, including its franchising business. While the Corporation is currently in late-stage discussions on certain such transactions, there can be no assurance that any particular transaction will be effected." "I am also pleased that our Company is continuing to act on the governance recommendations of our Board of Directors. The Board's commitment to adoption of better governance practices will help make Coolbrands better able to deliver the best possible results for our shareholders," Mr. Stein concluded. The decrease in net revenues for fiscal 2005 reflects the decrease in net sales and the decreases in drayage income. Net sales for fiscal 2005 declined by 10.3% to $364,686,000 in 2005 as compared with $406,470,000 for 2004. This decrease reflects a reduction in sales volume, as well as an increase in trade promotion payments to customers for promotions with consumers. The decline in net sales came principally from the discontinuation of sales of Weight Watchers Smart Ones brand products and the decline in sales of Atkins brand products, but declines also came from our other frozen dessert brands. These sales declines were partially offset by sales from newly introduced frozen dessert products, the acquisition of the Breyers Yogurt business on March 27, 2005 and the increase in sales as a result of the change in the business arrangement with Dreyer's Grand Ice Cream Holding, Inc. ("Dreyer's"). Effective September 1, 2004, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale, instead of delivering products to customers on a drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. During the forth quarter, all of the foregoing factors were present, however, net sales increased by 0.4% due to sales of $26,397 from the acquired Breyers Yogurt business, which more than offset other declines. Gross profit percentage for fiscal 2005 declined to 0.8% as compared to 19% for fiscal 2004, primarily due to (1) the increase in trade promotion payments to customers, (2) write downs for obsolete and slow moving inventories, (3) the impact of fixed overhead costs in our manufacturing and distribution operations resulting from the decrease in sales, and (4) product mix changes. Selling, general and administrative expenses for fiscal 2005 increased as a percentage of revenues to 13.6% as compared to 11.5% for fiscal 2004 primarily due to the decline in revenues and certain write offs related to inactive or expired license agreements. In accordance with U.S. GAAP, the Company recognized $1,918,000 and $30,983,000 in stock-based compensation expense representing the estimated fair value of stock options earned during 2005 and 2004, respectively. Cash and working capital Cash, investments and restricted cash decreased to $41,562 at August 31, 2005 from $64,327 at August 31, 2004. Working capital declined to $28,469 at August 31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August 31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and current liabilities are attributable to the use of cash and short term debt to finance the Company's acquisitions and fixed asset purchases. CoolBrands is currently negotiating with lenders to refinance its short term borrowings, including $40,000 due January 3, 2006 and $7,145 due January 10, 2006. Comparability of results The Company's 2005 financial statements reflect the March 27, 2005 acquisition of the Breyers Yogurt business. This acquisition was accounted for under the purchase method of accounting and the 2005 Consolidated Statement of Operations includes the results of this acquisition from the date of acquisition. In fiscal 2005, the revenues and operating results from the Breyers Yogurt business represent five months of activity as compared with no activity in fiscal 2004. The third quarter of fiscal 2006, ending May 31, 2006, will be the first quarter following this acquisition in which the Consolidated Statement of Operations for the quarter can be directly compared with the prior-year period. Corporate Governance Changes As previously announced, following the election of additional independent directors at the last annual and special shareholders' meeting, the board of directors of CoolBrands formed a Corporate Governance Committee consisting of three independent directors to review CoolBrands' corporate governance practices and to recommend changes with respect to these practices to the board of directors. Based on the recommendations of the Corporate Governance Committee, CoolBrands is instituting the following changes and initiatives: o Collapse of Dual Class Structure - CoolBrands will propose a special resolution to its holders of multiple voting shares and holders of subordinate voting shares at the upcoming annual and special meeting scheduled for February 27, 2006. If passed, the special resolution will result in the change of each multiple voting share and each subordinate voting share into one common share on May 31, 2007, unless the independent directors of CoolBrands unanimously determine to effect the change earlier. Aaron Serruya, Michael Serruya, David Smith and David Stein, and entities affiliated with them (collectively, the "Management MVS Holders"), have each entered into a voting agreement with the Corporation pursuant to which they each agreed to vote all of the shares that they beneficially own or control in favour of the special resolution. The Management MVS Holders beneficially control, in the aggregate, 5,986,043 multiple voting shares (representing approximately 99% of the issued and outstanding multiple voting shares) and 120,449 subordinate voting shares (representing less than 1% of the issued and outstanding subordinate voting shares). Currently, each multiple voting share carries 10 votes, and each subordinate voting share carries one vote. Following the change to the Corporation's dual class structure becoming effective, each common share will carry one vote. The change will not result in any conversion premium being paid to the holders of the multiple voting shares. o Board Representation Agreement and Trust Agreement - upon the change to the Corporation's dual class structure becoming effective, these agreements will terminate. In the meantime, the parties have agreed that all nominations for membership on the board of directors of the Corporation made by the Corporation will be made by the Corporate Governance Committee. Copies of the Board Representation Agreement and the Trust Agreement are available on the Internet at www.sedar.com. o Continuance under the Canada Business Corporations Act - at its upcoming annual and special meeting, CoolBrands will propose a special resolution to its holders of multiple voting shares and holders of subordinate voting shares to continue the Corporation under the Canada Business Corporations Act. If passed, this will allow the Corporation to be governed by a more modern corporate statute than the Nova Scotia Companies Act, under which the Corporation is currently organized. o Lead director - as previously announced, the Corporation has appointed Robert E. Baker as lead director of the board of directors of CoolBrands. The board of directors has also adopted written terms of reference for the position of lead director and for the Co-Chairmen of the Corporation. o Committee Charters - the board of directors has adopted written charters for each of the Audit Committee, Compensation Committee and Corporate Governance Committee. o Code of Conduct - the board of directors has adopted a corporate Code of Conduct which applies to all employees, officers and directors of the Corporation. As part of the Corporate Governance Committee's ongoing mandate, it will continue to monitor the Corporation's corporate governance practices and those of "best practices" with a view to making further recommendations from time to time as it determines appropriate. Copies of the voting agreement entered into by the Corporation and the Management MVS Holders, the terms of reference of the Lead Director and the Co-Chairmen, the committee charters and CoolBrands' Code of Conduct are all available at www.coolbrandsinc.com. Michael Serruya, Co-Chairman of CoolBrands and a holder of a significant number of the multiple voting shares of CoolBrands commented: "These best practice corporate governance changes, and in particular the elimination of the dual class share structure, are further steps in management's and the board of directors' commitment to the partnership we are building with all our shareholders." Robert E. Baker, Lead Director of CoolBrands stated: "We have been listening to our shareholders and have concluded a timetable for the ending of the dual class structure that we believe is in the best interests of the Company and our shareholders. Although we considered an immediate collapse of the structure, the board of directors and management, after careful consideration over several months, determined that an immediate action could jeopardize the Company's ability to stabilize the business and maximize value for our shareholders, given the several extraordinary events of the past year, including the loss of the Weight Watchers product line, the untimely death of our former Co-Chairman Richard Smith, and the need to refocus and reinvigorate our business plan and strategy." Filing Default Correction Further to the Corporation's press release dated November 23, 2005 in which CoolBrands stated that it would not meet the statutory filing deadline for its audited annual financial statements, related management's discussion and analysis and annual information form for its financial year ended August 31, 2005, the Company announces that it has today filed these items with the applicable Canadian securities regulators and CoolBrands therefore expects that the management cease trade order related to CoolBrands' securities and imposed against all of the directors and certain officers CoolBrands will be lifted in due course. Conference Call and Webcast The Company will hold a conference call to discuss its fourth quarter results on December 19, 2005 at 8:30 AM Eastern time. Persons wishing to participate in the call should telephone 1-866-862-3928 in North America; International participants should call (416) 641-6142. The call will also be webcast live on the following Internet site at: http://events.startcast.com/events/188/B0001 and subsequently archived at: www.coolbrandsinc.com and http://events.startcast.com/events/188/B001 CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2005 and August 31, 2004 - -------------------------------------------------------------------------------- (in thousands of dollars)
2005 2004 -------- -------- Assets Current Assets: Cash $ 24,062 $ 36,277 Investments 7,500 28,050 Restricted cash 10,000 Receivables, net 54,526 67,152 Receivables - affiliates 1,840 3,883 Inventories 49,955 49,076 Income taxes recoverable 9,767 Prepaid expenses 2,413 1,203 Deferred income taxes 5,148 4,907 -------- -------- Total current assets 165,211 190,548 Deferred income taxes, net of valuation allowance 14,799 13,711 Property, plant and equipment 47,639 28,730 Intangible and other assets 22,369 12,180 Goodwill 47,827 72,088 -------- -------- $297,845 $317,257 ======== ======== Liabilities and Shareholders' Equity 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 ======== ========
CoolBrands International Inc. Consolidated Statements of Operations - -------------------------------------------------------------------------------- (Unaudited) (in thousands of dollars, except share data)
For the year ended For the three months ended ----------------------- -------------------------- August 31, August 31, August 31, August 31, 2005 2004 2005 2004 ---------- ---------- ----------- ---------- Net revenues: Net sales $364,686 $406,470 $118,893 $118,457 Royalties, licensing, and consumer products license revenues 6,138 3,595 1,753 1,287 Drayage and other income 14,246 39,873 3,409 9,308 -------- -------- -------- -------- Total net revenues 385,070 449,938 124,055 129,052 -------- -------- -------- -------- Cost of goods sold 361,668 329,346 116,178 93,696 Selling, general and administrative expenses 52,172 51,688 19,688 17,115 Stock-based compensation expense 1,918 30,983 1,675 Interest expense 2,586 1,498 1,119 268 Asset impairment 55,525 54,124 Gain on sale of building (3,634) (3,634) -------- -------- -------- -------- (Loss) earnings before income taxes and minority interest (85,165) 36,423 (65,095) 17,973 Minority interest (2,700) (958) (453) (1,532) -------- -------- -------- -------- (Loss) earnings before income taxes (82,465) 37,381 (64,642) 19,505 (Recovery of) provision for income taxes: (8,395) 13,869 (549) 7,021 -------- -------- -------- -------- Net (loss) earnings $(74,070) $ 23,512 $(64,093) $ 12,484 ======== ======== ======== ======== Per share data: Basic (loss) earnings per share: Basic and diluted $ (1.32) $ .42 $ (1.15) $ .22 ======== ======== ======== ======== Weighted average shares outstanding: Shares used in per share calculation - basic 55,924 55,441 55,947 55,890 Shares used in per share calculation - diluted 55,924 56,329 55,947 56,332
CoolBrands International Inc. Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- (Unaudited) (in thousands of dollars)
For the year ended For the three months ended August 31, August 31, ------------------- -------------------------- 2005 2004 2005 2004 -------- -------- ----------- ------------ Cash and short-term investments provided by (used in): Operating activities: Net (loss) earnings $(74,070) $ 23,512 $(64,093) $ 12,484 Adjustments to reconcile net (loss) net earnings to net cash flows from operating activities Depreciation and amortization 5,042 7,314 927 4,015 Asset impairment 55,525 54,124 Stock-based compensation expense 1,918 30,983 1,675 Deferred income taxes 1,798 (15,314) 5,052 (1,615) Gain on sale of building (3,634) (3,634) Minority interest (2,700) (958) (453) (1,532) Cash effect of changes, net of the effects from businesses acquired Receivables 13,815 (21,115) 8,553 268 Receivables - affiliates 2,043 (1,464) 1,832 (267) Allowance for doubtful accounts (56) 126 (525) (306) Inventories 4,500 (6,845) 8,985 7,715 Prepaid expenses (2,207) 6,252 222 7,203 Income taxes recoverable (9,767) 761 Accounts payable 15,842 16,740 4,484 (13,282) Payables - affiliates (230) 277 370 46 Accrued liabilities 8,744 (4,843) (3,904) (7,095) Income taxes payable (4,935) 9,319 (5,584) (728) Other assets (513) 53 (669) 180 Other liabilities 124 (268) 71 (156) -------- -------- -------- -------- Cash provided by operating activities 11,239 43,769 8,194 6,930 -------- -------- -------- -------- Investing activities: Purchase of property, plant and equipment (12,409) (13,363) (3,484) (4,946) Purchase of intangible assets (76) (76) Purchase of license agreements (26) (300) 54 Proceeds from sale of building 5,434 5,434 Increase in restricted cash (10,000) (10,000) Purchase of investments (2,500) (33,050) (20,000) Redemption of investments 23,050 5,000 5,000 5,000 Acquisitions, net of cash acquired (59,609) Increase in notes receivable (28) Collection of notes receivable 65 23 41 1 -------- -------- -------- -------- Cash used in investing activities (56,023) (41,766) (3,009) (19,967) -------- -------- -------- -------- Financing activities: Change in revolving line of credit, secured 2,661 1,514 1,438 1,514 Capital contributions from minority interest 8,907 Proceeds from short term borrowings 44,553 Return of capital contribution to minority interest (2,000) Proceeds from issuance of Class A and B shares 57 12,286 23 Repayment of short term borrowings (10,000) (10,000) (4,765) Repayment of long-term debt (4,007) (5,781) (877) (784) -------- -------- -------- -------- Cash provided by financing activities 33,264 14,926 (9,439) (4,012) -------- -------- -------- -------- Decrease in cash flows due to changes in foreign exchange rates (695) (2,412) 3,473 (5,126) -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents (12,215) 14,517 (781) (22,175) Cash and cash equivalents - beginning of period 36,277 21,760 24,843 58,452 -------- -------- -------- -------- Cash and cash equivalents - end of period $ 24,062 $ 36,277 $ 24,062 $ 36,277 ======== ======== ======== ========
CoolBrands International Inc. Summary Financial Data - -------------------------------------------------------------------------------- (in thousands of dollars, except share data):
For the year ended For the three months ended ----------------------- -------------------------- August 31, August 31, August 31, August 31, 2005 2004 2005 2004 $ $ $ $ ---------- ---------- ---------- ---------- Net revenues 385,070 449,938 124,055 129,052 (Loss) earnings before income taxes (82,465) 37,381 (64,642) 19,505 (Recovery of) provision for income taxes: (8,395) 13,869 (549) 7,021 Net (loss) earnings (74,070) 23,512 (64,093) 12,484 Basic (loss) earnings per share: Basic and diluted: $ (1.32) $ .42 $ (1.15) $ .22 Depreciation and amortization 5,042 7,314 927 4,015 Interest expense 2,586 1,498 1,119 268 Weighted average number of shares outstanding: Shares used in per share calculation - basic 55,924 55,441 55,947 55,890 Shares used in per share calculation - diluted 55,924 56,329 55,947 56,332
About CoolBrands International: CoolBrands International is a leading marketer of dairy based snacks in the refrigerated and frozen snack foods categories. In the frozen snack foods category, CoolBrands manufactures and distributes such well known brands as Godiva Ice Cream, Whole Fruit Sorbet, Eskimo Pie frozen snacks, Tropicana Fruit Bars, Chipwich Ice Cream Cookie Sandwiches and many others. In the refrigerated dairy category, CoolBrands manufactures and distributes Breyer's Yogurt and Creme Savers Yogurt. CoolBrands operates a "direct store delivery" (DSD) ice cream distribution system in selected markets in the U.S., serving 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 soft serve mixes, packaged ice cream, frozen yogurt and sorbet products, frozen snacks and other food products to well known national retailers, food companies and restaurant chains. CoolBrands' Foodservice Division manufactures and sells premium soft serve ice cream and frozen yogurt to the foodservice industry. CoolBrands' Dairy Components Division manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, egg nog bases and other ingredients and flexible packaging products for use in private label dairy products in addition to the Company's brands. 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. For more information about CoolBrands, visit www.coolbrandsinc.com. Forward Looking Statements This press release includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, statements relating to goals, plans and projections regarding the Company's financial position and business strategy. These statements may be identified by the fact that they use such words as "anticipate," "estimate," "expect," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things, market factors, competitive product development and promotional activity, the level of consumer interest in the Company's products, product costing, the weather, the performance of management, including management's ability to implement its plans as contemplated, the Company's relationship with its customers, franchisees, licensees and licensors, governmental regulations and legislation and litigation. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. -30- EX-99 3 ex99-2.txt EXHIBIT 99.2 MANAGEMENT'S DISCUSSION AND ANALYSIS This management's discussion and analysis ("MD&A") addresses the results of operations and financial position of CoolBrands International Inc. ("CoolBrands" or the "Company") for the fiscal year ended August 31, 2005 compared to the fiscal year ended August 31, 2004. This MD&A is dated December 13, 2005 and has been approved by the board of directors of CoolBrands on the recommendation of the Audit Committee. This MD&A should be read in conjunction with the Company's audited consolidated financial statements and the related notes, which may be accessed on the Internet at www.sedar.com. Additional information relating to the Company, including the Company's Annual Information Form, can also be accessed on the SEDAR website. Unless otherwise indicated, all financial information herein is prepared in accordance with United States generally accepted accounting principles and all dollar amounts referred to herein are in thousands of United States dollars, except per share data. The information in this document contains certain forward-looking statements with respect to CoolBrands International Inc., its subsidiaries and affiliates. These statements are often, but not always made through the use of words or phrases such as "expect", "should continue", "continue", "believe", "anticipate", "estimate", "contemplate", "target", "plan", "budget" "may", "will", "schedule" and "intend" or similar formulations. By their nature, these forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant, known and unknown, business, economic, competitive and other risks, uncertainties and other factors affecting CoolBrands specifically or its industry generally that could cause actual performance, achievements and financial results to differ materially from those contemplated by the forward-looking statements. These risks and uncertainties include the tastes and preferences of the global retail consumer of CoolBrands' products; the ability of CoolBrands to be competitive in the highly competitive U.S. market for frozen desserts fluctuations in consumption of CoolBrands' products and services as a result the seasonal nature of the frozen dessert industry; the ability of CoolBrands to retain or acquire shelf space for its products in supermarkets, club stores and convenience stores; the ability of CoolBrands to effectively manage the risks inherent with mergers and acquisitions; the effect on foreign operation of political, economic and regulatory risks; currency risk exposure; the ability to recruit and retain qualified employees; changes in prices for raw materials; the ability of CoolBrands to pass on cost increases resulting from inflation and other risks described from time to time in publicly filed disclosure documents of CoolBrands and its subsidiaries and affiliates. In view of these uncertainties we caution readers not to place undue reliance on these forward-looking statements. CoolBrands disclaims any intention or obligation to update or revise any statements made herein, whether as a result of new information, future events or otherwise. Business Strategy The Company manufactures and distributes ice cream, sorbet, frozen yogurt and fresh yogurt and other refrigerated and frozen dairy-based snacks. The Company's line of ice cream and frozen dessert products is marketed throughout the United States and select markets in Canada and Europe. The "Breyers Yogurt" line of refrigerated yogurt products is marketed primarily in the eastern United States. The Company also manufactures and/or distributes frozen and refrigerated products for other companies (the "Partner Brands"). The Company's marketing strategy is based on management's belief that superior brand image can be combined with high quality and product innovation to develop products in the refrigerated and frozen snack food categories that will earn consumers' loyalty and deliver attractive margins and long-term revenue growth to the Company, and that brand licensing arrangements can help reduce costs, accelerate growth and maximize opportunities for success in building significant market share for the Company's products. The Company's objective is to develop brands - both owned and licensed, in both the frozen and refrigerated snack foods categories - that deliver these benefits to the Company and consumers of the Company's products. Brand Portfolio The Company's brands include, among others, the following: Breyers Yogurt. America's second leading brand for "fruit-on-the-bottom" yogurt, with a strong heritage of high quality, all natural dairy products. This brand, which the Company acquired from Kraft Foods in March 2005, is manufactured and distributed under license from Unilever. The Company's yogurt portfolio also includes the "Creme Savers Yogurt" product line manufactured and sold under license from Wm. Wrigley Jr. Company. Eskimo Pie. The original chocolate-coated ice cream bar, invented in 1921 and still one of the nation's best known ice cream snack brands. Eskimo Pies come in regular and no-sugar-added varieties, and have proven especially popular with diabetic consumers. The Company acquired the Eskimo Pie brand when it acquired Eskimo Pie Corporation in October 2000. Chipwich. The chocolate chip cookie ice cream sandwich that created the premium frozen snack category, Chipwich was acquired by the Company in July 2002. Whole Fruit Sorbet. The leading brand nationwide for all natural fruit sorbet sold in pint sized containers, Whole Fruit Sorbet was acquired from Dreyer's in July 2003. Godiva Ice Cream. The Company acquired the license rights to the Godiva trademark for ice cream from Dreyer's in July 2003 and manufactures and distributes Godiva Ice Cream in pints and ice cream bars under license from Godiva Chocolatier, Inc. No Pudge! Frozen Snacks. In 2005, the Company introduced its "No Pudge!" line of low fat frozen snacks under license from No Pudge! Foods, Inc., marketers of the popular low fat brownie mix. Tropicana Fruit Bars. Since 1997, the Company has manufactured and distributed Tropicana fruit bars under license from Tropicana Products, Inc. Snapple On Ice Pops. In 2005, the Company introduced its "Snapple On Ice" line of frozen juice pops, under license from Snapple Beverage Corp. Crayola Color Pops. In 2005, the Company introduced its "Crayola Color Pops" line of frozen snacks, under license from Binney & Smith Properties, Inc. The Company has continuously pursued acquisitions and new brand licensing partnerships in an effort to keep pace with rapid changes in consumer preferences and new trends in the snack food industry. During 2002, the Company acquired Chipwich and Fruit-a-Freeze. During 2003, the Company acquired three super-premium brands from Dreyer's Grand Ice Cream: Dreamery Ice Cream, Whole Fruit Sorbet and the license for Godiva Ice Cream. During 2004, as low-carb dieting became a powerful force throughout the food industry, the Company entered into a license with Atkins Nutritionals, Inc. to manufacture, sell and distribute Atkins Endulge super premium ice cream products for carb-conscious consumers. This license enabled the Company to realize significant revenue and earnings growth in 2004. However, in 2005 the rapid decline in low-carb dieting led to a similarly rapid decline in the Company's sales of Atkins Endulge Ice Cream. In July 2004, the Company learned that our license for Weight Watchers Smart Ones would not be extended beyond September 28, 2004, on which date our license would expire, subject to a negotiated nine-month period ended May 1, 2005 to sell off and balance out inventories. Primarily due to the decline in Atkins Endulge sales and the elimination of Weight Watchers Smart Ones from the Company's portfolio, the Company experienced significant erosion of its sales and market share in 2005, partially offset by several new product introductions, specifically the No Pudge!, Snapple On Ice and Crayola Color Pops. In 2005, the Company added significant diversity to its brand portfolio through the acquisition of Breyers Yogurt from Kraft Foods Inc. in March 2005. The Breyers brand gives the Company an established position in the market for refrigerated yogurt, one of the fastest growing food categories, and a platform for future brand development in the refrigerated snack foods category, including via the Company's license-based strategy. Distribution Channels The Company's products are offered for sale in a diverse range of retail outlets, including supermarkets, mass merchants, drug stores, convenience stores and club stores, as well as foodservice outlets, such as restaurants, cafeterias, theme parks and ice cream parlors. The Company also franchises and licenses ice cream parlors and frozen yogurt shops that offer the Company's products for sale. CoolBrands' Franchising division franchises and licenses frozen dessert outlets operated under a family of brands including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I Can't Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and Ice Cream Churn, with company-owned, franchised and non-traditional partnership locations around the world. The Company distributes its products primarily by direct shipment to 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 Brands. Significant current Partner Brands include Unilever, Masterfoods/M&M Mars and Dreyer's. In 2004, the Company enhanced its DSD system by acquiring the assets of Kinnett Distribution and integrating them into the Company's Atlanta, Georgia DSD operation. In 2005, the Company increased its penetration of the out-of-home (or "impulse") channel by introducing a complete line of single-serve frozen snacks under our proprietary brands, primarily Eskimo Pie, for DSD distribution. Also in 2005, the Company refocused its DSD operations in western states (California, Oregon and Washington) to reduce supermarket distribution operations in those markets in favor of increased focus on the impulse channel. Manufacturing Operations The Company manufactures its frozen products primarily at Americana Foods in Dallas, Texas, its 50.1% owned subsidiary. Americana Foods produces a diverse range of high quality soft serve mixes, packaged ice cream, frozen snacks and other similar products. In addition to Americana Foods, the Company manufactures its frozen products in Russellville, Arkansas at its Eskimo Pie Foodservice facility and in Norwalk, California at its Fruit-a-Freeze fruit bar plant. The Company also contracts with other companies to manufacture certain of the Company's frozen products. The Company manufactures its refrigerated yogurt products at its 100% owned subsidiary CoolBrands Dairy, Inc. in North Lawrence, New York. Americana Foods and CoolBrands Dairy also manufacture products for Partner Brands. The Company's Dairy Components division manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, eggnog bases and other ingredients, and flexible packaging products for use in private label dairy products, in addition to the Company's brands. Overall Performance In 2005, the Company adopted generally accepted accounting principles in the United States ("U.S. GAAP") and changed its reporting currency from Canadian dollars to U.S. dollars. For comparative purposes, historical financial statements and notes and Management's Discussion and Analysis have been restated to reflect these changes. For fiscal 2005, net revenues decreased to $385,070 as compared with $449,938, for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was ($74,070) (($1.32) basic and diluted loss per share) as compared with net earnings of $23,512 ($0.42 basic and diluted earnings per share) for fiscal 2004. The decrease in net revenues for fiscal 2005 reflects the decrease in sales, primarily from the frozen dessert segment, the increase in trade promotion payments made to customers, and the decline in drayage income. In fiscal 2005, net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. The decline in sales came from all of our frozen dessert brands, but principally from the Weight Watchers and Atkins. These sales declines were partially offset by the sales from newly introduced frozen dessert products, acquisition of the Breyers yogurt business on March 27, 2005 and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's"). Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales increases due to this change partially offset sales declines in our 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. The decline in gross profit percentage was primarily due to: 1. Increased trade promotion payments to customers, excluding the yogurt segment, which amounted to $52,359 and $32,913 in 2005 and 2004 respectively; 2. The write down of obsolete and slow moving finished goods inventories, packaging, and ingredients. This write down amounted to $12,723 in 2005 and was the result of a settlement of litigation with Weight Watchers International, a new labeling law which will become effective January 1, 2006, and a provision for slow moving inventories due to changes in consumer preferences; 3. Our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales; and 4. The change in mix of frozen dessert products being sold in 2005 with lower gross profit margins as compared with 2004. Selling, general and administrative expenses for fiscal 2005 increased as a percentage of revenues to 13.6% as compared with 11.5% for fiscal 2004. This increase occurred primarily due to the decline revenues. Selling, general and administrative expenses increased by $484 or 0.9% from $51,688 in 2004 to $52,172 in 2005. Selling, general and administrative expenses for 2005 and 2004 were adversely impacted by the write-off of certain license agreements and the write-off of deferred package design costs, primarily related to Weight Watchers, in 2005. These charges amounted to $2,358 and $3,684 in 2005 and 2004, respectively. In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123), the Company recognized stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which represents the estimated fair value of stock options earned during the respective fiscal years. The 2005 fiscal year results were adversely affected by the non-cash pre-tax asset impairment charge of $55,525 (Nil in 2004), which resulted from the impairment of goodwill and intangible assets related to the Company's frozen 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. Selected Annual Information The following chart shows selected annual information for the three most recently completed fiscal years.
Year ended August 31 ------------------------------ 2005 2004 2003 -------- -------- -------- Total net revenues $385,070 $449,938 $214,272 Net (loss) earnings (74,070) 23,512 16,833 Earnings per share Basic (1.32) 0.42 0.33 Diluted (1.32) 0.42 0.31 Total assets 297,845 317,257 223,661 Total long-term debt 60,962 27,754 32,022
CoolBrands' decline in total net revenues during fiscal 2005 reflects the decrease in net sales, primarily from the frozen dessert segment, partially offset by net sales gained from the acquisition of the Breyers yogurt business in March 2005 and the decline in drayage income. In fiscal 2005, net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. In fiscal 2005, drayage and other income decreased by 64.3% to $14,246 as compared with $39,873 for fiscal 2004. Revenue growth in fiscal 2004 and 2003 was the result of the successful introduction of new frozen dessert products in the Better for You category, the acquisition of 50.1% of Americana Foods effective July 1, 2003 and acquisition of certain assets from Dreyer's Grand Ice Cream, Inc. and Nestle Ice Cream Company LLC on July 6, 2003. CoolBrands' net loss in 2005 was primarily due to the substantial decline in net sales due to the loss of the Weight Watchers Smart Ones license agreement, the decline in net sales of the Atkins Endulge and other frozen dessert product lines and the resulting decrease in gross profit dollars, the $25,627 decline in drayage and other income and the asset impairment charge of $55,525. CoolBrands' net earnings in 2004 and 2003 reflected the growth in revenues and effective control of selling, general and administrative expenses. During this time, we developed and expanded our Better for You product lines, including Weight Watchers Smart Ones and Atkins Endulge. We obtained higher than normal gross profit margins and lower than normal promotion, marketing and advertising expenses due to the initial low level of competition in this niche category. Comparison of 2005 and 2004 We manage our business based on five industry segments: frozen 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 came from all of our frozen dessert brands, but principally from the Weight Watchers and Atkins. In connection with the settlement of the Weight Watchers litigation, CoolBrands agreed to discontinue the sale of all Weight Watchers products on May 1, 2005, approximately five months sooner than required by the Weight Watchers License Agreement. These declines in net sales were partially offset by the net sales from newly introduced frozen dessert products and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales 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. The decline in sales by our Dairy components segment reflects the decrease in sales due to the decline in the demand for Weight Watchers and Atkins ingredients and packaging from the Company's various contract manufacturers. Royalties, licensing, and consumer products license revenues Royalties, licensing and consumer products license revenues increased by 70.7% to $6,138 in fiscal 2005 from $3,595 in fiscal 2004 due primarily to the Whole Fruit license revenues the Company earned from Dreyer's of $3,103. The Company will continue to earn Whole Fruit license revenues through December 2005, estimated to be approximately $850. Drayage and other income Drayage and other income decreased by 64.3% to $14,246 in fiscal 2005 from $39,873 in fiscal 2004. This decline was due to the change in the business arrangement with Dreyer's discussed above. Drayage income in 2005 represents the fees paid to CoolBrands by Dreyer's for the delivery of products to Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. Gross profit margin The following table presents the gross profit margin dollars and gross profit percentage for our segments:
Year Ended August 31 ----------------------------------------- Percentage of Sales ------------------- 2005 2004 2005 2004 -------- -------- ---- ---- Frozen Dessert $(15,488) $64,779 (5.7) 18.2 Yogurt 7,369 16.7 Foodservice 3,626 3,439 20.4 21.9 Dairy Components 4,287 5,975 21.9 25.8 Franchising and Licensing 3,224 2,931 26.2 26.2 ------ ------- ---- ---- Total $3,018 $77,124 0.8 19.0 ====== ======= ==== ====
Gross profit dollars declined to $3,018 in fiscal 2005 from $77,124 in fiscal 2004 primarily due to the decline in gross profit dollars in frozen 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 our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales. Gross profit dollars in the frozen desserts segment were also adversely affected by the write down of $12,723 of obsolete and slow moving finished goods inventories, 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 will become effective January 1, 2006. Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19% for fiscal 2004. The decline in gross profit percentage was primarily due to: 1. Increased trade promotion payments to customers, excluding the yogurt segment, which amounted to $52,359 and $32,913 in 2005 and 2004 respectively; 2. The write down of obsolete and slow moving finished goods inventories, packaging, and ingredients. This write down amounted to $12,723 in 2005 and was the result of a settlement of litigation with Weight Watchers International, a new labeling law which will become effective January 1, 2006, and a provision for slow moving inventories due to changes in consumer preferences; 3. Our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales; and 4. The change in mix of frozen dessert products being sold in 2005 with lower gross profit margins as compared with 2004. Selling, general and administrative expenses Selling, general and administrative expenses are summarized by industry segment in the following table:
Year Ended August 31 --------------------------------------- Percentage of Sales ------------------- 2005 2004 2005 2004 ------- ------- ---- ---- Frozen desserts $38,818 $41,054 14.3 11.5 Yogurt 4,993 11.4 Foodservice 1,486 1,890 8.4 12.1 Dairy Components 1,694 1,942 8.7 8.4 Franchising and Liscensing 5,109 4,934 41.5 44.0 Corporate 72 1,868 ------- ------- Total $52,172 $51,688 ======= =======
Selling, general and administrative expenses increased by $484 from $51,688 in 2004 to $52,172 in 2005 due primarily to the increase in selling, general and administrative expenses incurred by the yogurt segment which relate to the Breyers yogurt business which was acquired March 27, 2005, partially offset by the decrease in selling, general and administrative expenses in the frozen desserts segment which resulted from a decline in expenses directly related to the decline in sales The frozen 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 increased overall as a percentage of revenues to 13.6% for fiscal 2005 from 11.5% for fiscal 2004 due primarily to the decline in revenues of $64,868 from 2004 to 2005. Selling, general and administrative expenses in 2004 were adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers' intangible license agreement asset. This write-off was required when Weight Watchers International notified CoolBrands on July 28, 2004 that the license agreement would not be extended. Stock-based compensation expense In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123), the Company recognized stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which represents the estimated fair value of stock options earned during the respective fiscal years. Interest expense Interest expense was $2,586 in fiscal 2005 compared with $1,498 in fiscal 2004. The increase in interest expense in fiscal 2005 as compared with fiscal 2004 was due to a $40,000 increase in short term borrowings related to the acquisition of the Breyers yogurt business and a $7,214 increase in debt at Americana Foods LLP, 50.1% owned by CoolBrands, offset by repayments of short-term borrowings and long-term debt of $14,007. Asset impairment The Company is required to conduct an annual review of goodwill and non-amortizable intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During 2005, the Company completed its annual review of goodwill and intangible assets. This review resulted in a non-cash pre tax charge related to a goodwill impairment of $48,701 and in a non-cash pre tax charge related to intangible asset impairment related to the Company's frozen dessert segment of $1,401. Also, this review resulted in a non-cash pre tax charges related to goodwill and intangible asset impairments related to the Company's franchise and licensing segment of $4,940. Additionally, the Company wrote-off certain company-owned store leasehold improvements and equipment related to the Company's franchise and licensing segment of $483. (Recovery of) provision for income taxes The effective (benefit) tax rate was (10.2)% in fiscal 2005 and 37.1% for fiscal 2004. The effective tax rate differs from the Canadian Federal/Provincial Statutory Rate primarily due to permanent differences related to the non-deductible goodwill impairment charges recognized in 2005, a valuation allowance established in 2005, and due to our operations in foreign countries with lower effective tax rates. Future effective tax rates could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates or changes in the valuation of our future income tax assets or liabilities. Net Loss The net loss for fiscal 2005 was $(74,070) as compared with net earnings of $23,512 for fiscal 2004. CoolBrands' net loss in 2005 was primarily due to the substantial decline in net sales due to the loss of the Weight Watchers Smart Ones license agreement, the decline in net sales of the Atkins Endulge products and other frozen dessert product lines and the resulting decrease in gross profit dollars, the $25,627 decline in drayage and other income and the asset impairment charge of $58,250. Comparability of 2005 results with 2004 The Company's 2005 financial statements reflect the March 27,2005 acquisition of the Breyers yogurt business. This acquisition was accounted for under the purchase method of accounting and the 2005 Consolidated Statements of Operations include the results of this acquisition from the date of acquisition. In fiscal 2005, the revenues and operating results from the Breyers yogurt business represent five months of activity as compared no activity in fiscal 2004. The third quarter of fiscal 2006, ended May 31, 2006, will be the first quarter following this acquisition in which the Consolidated Statement of Operations for the quarter can be directly compared with the prior-year period. Summary of quarterly results The following table presents a summary of our results for the last eight quarters:
August 31, 2005 May 31, 2005 February 29, 2005 November 30, 2004 Quarter ended $ $ $ $ - ------------------ --------------- ------------ ----------------- ----------------- Total revenues 124,055 97,890 73,833 89,292 Net earnings (64,093) (6,233) (8,077) 4,333 Earnings per share Basic (1.15) (.11) (0.14) 0.08 Diluted (1.15) (.11) (0.14) 0.08
August 31, 2004 May 31, 2004 February 29, 2004 November 30, 2004 Quarter ended $ $ $ $ - ------------------ --------------- ------------ ----------------- ----------------- Total revenues 129,052 128,140 99,946 92,800 Net earnings 12,484 (625) 8,465 3,188 Earnings per share Basic 0.22 (0.01) 0.15 0.06 Diluted 0.22 (0.01) 0.15 0.06
The ice cream and frozen dessert industry generally experiences its highest volume during the spring and summer months and its lowest volume in the winter months. Liquidity The following sets forth certain measures of our liquidity:
Year Ended August 31 -------------------- 2005 2004 -------- --------- Cash, investments and restricted cash $41,562 $ 64,327 Working Capital $28,469 $118,138 Current Ratio 1.2 to 1 2.6 to 1
The decrease in working capital of $89,669 was primarily due to a decrease in cash, investments and restricted cash of $22,765 and a decrease in total receivables of $14,669, an increase in current maturities of long-term debt and short term borrowings of $44,222, an increase in accounts payable and accrued liabilities of $25,185, and offset by the increase in income taxes recoverable of $9,767 and the reduction the income tax payable of $4,938. CoolBrands is currently negotiating the refinance of its long-term debt and short-term borrowings, including the $40,000 due on January 3, 2006 and $7,145 due January 10, 2006. Cash flows from operating activities The Company generated cash flow from operating activities of $11,239 for the year ended August 31, 2005 as compared with $43,769 for the year ended August 31, 2004 due primarily to the decrease in net earnings (exclusive of depreciation and amortization and asset impairment) for 2005 as compared with 2004. This was offset by changes in other operating assets and liabilities, which were primarily driven by the timing of certain payments. Cash used in investing activities The cash used in investing activities in 2005 was primarily due to the acquisitions of the yogurt business and the Zipp flavors and ingredients businesses which aggregated $59,609 and the purchase of property, plant and equipment of $12,409, offset by the net redemption of investments of $20,550 and the proceeds from the sale of our City of Industry facility for $5,434. The cash used in investing activities in 2004 was primarily due to the purchase of property, plant and equipment of $13,363 and the purchase of investments, net of redemptions of $28,050. Cash provided by financing activities In 2005, $33,264 was provided by financing activities as compared with $14,926 provided by financing activities in 2004. In 2005, the proceeds from short term borrowings of $44,553, and an increase in the revolving line of credit of $2,661 at Americana Foods. These additions were off set by the repayment of long-term debt. The exercise of stock options in 2004 provided $12,286 and Americana Foods' minority partner provided $6,907, net of a $2,000 repayment, as their share for the expansion of production capacity at Americana Foods. These additions were offset by the repayment of long-term debt of $5,781 and the increase in the secured revolving line of credit at Americana Foods of $1,514. Contractual obligations The following table presents our contractual obligations:
Less than 1 1 - 3 After 5 Total year years 4 - 5 years years ------- ----------- ------- ----------- ------- Contractual obligations Long-term debt $60,808 $52,560 $ 8,248 Capital lease obligations 154 154 Operating leases 12,393 4,363 6,590 $554 $886 Other long-term obligations 2,881 2,881 ------- ------- ------- ---- ---- Total contractual obligations $76,236 $57,077 $17,719 $554 $886 ======= ======= ======= ==== ====
Capital resources The Company is planning to spend approximately $3,000 on capital projects during fiscal 2006. The planned capital projects are primarily for the continuing expansion of capacity at Americana Foods and certain information technology infrastructure improvements. The Company will use existing cash on hand to fund the planned capital expenditures. However, the Company has not ruled out the possibility that it will fund the planned capital expenditures plus previous capital spent by restructuring Americana Foods' long-term debt. Additionally, CoolBrands is committed to the expansion of its frozen dessert segment in 2006 with the introduction of new products to respond to the increase in competition in the ice cream industry for shelf space and market share. As a result, CoolBrands has made or will make offers to retailers for new product introductory placement costs (slotting fees) of approximately $11,250. Payment requirements In connection with the acquisition of the yogurt business from Kraft in March 2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The unsecured term loan requires monthly payments of interest with the $40,000 principle balance due November 1, 2005. Interest is payable monthly on the unpaid principle balance with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates plus applicable margin were the lower of prime plus 0.5% or LIBOR plus 2.5% (6.02% at August 31, 2005). The Company made a principal payment of $10,000 on August 23, 2005 in anticipation of the September 2, 2005 amendment as discussed below. As of August 31, 2005 the term loan balance was $30,000. In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30,000 to finance the acquisition. The loan is payable in monthly installments of U.S. $250, which began December 1, 2000, with the remaining principal balance due on November 1, 2005. Interest on the term loan is payable monthly on the unpaid principal balance. CoolBrands and all of its significant subsidiaries guarantee all borrowings under the above loan agreement. The principal balance outstanding at August 31, 2005 was U.S. $10,500. The Company was in default of its financial covenants at May 31, 2005 and August 31, 2005. On September 2, 2005 the Company entered into an amendment to its existing credit facilities. The Amendment extends the maturity of the existing facilities from November 1, 2005 until January 3, 2006 and waives defaults in its financial covenants resulting from the Company's financial performance. The amendment eliminates all of the existing financial covenants from the loan agreements through the remainder of the term and grants a security interest in the personal property assets (other than certain excluded assets relating to the operations of the company's 50.1% owned limited partnership), reduced its outstanding indebtedness to the bank by $10,000 to a total of $40,500 and the Company has agreed to an increase of the interest rate by 2.0% basis points on all remaining outstanding balances to 4.5% basis points over LIBOR. In addition, the amendment reduced the Company's $5,000 revolving credit facility to $925 and requires the Company to maintain $20,000 of cash balances, of which $10,000 is restricted to use as approved by the lender. On April 27, 2005, Americana Foods LP, which is owned 50.1% by the Company, borrowed $4,553 for use in purchasing a building and adjacent acreage. Loan terms call for monthly, interest-only payments until anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The note provides a one-time right to extend the maturity date by two years. Monthly payments during the extension period will be based on a 25-year period. The Partnership may also at that time choose to continue any interest rate for Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender. Due to the one-year maturity date (before exercise of the extension option), this note is classified as a current liability. On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that included a term loan of U.S. $10,000, which is secured by the Partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80 and matures on November 19, 2007. The term of the loan bears interest at prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). The Partnership's amended credit agreement also includes a revolving loan of up to U.S. $9,000, subject to a borrowing base calculation, which bears interest at prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and was due on November 30, 2005. At August 31, 2005, approximately U.S. $1,855 was available to the Partnership under this loan. The revolving loan is secured by the Partnership's receivables and inventory and is classified as a current liability. On November 30, 2005 the Partnership executed an amendment to the credit agreement which extended the maturity date for the revolving loan until January 10, 2006. Americana Foods must maintain compliance with certain financial covenants, including fixed charge ratio, debt-to-tangible net worth ratio and tangible net worth. CoolBrands is currently negotiating the refinance of its long-term debt and short term borrowings with its current lenders, including $40,000 due on January 3, 2006 and $7,145 due January 10, 2006. Risk Factors and Uncertainties Inflation can significantly impact ice cream and frozen yogurt ingredients, including butterfat and packaging costs. In 2005 and 2004, CoolBrands passed on ingredient, energy and freight cost increases by raising prices on selected product lines. In 2006, CoolBrands believes that it will be able to pass on cost increases, if any, in the normal course of business within a relatively short period of time. However, the ability of CoolBrands to pass on cost increases will depend, to some extent, on whether its competitors have also done so. CoolBrands believes that, in the past, its competitors have passed on cost increases in a relatively short period of time. CoolBrands products are ultimately purchased by the global retail consumer, whose tastes and preferences are subject to variation and change. Although carefully monitored, these changes cannot be controlled and are difficult to predict. Management believes that CoolBrands' family of products is based on well-established brand names and is easily adaptable to meet changes in consumer tastes and demands. CoolBrands derives a substantial portion of its revenues from its operations in the United States. The U.S. market for frozen desserts and yogurt is highly competitive. As competitors introduce new products or revise their supply or pricing strategies, CoolBrands may encounter additional and more intense competition. Such competitors have greater name recognition and more extensive financial, technological, marketing and personnel resources than CoolBrands. In addition, CoolBrands may experience increased competition in its other markets as its competitors expand their international operations. CoolBrands existing shelf space in supermarkets, club stores and convenience stores for ice cream and frozen dessert treats and yogurt is at risk due to decisions by CoolBrands' customers. The Company's existing shelf space for our products, along with that of all other products, is reviewed at least annually by our customers. Supermarket, club store and convenience store chains reallocate their total shelf space taking into effect a number of variables, including the number of new products being introduced at any given time, the amount of new product placement fees (slotting fees) being offered by companies in the ice cream and frozen dessert and yogurt segments and by changing consumer tastes and fads. As a result, CoolBrands is subject, in any given year, to the loss of shelf space with its customers and the loss in revenues associated with the sale of those products. CoolBrands responds to this action by developing and introducing new products annually which will either maintain or increase its shelf space. There is also substantial risk that the sales of such new products will not be as successful as CoolBrands had previously estimated or as successful as new products introduced by CoolBrands in the past. The risks associated with the reallocation of shelf space by our customers and the development and introduction of new products could have a substantial adverse impact upon CoolBrands' financial position and results of operations. CoolBrands is subject to risks with respect to its cost of raw materials, some of which are subject to changes in commodity prices, particularly the cost of butterfat, which is used to produce ice cream products. From time to time, CoolBrands has used hedging contracts to reduce its exposure to such risks with respect to its raw material costs. CoolBrands has made, and may in the future make acquisitions of, or significant investments in, businesses or assets with complementary products or unrelated industries. Acquisitions involve numerous risks, including but not limited to: 1) diversion of management's attention from other operational matters; 2) the inability to realize expected synergies from the acquisition; 3) impairment of acquired intangible assets as a result of worse-than-expected-performance of the acquired operations; 4) integration and retention of key employees; and 5) integration of operations. Mergers and acquisitions are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect CoolBrands' business, financial condition and results of operations. CoolBrands operates in some countries that are subject to potential political and economic uncertainty. Such factors, beyond the control of CoolBrands, are lessened because of international diversification and the sharing of risks with Master and Sub-franchises. The Corporation is currently dependent upon a small number of key management personnel and continued success will depend, in part, upon their abilities. The loss of these key personnel may adversely affect the performance of the Corporation. The Company relies on major retailers in the U.S. for a substantial portion of its sales. As a result of this concentration of sales and accounts receivable the Company is subject to certain credit risks. Such risks are somewhat mitigated by the fact that net sales to any one customer do not exceed ten percent of the Company's consolidated net sales CoolBrands is subject to interest rate risk as it long-term debt and short term borrowings are based up the prime rate and/or Libor. If these bases rates increase, CoolBrands will incur incremental interest expense. The Company is subject to future legal proceedings and disputes with franchisees, former franchisees and others, which arise in the ordinary course of business. Transactions with Related Parties Integrated Brands, a wholly owned subsidiary of CoolBrands, has entered into a distribution agreement with Calip Dairies, Inc. ("Calip") an ice cream distribution company owned by Susan Smith and David M. Smith, the widow and son, respectively, of Richard E. Smith, former Co-Chairman, Co-Chief Executive Officer and Director of the Company. David M. Smith is currently Vice-Chairman and Chief Operating Officer of the Company. Calip was previously owned by Richard E. Smith and Susan Smith. Pursuant to the agreement, Integrated Brands Inc. has appointed Calip as its exclusive distributor for any ice cream or other frozen dessert product manufactured by, on behalf of, or under authority of, Integrated Brands Inc., its subsidiaries, affiliates or successors in the State of New Jersey and certain areas in the State of New York and the State of Connecticut. The agreement continues until December 31, 2007 and thereafter renews automatically on December 31 of each year for an additional one year term, provided that as of such date at least 50% of the issued and outstanding shares of Calip are beneficially owned by the Smith Family and/or David Stein, unless Calip gives Integrated Brands written notice on or before September 30th of that same year that Calip will not renew the agreement, in which event the agreement terminates effective December 31 following such notice. CoolBrands has agreed to guarantee the performance of the distribution agreement. Sales of products to Calip were $9,781 for the year ending August 31, 2005 (2004 - $9,482). At August 31, 2005, $1,840 of the receivables - affiliates represent receivables from Calip (2004 - $3,883). The transactions with Calip occur in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. Integrated Brands also entered into a management agreement effective July 1, 2003 with Calip pursuant to which Calip provided the full time management services and certain other ancillary services of Mr. Richard Smith, CoolBrands' former Co-Chairman and Co-Chief Executive Officer, for a fixed payment of $1,300 per year. The management agreement with Calip was terminated following the passing of Mr. Smith on January 29, 2005. Management fees incurred under the agreement were $542 and $1,300 for the years ended August 31, 2005 and 2004, respectively. As at August 31, 2005, the $620 balance of payables - affiliates (2004 - $850) represents payables to Calip. Fourth Quarter Revenues for the fourth quarter of fiscal 2005 decreased to $124,055 from $129,052 for the same quarter last year, a 3.9% decrease. Net (loss) for the fourth quarter was ($64,093) (($1.15) basic and diluted loss per share) as compared with net earnings of $12,484 ($0.22 basic and diluted earnings per share) for the same quarter last year. The decrease in net revenues for the fourth quarter of fiscal 2005 reflects the decline in drayage income from $9,308 in 2005 to $3,409 in 2005 that was due to the change in the business arrangement with Dreyer's. In the fourth quarter 2005, net sales increased by 0.4% to $118,893 as compared with $118,457 for fiscal 2004. However, net sales declined in the frozen dessert segment which reflects deduction from sales for payments made to customers by the Company, excluding the yogurt segment, of $ 11,626 in 2005 as compared with $5,251 in 2004 (a net reduction $6,375). The decline in sales came from all of our frozen dessert brands, but principally from a decline in sales in our Weight Watchers and Atkins lines. The sales declines in the frozen desserts segment were partially offset by the sales from newly introduced frozen dessert products and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales increases due to this change partially offset sales declines in our base frozen desserts business. The decline in sales in the frozen desserts segment were substantially offset by an increase in sales of $26,397 from the yogurt segment which resulted from the acquisition of the Kraft yogurt business on March 27, 2005. Gross profit percentage for the fourth quarter of fiscal 2005 declined to 2.3% as compared to 20.9% for the fourth quarter of fiscal 2004. The decline in gross profit percentage was primarily due to payments made to customers, including sales price promotions and cooperative advertising, by the Company which as previously discussed reduced sales and gross profits by $11,626 and $5,251 in the fourth quarter of 2005 and 2004, respectively and our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of sales. Gross profit percentage was also adversely affected by the write down of $8,163 in connection with slow-moving and obsolete inventory and packaging, ingredients and finished goods inventories which will not be used or sold resulting from the settlement of the Weight Watchers litigation and the change in mix of frozen dessert products being sold in the fourth quarter of 2005 with lower gross profit margins as compared with the fourth quarter of 2004. The fourth quarter of 2004 was impacted by the pre-tax operating losses at Americana Foods LP (50.1% owned) of approximately $2,089. These losses were primarily due to plant production losses incurred during the installation of new production lines and the related start-up expenses which occurred in the fourth quarter of fiscal 2004. Selling, general and administrative expenses increased by $2,573 or 15% from $17,115 in 2004 to $19,688 in 2005. However, selling, general and administrative expenses for the fourth quarter of fiscal 2005 increased as a percentage of revenues to 15.9% as compared to 13.3% for fiscal 2004 primarily due to the decline revenues and the additional selling, general and administrative expenses incurred by the yogurt segment which was acquired March 27, 2005. Selling, general and administrative expenses for the fourth quarter of 2004 were adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers' agreement license. This write-off was required when Weight Watchers International notified the Company on July 28, 2004 that the license agreement would not be extended. The 2005 fiscal fourth quarter results were adversely affected by the non-cash pre-tax asset impairment charge of $54,124, which resulted from the impairment of goodwill, intangible assets and property, plant and equipment related to the Company's frozen desserts and franchising segments. Critical Accounting Policies and Related Estimates The accounting policies and related estimates discussed in this section are those that we consider to be particularly critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these policies, we caution that future events rarely developed exactly as forecast, and our management's best estimates may require adjustment. Allowance for doubtful accounts We have an allowance for doubtful accounts for estimated losses resulting from customers' inability to pay amounts owed to us, for unresolved amounts that our customers have refused to pay due to disputes over promotions, co-op advertising and new product introductory allowances (slotting fees). The allowance is a combination of specific and general reserves based upon our evaluation of the customers' ability to pay determined by our assessment of their liquidity and financial condition through credit rating agencies, or the credibility of backup provided on disputed amounts. Write-offs against the allowances generally occur after we assess the particular customer's liquidity, financial condition and their basis for non-payment on disputed items and conclude that collection is highly unlikely. Our estimates of losses bear the risk of change due to the uncertainty of determining the likelihood of customer non-payment. The general reserve includes an amount for our Foodservice customers' price volume rebates. Accrual for promotion and co-op advertising expenses CoolBrands estimates promotion expenses for each of our customers, excluding our DSD customers, who receive off invoice promotion allowances, using a detail annual plan consisting of each promotion offered to each customer. The promotional sales volume is estimated using the sales history of each customer when the product or like product was previously promoted. An estimate of the promotion expense is then calculated using the estimated sales volume and the specific promotion dollar amount offered for each particular promotion. The estimates for all promotions for all customers are accumulated and recorded as expense in the accounting period in which the promotion runs. The results of all promotions are updated monthly, after the fact, with actual sales promotion volume. If actual sales were to be substantially higher than estimated, this could cause an additional promotions expense to be recorded. The amounts of these accruals are recognized by the Company as a reduction in sales and accounts receivables. Inventory valuation method Inventory is valued at the individual item level using the cost method which values inventory at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method. Market is determined based on the estimated net realizable value, which is generally the inventory item's selling price. CoolBrands reviews its inventory levels in order to identify slow-moving and obsolete inventory, which requires adjustment and evaluates the potential for slow-moving and obsolete inventory by analyzing historical and anticipated demand. If actual demand were to be substantially lower than estimated, an additional allowance for excess and obsolete inventory might be required. Asset Impairment The Company is required to conduct an annual review of goodwill and non-amortizable intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. Income taxes We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We also record a valuation allowance against our future tax assets arising from certain net operating losses when it is more likely than not that some portion or all of such net operating losses will not be realized. Our effective tax rate in a given financial statement period may be materially impacted by the changes in the mix and level of earnings, changes in the expected outcome of audit controversies or changes in the deferred tax valuation allowance. We currently expect the fiscal 2006 effective tax rate to be within the range of 38 percent to 39 percent. The ultimate rate will depend on several variables, including the future utilization of net operating losses, the mix of earnings between domestic and international operations and the overall level of earnings, and could also be affected by the resolution of tax contingencies for amounts different from our current estimates. Legal matters CoolBrands is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. CoolBrands evaluates, among other things, the degree of probability of an unfavorable outcome and reasonably estimates the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When CoolBrands determines that it is probable that a loss has been incurred, the effect is recorded in the Consolidated Financial Statements. Although the legal outcome of these claims cannot be predicted with certainty, CoolBrands does not believe that any of the existing legal matters will have a material adverse affect on its financial condition or results of operations. However, significant changes in legal proceedings and claims or the factors considered in the evaluation of those matters could have a material adverse affect on CoolBrands business, financial condition and results of operation. Changes in Accounting Policies Including Initial Adoption The Company initially adopted the following new accounting policies for the year ended August 31, 2005. Change in reporting currency Effective September 1, 2004, the Company has changed its reporting currency from Canadian dollars to U.S. dollars since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars in accordance with generally accepted accounting principles. Adoption of U.S. GAAP During the fourth quarter of 2005, the Company adopted, on a retroactive basis, U.S. GAAP. Previously, the Company prepared its annual and interim consolidated financial statements in accordance with generally accepted accounting principals in Canada ("Canadian GAAP"). As a result, the following adjustments have been made to previously issued Consolidated Financial Statements. The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). Such consumer and trade promotion activities have been historically accounted for as selling, general and administrative expenses. In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures must be deducted from revenue. Accordingly, our Consolidated Statement of Operations for 2004 has been restated to reflect a reduction in revenues and selling, general and administrative expenses of $32,913. The reduction in revenues and selling, general and administrative expenses in our 2005 Consolidated Statement of Operations is $68,155. The following summarizes the impact of restatement for the change from Canadian GAAP to U.S. GAAP for consumer trade promotion expenses in our Consolidated Statement of Operations:
2005 2004 -------- -------- Total net revenues in accordance with Canadian GAAP $453,225 $482,851 Less consumer and trade promotion expenses (68,155) (32,913) -------- -------- Total net revenues in accordance with U.S. GAAP $385,070 $449,938 ======== ========
2005 2004 -------- -------- Total Selling, general and administrative expenses in accordance with Canadian GAAP $120,327 $ 84,601 Less consumer and trade promotion expenses (68,155) (32,913) -------- -------- Total Selling, general and administrative expenses in accordance with U.S. GAAP $ 52,172 $ 51,688 ======== ========
Product introduction expenditures (i.e. slotting fees) incurred by the Company have been historically recognized as expense by amortizing the slotting fees over the twelve months subsequent to the actual acceptance of product introduction offers by our customers. Under U.S. GAAP, such expenditures are recognized as reductions in revenues at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported net earnings for the year ended August 31, 2004 have been increased by $756. Our reported net loss for the year ended August 31, 2005 was increased by $553, when compared with the Net loss that would have been reported using our historical accounting principles. The following summarizes the impact of restatement for the change from Canadian GAAP to U.S. GAAP for new product introduction expenditures (slotting fees) in our Consolidated Statement of Operations:
2005 2004 -------- ------- Net (loss) income in accordance with Canadian GAAP $(73,517) $22,756 Adjustment for new product introduction expense (553) 756 -------- ------- Net (loss) income in accordance with U.S. GAAP $(74,070) $23,512 ======== =======
Stock-based compensation On September 1, 2005, the Company adopted, on a retroactive basis without restatement, the recommendation of CICA Handbook Section 3870, "Stock-based compensation and other stock-based payments", which required companies to adopt the fair value based method for all stock-based awards granted on or after September 1, 2002. Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. As a result of adopting U.S. GAAP during the fourth quarter of 2005, as previously discussed, the Company adopted, on a modified prospective basis, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123). Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. The effect of adopting this accounting policy increased the loss before income taxes and minority interest for fiscal 2005 by $1,918 with a corresponding increase to additional paid-in capital and reduced earnings before income tax and minority interest for fiscal 2004 by $24,270 with a corresponding increase to additional paid-in capital. Annual Information Form Additional information relating to CoolBrands, including CoolBrands' Annual Information Form, is available on the website for Canadian regulatory filings at www.sedar.com. Outstanding share data As of December 13, 2005, the Company had 50,004,069 subordinate voting shares, 6,028,864 multiple voting shares and 3,840,517 stock options outstanding. EX-99 4 ex99-3.txt EXHIBIT 99.3 ANNUAL INFORMATION FORM OF COOLBRANDS INTERNATIONAL INC. Fiscal Year Ended August 31, 2005 December 13, 2005 TABLE OF CONTENTS CORPORATE STRUCTURE............................................... 2 GENERAL DEVELOPMENT OF THE BUSINESS............................... 3 NARRATIVE DESCRIPTION OF THE BUSINESS............................. 7 DIVIDENDS......................................................... 17 DESCRIPTION OF CAPITAL STRUCTURE.................................. 17 MARKET FOR SECURITIES............................................. 18 DIRECTORS AND OFFICERS............................................ 19 AUDIT COMMITTEE................................................... 23 LEGAL PROCEEDINGS................................................. 25 INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS........ 25 TRANSFER AGENT AND REGISTRAR...................................... 26 MATERIAL CONTRACTS................................................ 26 INTERESTS OF EXPERTS.............................................. 27 ADDITIONAL INFORMATION............................................ 28 SCHEDULE AUDIT COMMITTEE CHARTER........................................... SCHEDULE "A"
FORWARD-LOOKING STATEMENTS The information in this document contains certain forward-looking statements with respect to CoolBrands International Inc., its subsidiaries and affiliates. These statements are often, but not always made through the use of words or phrases such as "expect", "should continue", "continue", "believe", "anticipate", "estimate", "contemplate", "target", "plan", "budget" "may", "will", "schedule" and "intend" or similar formulations. By their nature, these forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant, known and unknown, business, economic, competitive and other risks, uncertainties and other factors affecting CoolBrands specifically or its industry generally that could cause actual performance, achievements and financial results to differ materially from those contemplated by the forward-looking statements. These risks and uncertainties include the tastes and preferences of the global retail consumer of CoolBrands' products; the ability of CoolBrands to be competitive in the highly competitive U.S. market for frozen desserts fluctuations in consumption of CoolBrands' products and services as a result the seasonal nature of the frozen dessert industry; the ability of CoolBrands to retain or acquire shelf space for its products in supermarkets, club stores and convenience stores; the ability of CoolBrands to effectively manage the risks inherent with mergers and acquisitions; the effect on foreign operation of political, economic and regulatory risks; currency risk exposure; the ability to recruit and retain qualified employees; changes in prices for raw materials; the ability of CoolBrands to pass on cost increases resulting from inflation and other risks described from time to time in publicly filed disclosure documents of CoolBrands and its subsidiaries and affiliates. In view of these uncertainties we caution readers not to place undue reliance on these forward-looking statements. Statements made in this document are made as of December 5, 2005 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. CORPORATE STRUCTURE CoolBrands International Inc. ("CoolBrands" or 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). On March 15, 2000, the Corporation amended its articles to change its name to CoolBrands International Inc. The Corporation's principal office is located at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario, L3R 9Y7. Its registered office is located at Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada, B3J 2X2. The Corporation's principal office in the United States is located at 4175 Veterans Highway, 3rd Floor, Ronkonkoma, New York, 11779. The principal direct and indirect subsidiaries of the Corporation and the jurisdiction in which they were incorporated or organized are set out below. ------------------------------- | COOLBRANDS INTERNATIONAL INC. | | (Nova Scotia) | ------------------------------- | | | --------------------------------------------------------- | | | | 100% | 100% | 100% | | | -------------- ------------------- ------------- | INTEGRATED | | YOGEN FRUZ | | YOGEN FRUZ | | BRANDS INC. | | ACQUISITIONS INC. | | CANADA INC. | | (New Jersey) | | (Nevada) | | (Ontario) | -------------- ------------------- ------------- | | | | 100% | | | ----------------------- | | KAYLA FOODS | | | INT'L (Barbados) INC. | | | (Barbados) | | ----------------------- | -------------------------------------------------------- | | | | | 100% | 50.1% | 100% | 100% | | | | ------------ ----------- ------------------- ------------- | COOLBRANDS | | AMERICANA | | ESKIMO PIE FROZEN | | ESKIMO PIE | | DAIRY INC. | | FOODS LP | | DISTRIBUTION INC. | | CORPORATION | | (Delaware) | | (Texas) | | (Delaware) | | (Virginia) | ------------ ----------- ------------------- -------------
-2- GENERAL DEVELOPMENT OF THE BUSINESS Overview CoolBrands is focused on manufacturing, marketing and selling a broad range of ice creams, frozen snacks and fresh yogurt products under nationally and internationally recognized brand names. The Corporation has five main operating segments: the frozen dessert segment (formerly called the pre-packaged consumer products segment) (the "Frozen Dessert Segment"), the yogurt segment (the "Yogurt Segment"), the foodservice segment (the "Foodservice Segment"), the dairy components segment (the "Dairy Components Segment") and the franchising and licensing segment (the "Franchising and Licensing Segment"). Frozen Dessert Segment CoolBrands competes in the frozen dessert industry, marketing a diverse range of frozen desserts through its Frozen Dessert Segment under nationally and internationally recognized brand names, including Whole Fruit'TM' Sorbet, Eskimo Pie'r, Godiva'r', Dreamery'r' Ice Cream, Tropicana'r', Yoplait'r', Chipwich'r', Fruit-A-Freeze'r', Trix'r', No Pudge!'TM', Crayola'TM', Justice League'TM', Snapple'TM', Care Bear'TM', and Atkins'r'. Through its Frozen Dessert Segment, CoolBrands operates a direct store door distribution system in selected markets in the United States, serving these CoolBrands products and a growing family of partner brands including Good Humor, Nestle, Dreyer's, Edy's, Haagen-Dazs, Friendly's, Klondike and Carvel to supermarkets, convenience stores and other retail customers. Yogurt Segment CoolBrands subsidiary, CoolBrands Dairy Inc. manufactures cup yogurt at its plant located in North Lawrence, New York, under the Breyers'r' brand pursuant to a trademark rights agreement, which grants the right in perpetuity, and under the Creme Savers'r' brand pursuant to a long term license agreement. Foodservice Segment CoolBrands' Foodservice Segment manufactures and sells premium soft-serve ice cream, frozen yogurt, a wide variety of hard pack ice cream, frozen yogurt and ice cream mixes, frozen dessert novelties and dairy mixes to well-known national distributors, colleges and universities, food companies and national chain restaurant customers. Dairy Components Segment CoolBrands' Dairy Components Segment manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, -3- eggnog bases and other ingredients, and flexible packaging products for use in private label dairy products, in addition to the Corporation's brands. Franchising and Licensing Segment The Corporation is one of the largest franchisors and licensors of stores and other locations serving primarily frozen yogurt through its Franchising and Licensing Segment. CoolBrands franchises and licenses frozen dessert outlets operated under a family of brands including Tropicana'r' Smoothies, Juices & More, Swensen's'r' Ice Cream, I Can't Believe It's Yogurt'r', Yogen Fruz, Bresler's'r' Ice Cream, Golden Swirl'r' and Ice Cream Churn'r', with company-owned, franchised and non-traditional partnership locations around the world. The Corporation also franchises and licenses gourmet coffee shop outlets in 3 countries under the name Java Coast'r' Fine Coffees. Three Year History Recent Developments 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. 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 -4- Corporation to be governed by a more modern corporate statute than the Nova Scotia Companies Act, under which the Corporation is currently organized. o 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 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 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. o 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. 2005 CoolBrands reported a consolidated net loss for the year ended August 31, 2005 of $74,070,000. Major developments in fiscal 2005 included: o the acquisition of the yogurt business of Kraft Foods, Inc. for approximately $59,000,000 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; o the announcement of 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; o the termination by mutual agreement of 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; and o the election of four new independent directors to the board of directors of the Corporation, following which the Corporation's board of directors now consists of a majority of independent directors. -5- 2004 CoolBrands reported net earnings of $23,512,000 for the year ended August 31, 2004. Major developments in fiscal 2004 included: o the successful launch of a complete line of Atkins'r' Endulge'TM' super premium ice creams and frozen snacks intended for use as part of a controlled-carbohydrate lifestyle. Sales of the Corporation's Atkins'r' offerings have since declined with the general drop in popularity of such ice creams and frozen snacks among global retail consumers; o the commencement of franchising Tropicana Smoothies, Juices & More retail outlets and completion of four development agreements requiring the opening of twenty-two franchise stores, of which, fourteen stores have been opened to date; o the continued expansion of the Corporation's production capabilities at Americana Foods with a $15,000,000 investment to install new production lines and to upgrade existing production lines to accommodate growth; and o the loss of the Corporation's license for Weight Watchers Smart Ones effective September 28, 2004, subject to an additional period in which the Corporation sold off and balanced inventories. 2003 CoolBrands reported net earnings of $16,833,000 for the year ended August 31, 2003. Major developments in fiscal 2003 included: o the acquisition of 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; and o the acquisition of Dreamery'r' ice cream and Whole Fruit'TM' sorbet brands from Dreyer's Grand Ice Cream, Inc. 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"); and o the acquisition of 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. -6- NARRATIVE DESCRIPTION OF THE 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, the manufacture and sales of ingredients and packaging to the dairy industry and the franchising and licensing of well known ice cream and frozen yogurt brand names internationally. CoolBrands markets a diverse range of frozen desserts and fresh yogurt products under nationally and internationally recognized brand names. The Corporation manages and evaluates 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. 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 specialities, 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 Inc. ("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 -7- 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 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 -8- 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 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 A full franchising program has 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') is substantially similar and is organized on two levels: master franchising, pursuant to which master franchises are sold for specific regions, countries or other geographical areas; and retail franchising and licensing, -9- pursuant to which franchises are sold, and licenses are 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, enters into a license agreement with each licensee for each location. The license agreement authorizes 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 must operate the outlet in accordance with the methods, standards, specifications and procedures prescribed by CoolBrands. Generally, the licensee must purchase products used within the outlet from CoolBrands or from suppliers and manufacturers designated by it. Intangible Properties 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', Fruit-A-Freeze'r', Yogen Fruz'r', I Can't Believe It's Yogurt'r', Honey Hill'r', Bresler's'r', Swensen's'r', Steve's'r', Java Coast'r' Fine Coffees and Golden Swirl'r'. The Java Coast'r' Fine Coffees trademark and related symbols are owned in the United States by Superior Coffee and Foods, a division of Sara Lee Corporation, and used by I Can't Believe It's Yogurt pursuant to a trademark and license agreement providing for, among other things, a royalty-free license of such trademark and related symbols in the United States for an unlimited period of time (subject to termination upon the occurrence of certain events such as bankruptcy). CoolBrands has registered the Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r', Java Coast'r' Fine Coffees trademarks in all countries where Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r', and Java Coast'r' Fine Coffees outlets operate and where local laws permit trademark registration. 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 and Tropicana'r' Smoothies, Juices & More! trademark in connection with franchising. In countries lacking trademark and/or service mark legislation, CoolBrands utilizes alternative measures available to it, including the publication of cautionary notices, to protect its intellectual property interests. -10- Regulation Some states in the United States and the provinces of Alberta and Ontario have statutes regulating franchise operations, including registration and disclosure requirements in the offer and sale of franchises and the application of statutory standards regulating franchise relationships, such as termination and non-renewal of franchises. CoolBrands is also subject to the U.S. Federal Trade Commission regulations relating to disclosure requirements in the offer and sale of franchises in the United States. In addition, CoolBrands' frozen dessert and fresh yogurt products are also 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 and Russellville, Arkansas 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 and the gourmet coffee 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. In North America, competitors of CoolBrands include a number of large chains such as -11- Baskin-Robbins Inc., International Dairy Queen, Inc., Ben & Jerry's Homemade Inc. and Haagen-Dazs Company Inc., owned by The Pillsbury Company, TCBY Systems Inc. ("TCBY"), Freshens Premium Yogurt as well as independent retailers. In addition, both ice cream and frozen yogurt have been added as menu items by certain North American fast food restaurant chains and in recent years there has been an overall increase in the number of food service locations serving frozen yogurt, including snack food or dessert item restaurants. Frozen yogurt and ice cream are also offered in supermarkets, grocery stores and wherever convenience food operations are conducted. In the gourmet coffee retail market, the Corporation competes against a number of well-established chains such as Starbucks, Second Cup and Timothy's as well as a large number of other smaller chains and independent coffee shops and other outlets serving coffee. In the frozen dessert retail market, the level of competition is highest in the United States where I Can't Believe It's Yogurt'r', Bresler's'r', Swensen's'r', and Yogen Fruz'r' outlets not only compete with other frozen yogurt and ice cream chains but, in certain instances, also with each other. In Canada, Yogen Fruz'r' outlets experience l competition from frozen dessert competitors Baskin Robbins and Dairy Queen. Although in certain countries Yogen Fruz'r' and I Can't Believe It's Yogurt'r' outlets compete with TCBY outlets and with each other, markets outside of North America, and particularly in Asia and Latin America, tend to be in their initial stages of development resulting in CoolBrands' outlets facing local and national direct competition. In the United States, Bresler's'r' Industries and I Can't Believe It's Yogurt also sell some of their products for in-premises consumption at the locations of various retail food outlets. While the ice 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. -12- Employees As of August 31, 2005, CoolBrands had 1361 full-time and part-time employees. Of these, 219 perform contract labour at Americana Foods through a temporary employment agency. The following is a breakdown of employees by segment: Frozen Dessert Segment 1,051 Yogurt Segment 170 Foodservice Segment 36 Dairy Components Segment 37 Franchise and Licensing Segment 67
Foreign Operations The Corporation and all five of its operating segments are largely dependent on foreign operations as the vast majority of the Corporation's business is derived from, and the majority of the Corporation's assets are located in, the United States. In addition to its headquarters in Ontario, Canada, the Corporation leases various spaces in the United States for numerous purposes, including for offices, production and storage facilities, manufacturing plants, printing and packaging plants, and freezer and distribution facilities. Revenue by Industry Segments and Classes of Product and Services The following tables set forth the contribution to revenue of each of the above-described segments: -13- 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
-14- Risk Factors Consumer Tastes 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. 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. 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. -15- 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. Political Risk 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. 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 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. -16- 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 in the future to legal proceedings and disputes with franchisees, former franchisees and others in the ordinary course of its business. 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 Corporation's Class B multiple voting shares (the "Multiple Voting Shares"). However, 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. DESCRIPTION OF CAPITAL STRUCTURE The Corporation's authorized capital consists of 200,000,000 Subordinate Voting Shares and 200,000,000 Multiple Voting Shares, of which, as at the date hereof, 50,004,069 Subordinate Voting Shares and 6,028,864 Multiple Voting Shares are issued and outstanding. Accordingly, 45.3% of the aggregate voting rights attached to the Corporation's securities are represented by the Subordinate Voting Shares. Holders of the Subordinate Voting Shares are entitled to notice of and to attend all meetings of the shareholders of the Corporation, other than those meetings at which only holders of another specified class or series of shares of the -17- Corporation are entitled to vote and are entitled to one (1) vote for each Subordinate Voting Share held on all votes taken at such meetings. Each Multiple Voting Share entitles the holder thereof to notice of and to attend all meetings of the shareholders of the Corporation, other than those meetings at which only holders of another specified class or series of shares of the Corporation are entitled to vote and are entitled to ten (10) votes for each Multiple Voting Share held on all votes at such meetings. The Subordinate Voting Shares and the Multiple Voting Shares vote as a single class unless otherwise required by law. The holders of the Subordinate Voting Shares are entitled to convert such shares into Multiple Voting Shares in the event that an offer is made to the holders of the Multiple Voting Shares to purchase such shares if such offer must, by law, be made to all or substantially all of the shareholders of the Corporation. MARKET FOR SECURITIES 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". The table below sets forth the high and low trading prices and volumes for the Subordinate Voting Shares traded through the Toronto Stock Exchange on a monthly basis for the period commencing on September 1, 2004 and ending on August 31, 2005.
High Low Volume ------ ----- ---------- September 2004.................................... $10.25 $8.30 6,938,500 October 2004...................................... $ 9.30 $6.73 5,842,600 November 2004..................................... $ 9.23 $6.39 14,853,600 December 2004..................................... $ 9.20 $7.00 10,726,800 January 2005...................................... $ 9.95 $7.25 10,251,700 February 2005..................................... $ 9.29 $7.77 7,697,500 March 2005........................................ $ 9.69 $8.44 3,538,100 April 2005........................................ $ 9.18 $5.40 6,905,800 May 2005.......................................... $ 5.75 $3.91 4,559,600 June 2005......................................... $ 4.75 $3.80 13,675,800 July 2005......................................... $ 4.30 $2.55 19,051,900 August 2005....................................... $ 3.59 $2.78 4,199,300
-18- DIRECTORS AND OFFICERS The following table sets forth, as at the date hereof, the name and municipality of residence of each director of CoolBrands, as well as such individual's position with CoolBrands, principal occupation and period of service as a director.
Name, Municipality of Residence and Current Position(s) with the Corporation Principal Occupation Director Since - -------------------------- --------------------------------------------------- -------------- Michael Serruya Executive Co-Chairman and Director of the September 1994 Thornhill, Ontario Corporation Co-Chairman and Director David J. Stein Co-Chairman, President, Chief Executive March 1998 Southampton, New York Officer and Director of the Corporation President, Chief Executive Officer and Director Aaron Serruya Executive Vice President, Secretary and September 1994 Thornhill, Ontario Director of the Corporation Executive Vice President, Secretary and Director David M. Smith Vice-Chairman, Chief Operating Officer and March 1998 Manhasset, New York Director of the Corporation Vice-Chairman, Chief Operating Officer and Director Romeo DeGasperis (1) Vice President of Con-Drain Company Limited, February 2000 Concord, Ontario a watermain and sewer contracting business Director Robert E. Baker (2)(3) President of Puroast Coffee, Inc., a private March 2005 Smyrna, Georgia company manufacturing low acid coffee. Lead Director Beth L. Bronner (1)(3) Senior Vice President & Chief Marketing Officer of March 2005 Deerfield, Illinois Jim Beam Brands Co., a division of Fortune Brands Director Inc., a publicly traded leading consumer products company. L. Joshua Sosland (2)(3) Vice Chairman of Sosland Publishing Co., a March 2005 Kansas City, Missouri publisher of business-to-business periodicals Director for the grain-based and food processing industries. Arthur Waldbaum(1)(2) Private Investor March 2005 Old Westbury, New York Director
(1) Member of the Audit Committee. (2) Member of Compensation Committee. (3) Member of Corporate Governance Committee. -19- During the past five years, each of the foregoing individuals has held his or her present principal occupation or a similar position with his or her present employer or its predecessors or affiliates except for: Mr. Robert E. Baker who, prior to October 2003, was Vice President, Market Strategy at ConAgra Foods Retail Products Company; and Ms. Beth L. Bronner who, from May 2001 to September 2003, served as a private consultant and president of a private realty company and from August 2000 to May 2001 was the President and Chief Operating Officer of ADVO Inc., a publicly-traded targeted home-delivered print advertising company. 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. The following table sets forth, as at the date hereof, the name and municipality of residence of each executive officer of CoolBrands, as well as such individual's position with CoolBrands and principal occupation within the five preceding years.
Name and Municipality of Residence Principal Occupation - ------------------------- ----------------------------------------------------- Michael Serruya Executive Co-Chairman and Director of the Corporation Thornhill, Ontario David J. Stein Co-Chairman, President, Chief Executive Officer Southampton, New York and Director of the Corporation Aaron Serruya Executive Vice President, Secretary and Director of Thornhill, Ontario the Corporation David M. Smith Vice-Chairman, Chief Operating Officer and Director Manhasset, New York of the Corporation Gary P. Stevens Chief Financial Officer of the Corporation. Las Vegas, Nevada Timothy Timm Vice-President, Manufacturing and Quality Assurance Green Bay, Wisconsin of the Corporation. John M. Kaczynski Senior Vice-President, Sales and Marketing of the Marshfield, Massachusetts Corporation. William J. Weiskopf President, Value America Flavors and Ingredients Midlothian, Virginia John R. LeSauvage Vice-President, Operations of the Corporation Chappaqua, New York J. Leo Glynn President, Eskimo Pie Frozen Distribution, Inc. Mahwah, New Jersey
-20- Craig Hettrich President, Foodservice, Impulse and Copack Lincoln, Rhode Island Francis X. Orfanello Vice President East Taunton, Massachusetts
During the past five years, each of the foregoing individuals has held his or her present principal occupation or a similar position with his or her present employer or its predecessors or affiliates except for: Mr. J. Leo Glynn who, prior to June 2003, was employed by Dreyer's Grand Ice Cream from 1993 in various sales and distribution management positions; Mr. Craig Hettrich who, from 2003 to 2005, was a principal of The Hale Group, a strategic management consulting firm serving the food and agribusiness industries, and from 2000 to 2002 was President of American Seafood International; and Mr. Frank Orfanello who, prior to September 2005 was Chief Operating Officer of Veryfine Products Inc., a leading manufacturer of non-carbonated juice and water beverages. As of August 31, 2005, all directors and officers of the Corporation, as a group beneficially own or exercise control of approximately 54.4% of the votes attaching to all outstanding shares of the Corporation, comprised of the following: 155,031 multiple voting shares held directly by The Serruya Family Trust and 4,078,301 multiple voting shares held by 1082272 Ontario Inc., a wholly-owned subsidiary of The Serruya Family Trust; 1,419,467 multiple voting shares held by the Estate of Richard E. Smith, 288,106 multiple voting shares held by David M. Smith and 45,138 multiple voting shares held by David J. Stein; and approximately 66,707 subordinate voting shares held by the remaining directors and officers of the Corporation. In addition, Michael Serruya owns 56,000 subordinate voting shares, Aaron Serruya owns 56,149 subordinate voting shares and the Estate of Richard E. Smith owns 8,300 subordinate voting shares. Corporate Cease Trade Orders or Bankruptcies Michael Serruya, the Corporation's Co-Chairman, by virtue of his role as a director of Moneysworth & Best Shoe Care Inc., was subject to a cease trade order issued by the Ontario Securities Commission in June 2000 concerning Moneysworth & Best Shoe Care Inc. securities when Moneysworth failed to comply with certain continuous disclosure requirements. Moneysworth & Best Shoe Care Inc. filed for voluntary assignment into bankruptcy on July 11, 2000. The cease trade order is no longer in effect. In connection with the Corporation's failure to meet the deadline under Canadian securities legislation of November 29, 2005 for the filing of its audited -21- annual financial statements, related management's discussion and analysis, and annual information form for the year ended August 31, 2005, the Corporation made application to Canadian securities regulators for an order that trading in the Corporation's securities by directors and officers cease until such time as the requisite filings have been made. On December 1, 2005, the Ontario Securities Commission (as principal regulator) issued a temporary order prohibiting Michael Serruya, David Stein, Aaron Serruya, David Smith, Romeo DeGasperis, Robert Baker, Beth Bronner, Joshua Sosland, Arthur Waldbaum, Gary Stevens, Timothy Timm, John Kaczynski, William Weiskopf, Paul Samuel, John LeSauvage, Fred Fullerton, Jr., J. Leo Glynn, Craig Hettrich and Frank Orfanello from trading in securities of the Corporation for a period of 15 days. Penalties or Sanctions No director or officer of the Corporation, and no shareholder holding sufficient securities of the Corporation to effect materially the control of the Corporation, has, during the ten years prior to the date hereof: (a) been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities regulatory authority; or (b) been subject to any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to a reasonable investor making an investment decision. Personal Bankruptcies No director or officer of the Corporation, and no shareholder holding sufficient securities of the Corporation to affect materially the control of the Corporation, nor any personal holding company of any such person, has, during the ten years prior to the date thereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or has been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his or her assets. Conflicts of Interest The directors of the Corporation are required by law to act honestly and in good faith with a view to the best interests of the Corporation and to disclose any interests that they may have in any project or opportunity of the Corporation. If a conflict of interest arises at a meeting of the board of directors, any directors in a conflict is required to disclose his or her interest and abstain from voting on such matter. -22- To the best of the Corporation's knowledge, there are no known existing or potential conflicts of interest among the Corporation, its directors, officers or other members of management of the Corporation as a result of their outside business interests at the date hereof other than: 1. the agreement between Integrated Brands and Calip, a company controlled by David M. Smith, a Director of the Corporation, pursuant to which Integrated Brands 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, 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; and 2. John R. LeSauvage, in addition to his employment with the Corporation as Vice-President, Operations, is also employed by Calip. However, certain of the directors, and officers and other members of management serve as directors, officers, and members of management of other public companies. Accordingly, conflicts of interest may arise which could influence these persons in evaluating possible acquisitions or in generally acting on behalf of the Corporation. The directors and officers of the Corporation have been advised of their obligations to act at all times in good faith in the interest of the Corporation and to disclose any conflicts to the Corporation if and when they arise. AUDIT COMMITTEE Under Multilateral Instrument 52-110 - Audit Committees, companies are required to provide disclosure with respect to their audit committee including the text of the audit committee's charter, composition of the audit committee and the fees paid to the external auditor. Accordingly, the Corporation provides the following disclosure with respect to its audit committee: The Audit Committee Charter The text of the Corporation's audit committee charter is set out in Schedule "A". -23- Composition of the Audit Committee The Audit Committee consists of the following members:
Member Name Independent(1) Financially Literate(2) - ---------------- -------------- ----------------------- Romeo DeGasperis Yes Yes Beth L. Bronner Yes Yes Arthur Waldbaum Yes Yes
(1) A member of an audit committee is independent if the member has no direct or indirect material relationship with the Corporation which could, in the view of the Board of Directors, reasonably interfere with the exercise of a member's independent judgment. (2) A member of an audit committee is financially literate if he/she has the ability to read and understand a set of financial statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Corporation's financial statements. Relevant Education and Experience The education and experience of each Audit Committee member that is relevant to the performance of his or her responsibilities as a member of the Audit Committee are as follows:
Member Name Education and Experience - ---------------- ------------------------------------------------------------- Romeo DeGasperis Mr. DeGasperis is the Chief Executive Officer and a Vice-President of Con-Drain Company Limited, a private company operating in Ontario. He is also a director of Futureway Communications (FCI Broadband), a full service provider of local and long distance telephone, high-speed Internet and data center service to homes and businesses in the Greater Toronto Area. Mr. DeGasperis has been a member of the Audit Committee of CoolBrands since 2000. Beth L. Bronner Ms. Bronner holds a Bachelor of Arts Degree from Vassar College and an MBA in marketing and finance from the University of Chicago. Ms. Bronner has more than 25 years of experience in the consumer products business, including recently as President of Advo, Inc. (listed on the NYSE), Revlon, Inc. (listed on the NYSE), and with Slim Fast Foods. Currently, she is the Chief Marketing Officer and Senior Vice President of Marketing for Jim Beam Brands Worldwide. Ms. Bronner is also a director of two other public companies - Assurant, Inc. and The Hain-Celestial Group. Arthur Waldbaum Mr. Waldbaum has significant experience over more than 25 years in the grocery business, an industry in which CoolBrands participates. He has served in various capacities with Waldbaum's Supermarkets, which was sold to The Great Atlantic & Pacific Tea Co. in 1986, including as Executive Vice-President responsible for merchandising. Mr. Waldbaum also holds a Bachelor of Arts Degree in Sociology and Business from the University of Colorado.
-24- External Auditor Service Fees (By Category) The aggregate fees billed by the Corporation's external auditors in each of the last two financial years for audit fees are as follows:
Financial Year Audit Related Ending August 31 Audit Fees(1) Fees(2) Tax Fees(3) All Other Fees(4) - ---------------- ------------- ------------- ----------- ----------------- 2005 $430,000 $27,750 $10,800 None 2004 $380,500 $17,000 $ 6,200 None
(1) The aggregate audit fees billed. (2) The aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Corporation's financial statements which are not included under the heading "Audit Fees". (3) The aggregate fees billed for professional services rendered for tax compliance, tax advice and tax planning. (4) The aggregate fees billed for products and services other than as set out under the headings "Audit Fees", "Audit Related Fees" and "Tax Fees". 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. INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS The only transactions in which the Corporation has participated within the three year period prior to the date hereof 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 does not earn any fees or premium on such leases. b) 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, -25- 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 c) Integrated Brands, a wholly owned subsidiary of the Corporation, entered into a management agreement effective July 1, 2003 with Calip, pursuant to which Calip provided Mr. Richard Smith's full time management services and certain other ancillary services to the Corporation for a fixed payment of $1,300,000 per year. The management agreement with Calip was terminated following the passing of Mr. Smith on January 29, 2005. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Subordinate Voting Shares and the Multiple Voting Shares of the Corporation is Equity Transfer Services Inc. at its principal office in Toronto, Ontario. MATERIAL CONTRACTS Other than contracts entered into in the ordinary course of business, the following are the only contracts that are material to the Corporation that were entered into either (i) within the most recently completed financial year of the Corporation; or (ii) after January 1, 2002 and before the most recently completed financial year of the Corporation and which is still in effect as of the date hereof: 1. the Credit Amendment (see "General Development of the Business"); 2. the definitive purchase agreement with Kraft relating to the Corporation's purchase of Kraft's yogurt business (see "General Development of the Business"); 3. a transition services agreement dated March 27, 2005 between Kraft and the Corporation pursuant to which Kraft provides the Corporation with certain services to facilitate the Corporation's purchase of Kraft's yogurt business; -26- 4. a transition services agreement dated July 5, 2003 between Dreyer's and the Corporation pursuant to which Dreyer's provides the Corporation with certain transition services to facilitate the Dreyer's Acquisition; 5. a grocery carrier agreement dated July 5, 2003 between Dreyer's and the Corporation pursuant to which the Corporation agreed to perform certain grocery carrier duties for Dreyer's in connection with the Dreyer's Acquisition; 6. a distribution agreement dated July 5, 2003 between Dreyer's and the Corporation pursuant to which Dreyer's provides the Corporation with certain distribution services to facilitate the Dreyer's Acquisition; 7. a non-grocery distribution agreement dated July 5, 2003 between Dreyer's and the Corporation pursuant to which the Corporation agreed to provide Dreyer's with certain distribution services following the Dreyer's Acquisition; and 8. an amended and restated limited partnership agreement dated January 10, 2003 between the Corporation, Americana Foods Corp. and AF Sub Corp. pursuant to which the Corporation was admitted as a limited partner to Americana Foods Limited Partnership in connection with the Americana Foods Acquisition. The above material contracts are available on the Internet at www.sedar.com. INTERESTS OF EXPERTS The Corporation's auditors are BDO Dunwoody LLP, Chartered Accountants, Toronto, Ontario. The report of BDO Dunwoody LLP on the Corporation's consolidated financial statements as at August 31, 2005 and August 31, 2004 has been filed under National Instrument 51-102 with those financial statements. To the best of the knowledge and belief of the Corporation, BDO Dunwoody LLP and its partners collectively own beneficially, directly or indirectly, less than 1% of the Corporation's outstanding Subordinate Voting Shares. -27- ADDITIONAL INFORMATION Additional information concerning the Corporation may be found on SEDAR at www.sedar.com. Additional financial information is contained in the Corporation's audited financial statements and management discussion and analysis for the year ended August 31, 2005. Additional information, including directors' and officers' remuneration and indebtedness and principal holders of securities of the Corporation, is contained in the Corporation's management information circular relating to the annual meeting of shareholders held on February 25, 2005. -28- SCHEDULE "A" COOLBRANDS INTERNATIONAL INC. (The "Company") AUDIT COMMITTEE CHARTER Purpose of the Committee The Audit Committee (the "Committee") is a committee of the Board of Directors of the Company. The function of the Committee is to assist the Board of Directors in fulfilling its oversight responsibilities regarding matters related to the Company's financial reporting. The Committee will primarily fulfill this role by carrying out the activities enumerated in this Charter. Composition of the Committee The Committee shall be comprised of not less than three Directors, each of whom is and must at all times be independent and financially literate within the meaning of applicable Canadian securities laws. The members of the Committee, and its Chair, shall be appointed by the Board of Directors on an annual basis or until their successors are otherwise duly appointed. Responsibilities of the Committee As part of its function in assisting the Board of Directors in fulfilling its oversight responsibilities (and without limiting the generality of the Committee's role), the Committee will: (a) Financial Disclosure (i) Review and recommend to the Board of Directors the Company's annual and interim financial statements, including any certification, report, opinion or review rendered by the external auditor and the related Management's Discussion & Analysis, as well as such other financial information of the Company provided to the public or any governmental body. (ii) Review and recommend to the Board of Directors for approval any press releases of the Company that contain financial information. (iii) Satisfy itself that adequate procedures are in place for the review of the Company's public disclosure of financial information extracted or derived from the Company's financial statements and the related Management's Discussion & Analysis, and periodically assess the adequacy of those procedures. (b) Relationship with the External Auditor (i) Recommend to the Board of Directors the selection of the external auditor and the fees and other compensation to be paid to the external auditor. (ii) Have the authority to communicate directly with the external auditor, and shall communicate directly with the external auditor concerning the audit process in accordance with this Charter. (iii) Advise the external auditor that it is required to report to the Committee, and not to management of the Company. (iv) Monitor the relationship between management and the external auditor, including reviewing any management letters or other reports of the external auditor, discussing any material differences of opinion between management and the external auditor and resolving disagreements between the external auditor and management. (v) Review and discuss on an annual basis with the external auditor all significant relationships they have with the Company, its management or employees that might interfere with the independence of the external auditor. (vi) Pre-approve all non-audit services (or delegate such pre-approval, as the Committee may determine and as permitted by applicable Canadian securities laws) to be provided by the external auditor. (vii) Review the performance of the external auditor and recommend any discharge of the external auditor when the Committee determines that circumstances warrant. (viii) Periodically consult with the external auditor out of the presence of management regarding: (A) any significant financial risks or exposures facing the Company; -2- (B) internal financial reporting controls and other steps that management has taken to control such risks; and (C) the fullness and accuracy of the financial statements of the Company, including the adequacy of internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper. (ix) Review and approve any proposed hiring of current or former partners or employees of the current (and any former) external auditor of the Company. (c) Audit Process (i) Review the scope, plan and results of the external auditor's audit and reviews, including the auditor's engagement letter, the post-audit management letter, if any, and the form of the audit report. The Committee may authorize the external auditor to perform supplemental reviews, audits or other work as deemed desirable. (ii) Following completion of the annual audit and quarterly reviews, review separately with each of management and the external auditor any significant changes to planned procedures, any difficulties encountered during the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to required information and the cooperation that the external auditor received during the course of the audit and, if applicable, reviews. (iii) Review any significant disagreements among management and the external auditor in connection with the preparation of the financial statements. (iv) Where there are significant unsettled issues between management and the external auditor that do not affect the audited financial statements, the Committee shall seek to ensure that there is an agreed course of action leading to the resolution of such matters. (v) Review with the external auditor and management significant findings and the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented. -3- (vi) Review the system in place to seek to ensure that the financial statements, Management's Discussion & Analysis and other financial information disseminated to applicable securities regulators and stock exchanges, and the public, satisfy applicable requirements. (d) Financial Reporting Processes (i) Review the integrity of the Company's financial reporting processes, both internal and external, in consultation with the external auditor. (ii) Review all material balance sheet issues, material contingent obligations and material related party transactions. (iii) Review with management and the external auditor the Company's accounting policies and any changes that are proposed to be made thereto, including all critical accounting policies and practices used, any alternative treatments of financial information that have been discussed with management, the ramification of their use and the external auditor's preferred treatment and any other material communications with management with respect thereto. Review the disclosure and impact of contingencies and the reasonableness of the provisions, reserves and estimates that may have a material impact on financial reporting. (e) General (i) The Committee may at its discretion retain independent counsel, accountants and other professionals to assist it in the conduct of its activities and to set and pay (as an expense of the Company) the compensation for any such advisors. (ii) Periodically review this Charter and, if the Committee deems appropriate, recommend to the Board of Directors changes to this Charter. (iii) Review the public disclosure regarding the Committee required from time to time by applicable Canadian securities laws, including: (A) the Charter of the Committee; (B) the composition of the Committee; -4- (C) the relevant education and experience of each member of the Committee; (D) the external auditor services and fees; and (E) such other matters as the Company is required to disclose concerning the Committee. (iv) Perform any other activities as the Committee or the Board of Directors deems necessary or appropriate. Limitations on the Committee's Duties and Responsibilities In contributing to the Committee's discharge of its duties under this Charter, each member of the Committee shall be obliged only to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nothing in this Charter is intended or may be construed as imposing on any member of the Committee a standard of care or diligence that is in any way more onerous or extensive than the standard to which the Directors are subject. It is not the duty of the Committee to prepare financial statements or ensure their accuracy or absence of errors and omissions, to plan or conduct audits, to determine that the financial statements are complete and accurate and in accordance with applicable generally accepted accounting principles, to conduct investigations, or to assure compliance with laws and regulations or the Company's internal policies, procedures and controls, as these are the responsibility of management and in certain cases the external auditor. Members of the Committee are entitled to rely, absent actual knowledge to the contrary, on (i) the integrity of the persons and organizations from whom they receive information, (ii) the accuracy and completeness of the information provided, (iii) representations made by management as to the non-audit services provided to the Company by the external auditor, (iv) financial statements of the Company represented to them by a member of management or in a written report of the external auditors to present fairly the financial position of the Company in accordance with generally accepted accounting principles, and (v) any report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person. Meeting Procedure (a) General (i) The Committee shall meet at least four times annually. -5- (ii) The Committee or its Chair will meet at least once per year with management and the external auditor in separate sessions to discuss any matters that the Committee or each of these groups desires to discuss privately. (b) Quorum (i) A quorum for the transaction of business at any meeting of the Committee shall be a majority of the number of members of the Committee or such greater number as the Committee shall by resolution determine. (c) Minutes (i) The Committee shall keep minutes of each meeting of the Committee. A copy of the minutes shall be provided in a timely manner to each member of the Committee and each member of the Board of Directors. (d) Notice of Meetings (i) Meetings of the Committee shall be held from time to time and at such place as any member of the Committee shall determine upon a minimum of 24 hours prior notice to each of the other Committee members. (ii) The members of the Committee may waive the requirement for notice. The Chief Executive Officer and the Chief Financial Officer, and the external auditor shall be entitled to request that the Chair call a meeting. (iii) The Committee may ask members of the Company's management, employees or others (including the external auditor) to attend meetings and provide such information as the Committee requests. Members of the Committee shall have full access to all information of the Company (including, for greater certainty, its affiliates, subsidiaries and their respective operations) and shall be permitted to discuss such information and any other matters relating to the results of operations and financial position of the Company with management, employees, the external auditor and others as they consider appropriate. -6- Complaints Procedure Anyone may submit a complaint regarding conduct by the Company or its employees or agents (including its external auditor) reasonably believed to involve questionable accounting, internal accounting controls, auditing or other matters. The Chair of the Committee will oversee treatment of such complaints. Complaints are to be directed to the attention of the Chair of the Committee. Complaints may be submitted to the Chair on a confidential basis to the following confidential e-mail address: auditchair@coolbrandsww.com. The Committee will endeavour to keep the identity of the complainant confidential. The Chair of the Committee shall lead the review and investigation of a complaint. The Committee shall retain a record of all complaints received. Corrective action will be taken when and as warranted. Establishment of the Committee The Committee is established by resolution of the Board of the Directors of the Company dated April 1, 2005. -7- EX-99 5 ex99-4.txt EXHIBIT 99.4 [BDO LOGO] BDO Dunwoody Royal Bank Plaza LLP P.O. Box 32 Chartered Accountants Toronto Ontario Canada M5J 2J8 Telephone: (416) 865-0200 Telefax: (416) 865-0887 www.bdo.ca AUDITORS' REPORT To the Shareholders of CoolBrands International Inc.: We have audited the consolidated balance sheets of CoolBrands International Inc. as at August 31, 2005 and 2004 and the consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2005 and 2004 and the results of its operations, and its cash flows for the years then ended in accordance with United States generally accepted accounting principles. /s/ BDO Dunwoody LLP - --------------------------- Chartered Accountants Toronto, Ontario December 9, 2005 BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario -2- CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
2005 2004 -------- -------- Assets Current Assets: Cash $ 24,062 $ 36,277 Investments 7,500 28,050 Restricted cash 10,000 Receivables, net 54,526 67,152 Receivables - affiliates 1,840 3,883 Inventories 49,955 49,076 Income taxes recoverable 9,767 Prepaid expenses 2,413 1,203 Deferred income taxes 5,148 4,907 -------- -------- Total current assets 165,211 190,548 Deferred income taxes, net of valuation allowance 14,799 13,711 Property, plant and equipment 47,639 28,730 Intangible and other assets 22,369 12,180 Goodwill 47,827 72,088 -------- -------- $297,845 $317,257 ======== ========
-3- CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
2005 2004 -------- -------- Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 53,300 $ 37,506 Payables - affiliates 620 850 Accrued liabilities 30,015 20,624 Income taxes payable 4,938 Deferred income taxes 93 Short term borrowings 34,553 Current maturities of long-term debt 18,161 8,492 -------- -------- Total current liabilities 136,742 72,410 Long-term debt 8,248 19,262 Other liabilities 2,881 2,758 Deferred income taxes 6,180 3,638 -------- -------- Total liabilities 154,051 98,068 -------- -------- Minority interest 5,388 8,088 -------- -------- Commitments and contingencies Shareholders' Equity Capital stock 97,578 97,485 Additional paid-in capital 46,376 44,494 Accumulated other comprehensive earnings (1,696) (1,096) Retained earnings (3,852) 70,218 -------- -------- Total shareholders' equity 138,406 211,101 -------- -------- $297,845 $317,257 ======== ========
See accompanying notes to consolidated financial statements. Approved by the Board, "David J. Stein", Director "Romeo DeGasperis", Director - ---------------- ------------------ -4- CoolBrands International Inc. Consolidated Statements of Operations for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars, except for per share data)
2005 2004 -------- -------- Net revenues: Net sales $364,686 $406,470 Royalties, licensing, and consumer products license revenues 6,138 3,595 Drayage and other income 14,246 39,873 -------- -------- Total net revenues 385,070 449,938 -------- -------- Cost of goods sold 361,668 329,346 Selling, general and administrative expenses 52,172 51,688 Stock-based compensation expense 1,918 30,983 Interest expense 2,586 1,498 Asset impairment 55,525 Gain on sale of building (3,634) -------- -------- (Loss) earnings before income taxes and minority interest (85,165) 36,423 Minority interest (2,700) (958) -------- -------- (Loss) earnings before income taxes (82,465) 37,381 -------- -------- (Recovery of) provision for income taxes: Current (10,193) 29,183 Deferred 1,798 (15,314) -------- -------- (8,395) 13,869 -------- -------- Net (loss) earnings $(74,070) $ 23,512 ======== ======== Per share data: (Loss) earnings per share: Basic and diluted $ (1.32) $ .42 ======== ======== Weighted average shares outstanding: Shares used in per share calculation - basic 55,924 55,441 Shares used in per share calculation - diluted 55,924 56,329
See accompanying notes to consolidated financial statements -5- CoolBrands International Inc. Consolidated Statements of Shareholders' Equity for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
Accumulated other comprehensive Total Capital Additional (losses) Retained Shareholders' Stock paid-in capital earnings earnings equity ------- --------------- ------------- -------- ------------- Balance at August 31, 2003 $85,199 $ 1,649 $ (840) $ 46,706 $132,714 Comprehensive earnings: Net earnings 23,512 23,512 Other comprehensive earnings, net of income taxes: Currency translation adjustment (256) (256) Tax benefit relating to exercise of non- qualified stock options 11,862 11,862 Stock-based compensation expense 30,983 30,983 -------- Total other comprehensive earnings 42,589 -------- Total comprehensive earnings 66,101 -------- Issuance of shares for stock options exercised 11,779 11,779 Issuance of shares for warrants exercised 507 507 ------- ------- ------- -------- -------- Balance at August 31, 2004 97,485 44,494 (1,096) 70,218 211,101 Compressive losses: Net loss (74,070) (74,070) Other comprehensive earnings (losses), net of income taxes: Currency translation adjustment (600) (600) Stock-based compensation expense 1,918 1,918 -------- Total other comprehensive earnings 1,318 -------- Total comprehensive loss (72,752) -------- Issuance of shares for stock options exercised 93 (36) 57 ------- ------- ------- -------- -------- Balance at August 31, 2005 $97,578 $46,376 $(1,696) $ (3,852) $138,406 ======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements. -6- CoolBrands International Inc. Consolidated Statements of Cash Flow for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
2005 2004 -------- -------- Cash and short-term investments provided by (used in): Operating activities: Net (loss) earnings $(74,070) $ 23,512 Adjustments to reconcile net (loss) net earnings to net cash flows from operating activities Depreciation and amortization 5,042 7,314 Asset impairment 55,525 Stock-based compensation expense 1,918 30,983 Deferred income taxes 1,798 (15,314) Gain on sale of building (3,634) Minority interest (2,700) (958) Cash effect of changes, net of the effects from businesses acquired Receivables 13,815 (21,115) Receivables - affiliates 2,043 (1,464) Allowance for doubtful accounts (56) 126 Inventories 4,500 (6,845) Prepaid expenses (2,207) 6,252 Income taxes recoverable (9,767) Accounts payable 15,842 16,740 Payables - affiliates (230) 277 Accrued liabilities 8,744 (4,843) Income taxes payable (4,935) 9,319 Other assets (513) 53 Other liabilities 124 (268) -------- -------- Cash provided by operating activities 11,239 43,769 -------- -------- Investing activities: Purchase of property, plant and equipment (12,409) (13,363) Purchase of intangible assets (76) Purchase of license agreements (26) (300) Proceeds from sale of building 5,434 Increase in restricted cash (10,000) Purchase of investments (2,500) (33,050) Redemption of investments 23,050 5,000 Acquisitions, net of cash acquired (59,609) Increase in notes receivable (28) Collection of notes receivable 65 23 -------- -------- Cash used in investing activities (56,023) (41,766) -------- -------- Financing activities: Change in revolving line of credit, secured 2,661 1,514 Capital contributions from minority interest 8,907 Proceeds from short term borrowings 44,553 Return of capital contribution to minority interest (2,000) Proceeds from issuance of Class A and B shares 57 12,286 Repayment of short term borrowings (10,000) Repayment of long-term debt (4,007) (5,781) -------- -------- Cash provided by financing activities 33,264 14,926 -------- -------- Increase (decrease) in cash flows due to changes in foreign exchange rates (695) (2,412) -------- -------- (Decrease) increase in cash and cash equivalents (12,215) 14,517 Cash and cash equivalents - beginning of year 36,277 21,760 -------- -------- Cash and cash equivalents - end of year $ 24,062 $ 36,277 ======== ========
See accompanying notes to consolidated financial statements. -7- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies Frozen desserts segment (formerly Prepackaged consumer products) Revenues and profits in the Frozen desserts (formerly Prepackaged consumer products) segment are generated from manufacturing and selling a variety of prepackaged frozen dessert to distributors, including Eskimo Pie Frozen Distribution, and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. CoolBrands competes in the fast-growing Better for You ice cream category with offerings such as fat-free, non-dairy WholeFruit Sorbet and Atkins Endulge controlled-carbohydrate super premium ice cream. New Better for You offerings by CoolBrands include No Pudge! branded frozen snacks and a line of Better for Kids frozen snacks sold under the Crayola, Justice League, Snapple, Care Bears and Trix Pops brands. CoolBrands also competes in the super premium ice cream category with the Dreamery Ice Cream and Godiva Ice Cream brands. In addition, CoolBrands markets a wide variety of "all family" premium ice creams and frozen snacks under brand names including Eskimo Pie, Chipwich, Tropicana and Yoplait. CoolBrands' subsidiary, Eskimo Pie Frozen Distribution, operates a direct store door ice cream distribution system in selected markets in the U.S., serving these CoolBrands products and a growing family of Partner Brands to supermarkets, convenience stores and other retail customers. CoolBrands' 50.1% owned subsidiary, Americana Foods, is a leading U.S. manufacturer and supplier of packaged ice cream, frozen yogurt and sorbet products, frozen snacks, soft-serve mixes and other food products to well-known national retailers, food companies and restaurant chains. Yogurt segment CoolBrands' subsidiary, CoolBrands Dairy Inc., manufactures cup yogurt at its plant located in North Lawrence, New York and markets the products under the Breyers brand pursuant to a trademark rights agreement, which grants the rights in perpetuity, and under the Creme Savers brand pursuant to a long-term license agreement. Foodservice segment Revenues and profits in the Foodservice segment are generated from manufacturing and selling soft-serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft-serve ice cream and yogurt products to consumers. -8- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Dairy components segment Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. CoolBrands' Dairy Components division manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, eggnog bases and other ingredients, and flexible packaging products for use in private label dairy products, in addition to the Company's brands. Franchising and licensing segment Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring franchise revenues, and from the sale of proprietary products to franchisees and licensees and from Company-owned stores selling ice cream and soft-serve yogurt out of Company-owned stores and outlets. CoolBrands' Franchising division franchises and licenses frozen dessert outlets operated under a Family of Brands including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I Can't Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and Ice Cream Churn, with company-owned, franchised and non-traditional partnership locations around the world. Basis of presentation The consolidated financial statements are prepared by management using accounting principles generally accepted in the United States and include all wholly and majority owned subsidiaries. All significant intercompany transactions of consolidated subsidiaries are eliminated. Acquisitions recorded as purchases are included in the statement of operations from the date of acquisition. All amounts are reported in U.S. dollars unless otherwise indicated. Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated. Cash All highly liquid commercial paper purchased with maturities of three months or less is classified as a cash equivalent. Cash equivalents are stated at cost, which approximates market value. Investments The Company's investment portfolio consisted of investments in Auction Rate Securities. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in -9- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) excess of 90 days. The Company evaluates whether to redeem or rollover each security no later than every 35 days. At August 31, 2005 and 2004 the Company had investment balances of $7,500 and $28,050, respectively. Inventories Inventories consist primarily of ice cream, frozen yogurt and frozen dessert products, cup yogurt products, food supplies and packaging. Inventories are valued at the lower of cost and net realizable value, with cost determined principally by the first-in, first-out (FIFO) method. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of buildings and machinery and equipment is provided by the straight-line or declining balance methods, using the estimated useful lives of the assets, principally 20 to 38 years and 2 to 10 years, respectively. Store leasehold improvements are amortized on a straight-line basis over the terms of the leases, principally 5 to 10 years. Intangible and other assets Intangible and other assets consist of license agreements, trademarks, trademark rights, franchise agreements and rights and other assets. Amortizing intangibles are stated at cost less accumulated amortization. Amortization is provided by the straight-line method using the terms of the agreements, which range from 4 to 20 years. Goodwill and Other Non-Amortizable Asset In accordance with Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"), goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but instead are to be tested for impairment at least annually or earlier if there are impairment indicators. Other intangible assets continue to be amortized over their estimated useful lives. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. The Company completed its annual impairment testing of goodwill and intangible assets. This review resulted in a $48,701 non-cash pre tax charge related to a goodwill impairment in the Company's frozen dessert segment and a $3,400 non-cash pre tax goodwill impairment in the Company's franchise business segment. Also this review resulted in a $1,401 and $ 1,540 non-cash pre tax charge related to intangible asset impairment for the Company's frozen dessert segment and franchise business segment, respectively. -10- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Long-Lived Assets The Company's other long-lived assets include property, plant and equipment and amortizable intangibles. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of any of these assets may not be recoverable, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". When any such impairment exists, the related assets will be written down to fair value. During the fourth quarter, due to the presence of indicators, the Company completed impairment testing of other long-lived assets. This review resulted in a $ 483 impairment of property, plant and equipment. Revenue recognition Revenue from sales of the Company's products is recognized at the time of sale, which is generally when products are shipped to customers. Revenue from drayage income is recognized at the time the product is delivered for the vendor to their customer by the Company. Effective September 1, 2004, Coolbrands began the distribution of Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's") products as an independent distributor, changing from the previously used drayage basis. As a result of this change, Coolbrands began purchasing products from Dreyer's and selling those products to customers at wholesale, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. Revenue from sales by Company-owned and operated stores is recognized when products are purchased by customers. Master franchise fee revenues are recognized at the time the Company has received the deposit specified in the master franchise agreement, has substantially performed all significant services to be provided in accordance with the terms of the agreement and when collectibility is reasonably determinable. Single store franchise fees are recognized as revenue when the franchise application is approved, cash payments are received, and the Company has performed substantially all services required under the agreement. Continuing franchise royalties are based on a percentage of gross sales as reported by the franchisees or gross products purchased by the franchisees. These fees are recognized on an accrual basis as they are earned. Product introduction expenses Product introduction expenses (i.e. slotting fees) are recognized as expenses at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. -11- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Advertising The Company spends a significant amount of its advertising dollars with its supermarket customers in the form of co-operative advertising in the chains' weekly circulars. The remainder of the Company's advertising is spent on media and other direct advertising. All advertising costs are expensed as incurred. The Company spent $7,165 on advertising for the year ended August 31, 2005 (2004 - - $5,600). Financial instruments The carrying amount of financial instruments including cash, investments, restricted cash, receivables, receivables - affiliates, accounts payable, payables - affiliates, accrued liabilities and income taxes payable and income taxes recoverable approximates fair value at August 31, 2005 because of the relatively short maturity of these instruments. The fair value of short term borrowings and long-term debt are disclosed in Note 9. The carrying amount of the remaining long-term debt approximates fair value at August 31, 2005 because of their fluctuating interest rates. The carrying amount of other liabilities approximates fair value at August 31, 2005 because the fair value estimates are based upon pertinent information available to management at August 31, 2005. Concentration of credit risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash, investments and receivables. The Company attempts to minimize credit risk with respect to receivables by reviewing customers' credit history before extending credit, and by regularly monitoring customers' credit exposure. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Earnings (loss) per share The Company uses the treasury stock method to determine the dilutive earnings per share. The following table presents the numerators and denominators used in the basic and diluted (loss) earnings per share calculations:
2005 2004 -------- ------- Numerator Net (loss) earnings $(74,070) $23,512 ======== ======= Denominator Basic weighted average shares outstanding 55,924 55,441 Dilutive effect of stock awards 888 -------- ------- 55,924 56,329 ======== ======= Net (loss) earnings Basic $ (1.32) $ .42 Diluted $ (1.32) $ .42
-12- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Diluted net loss per share for 2005 is equal to basic net loss per share because the effect of common stock equivalents is anti-dilutive. Potentially dilutive securities, calculated in terms of weighted-average share equivalent of stock options outstanding, are excluded from the calculations of diluted net loss per share when their inclusion would have anti-dilutive effect. During 2005,145,000 shares of potentially dilutive securities were excluded from weighted-average share calculation for purposes of calculating weighted-average diluted shares and diluted loss per share. Foreign currency translation Translation gains or losses of accounts of foreign subsidiaries considered financially and operationally self-sustaining are deferred as a separate component of shareholders' equity until there has been a realized reduction in the net investment. Foreign currencies are translated into U.S. dollars using the average exchange rate for the year for items included in the Consolidated Statements of Earnings. Foreign currencies are translated into U.S. dollars using the current rate for assets and liabilities included in the consolidated balance sheets except for earnings reinvested in the business, which are translated at historical rates. Income taxes Income taxes are calculated using the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. New accounting pronouncements In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation, which was subsequently revised in December 2003 (FIN 46-R), clarifies certain issues related to Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and addresses consolidation by business enterprises of the assets, liabilities, and results of the activities of a variable interest entity. The Company has determined that it does not hold a variable interest in a variable interest entity under FIN 46-R at August 31, 2005. In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing". This Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The provisions of this statement are effective for inventory costs incurred during the fiscal year beginning after June 15, 2005 and are applied on a prospective basis. The Company does not expect the impact of implementing this Statement to have a material effect on its financial statements. -13- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) In December 2004, the FASB issued Statement No. 153, "Exchange of Nonmonetary Assets" ("SFAS 153"). SFAS 153 eliminates prior guidance for nonmonetary transactions by eliminating the exception for nonmonetary exchanges of similar production assets and replaces it with a general exception for exchange of nonmonetary assets lacking commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a material effect on its financial position or results of operations. In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 requires companies to recognize changes in accounting principle, including changes required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods' financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS 154 will have a material effect on its financial position or results of operations. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces "Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual reporting period that begins after June 15, 2005. Under SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. The Company has not at this time evaluated the impact of implementing this statement on its financial statements. Reclassifications Certain 2004 amounts have been reclassified to conform with the 2005 presentation. Certain auction rate securities have been reclassified from cash to investments. Auction rate securities are variable rate bonds tied to short-term interest rates with maturities on the face of the securities in excess of 90 days. The Company historically classified these instruments as cash if the period between interest rate resets was 90 days or less, which was based on the Company's ability to either liquidate its holdings or roll the investment over to the next reset period. The Company has classified its auction rate securities at August 31, 2005 of $7,500 and $28,050 at August 31, 2004 as investments. In addition, "Purchase of investments" and "Redemption of investments" included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities for the year ended August 31, 2004. -14- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 2. Changes in accounting policies Change in reporting currency Effective September 1, 2004, the Company changed its reporting currency from Canadian dollars to U.S. dollars since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars. Adoption of US GAAP During the fourth quarter of 2005, the Company adopted, on a retroactive basis, accounting principles generally accepted in the United States of America. Previously the Company prepared its annual and interim consolidated financial statements in accordance with generally accepted accounting principals in Canada ("Cnd GAAP"). As a result, the following adjustments have been made to previously issued Consolidated Financial Statements. The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). Such consumer and trade promotion activities have been historically accounted for as selling, general and administrative expenses. In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures must be deducted from revenue. Accordingly, our Consolidated Statement of Operations for 2004 has been restated to reflect a reduction in revenues and selling, general and administrative expenses of $32,913. The reduction in revenues and selling, general and administrative expenses in our 2005 Consolidated Statement of Operations is $68,155. The following summarizes the impact of restatement for the change from CDN to US GAAP for consumer trade promotion expenses in our Consolidated Statement of Operations:
2005 2004 -------- -------- Total net revenues in accordance with Canadian GAAP $453,225 $482,851 Less consumer and trade promotion expenditures (68,155) (32,913) -------- -------- Total net revenues in accordance with U.S. GAAP $385,070 $449,938 ======== ========
2005 2004 -------- -------- Total selling, general and administrative expenses in accordance with Canadian GAAP $120,327 $ 84,601 Less consumer and trade promotion expenditures (68,155) (32,913) -------- -------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 52,172 $ 51,688 ======== ========
-15- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 2. Changes in accounting policies (cont'd) Product introduction expenditures (i.e. slotting fees) incurred by the Company have been historically recognized as expense by amortizing the slotting fees over the twelve months subsequent to the actual acceptance of product introduction offers by our customers. Under U.S. GAAP, such expenditures are recognized as reductions in revenues at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported Net earnings for the year ended August 31, 2004 has been increased by $756. Our reported net loss for the year ended August 31, 2005 was increased by $553, when compared with the Net loss that would have been reported using our historical accounting principles. The following summarizes the impact of restatement for the change from CDN to US GAAP for new product introduction expenditures (slotting fees) in our Consolidated Statement of Operations:
2005 2004 -------- ------- Net (loss) earnings income in accordance with Canadian GAAP $(73,517) $22,756 Adjustment for new product introduction expenditures (553) 756 -------- ------- Net (loss) earnings income in accordance with U.S. GAAP $(74,070) $23,512 ======== =======
Stock-based compensation On September 1, 2005, the Company adopted, on a retroactive basis without restatement, the recommendation of CICA Handbook Section 3870, "Stock-based compensation and other stock-based payments", which required companies to adopt the fair value based method for all stock-based awards granted on or after September 1, 2002. Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. As a result of adopting U.S. GAAP during the fourth quarter of 2005, as previously discussed, the Company adopted, on a modified prospective basis, the recommendations of Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting for Stock Based Compensation." This statement superseded Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows". The effect of adopting this accounting policy increased the loss before income taxes and minority interest for fiscal 2005 by $1,918 with a corresponding increase to additional paid-in capital and reduced earnings before income tax and minority interest for fiscal 2004 by $24,270 with a corresponding increase to additional paid-in capital. -16- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 3. Acquisitions 2005 Acquisitions On March 27, 2005, the Company completed the acquisition of the yogurt business of Kraft Foods, Inc. The acquired brands included Breyers Fruit on the Bottom, Light and Creme Savers cup yogurt varieties and Cream Savers Smoothie drinkable yogurt and included substantially all of Kraft's assets related to its yogurt business, including a license for the Breyers trademark, a license for the Creme Savers trademark, a license for the Light 'n Lively trademark and Kraft's manufacturing facility in North Lawrence, New York. The purpose of this acquisition was to diversify CoolBrands business and to reduce its concentration of operations in the frozen desserts segment. Factors that contributed to the purchase price and resulting goodwill were based upon negotiations with the seller and the valuation of the business based upon future contributions to net earnings and cash flow. The following is a summary of the assets and liabilities acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: - -------------------- Current assets $ 5,373 Property, plant and equipment 11,846 Trademark rights 15,000 Goodwill 27,582 ------- 59,801 Less: Liabilities (649) ------- $59,152 =======
Purchase consideration: - ----------------------- Cash $17,500 Acquisition costs 1,652 Bank loan 40,000 ------- $59,152 =======
In April 2005, the Company acquired the assets of Zipp Manufacturing, Inc., a manufacturer of flavors and ingredients. The assets and related business of Zipp Manufacturing were acquired to provide additional volume to our dairy components segment which has excess capacity. The primary factors that contributed to the purchase price and resulting goodwill were based upon negotiations with the seller, CoolBrands' desire for additional production volume and the resulting projected incremental earnings and cash flow. The following is a summary of the assets and liabilities acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: - -------------------- Current assets $208 Equipment 80 Goodwill 258 ---- 546 Less: Liabilities (89) ---- $457 ====
Purchase consideration: - ----------------------- Cash $457 ====
-17- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 4. Receivables, net
2005 2004 ------- -------- Trade accounts receivable $57,213 $69,692 Franchise and license fees receivable 324 516 Notes receivable, current maturities 97 108 ------- ------- 57,634 70,316 Less Allowance for doubtful accounts (3,108) (3,164) ------- ------- $54,526 $67,152 ======= ======= Allowance for doubtful accounts: Year ended August 31, 2003 $ 2,888 Charges to costs and expenses 818 Reserve utilized (542) ------- Ending balance August 31, 2004 3,164 Charges to costs and expenses 1,846 Reserve utilized (1,902) ------- Ending balance August 31, 2005 $ 3,108 =======
No customer accounted for 10 percent or more of Total net revenues in 2005 and 2004. Note 5. Inventories
2005 2004 ------- ------- Raw materials and packaging $35,304 $32,484 Finished goods 14,651 16,592 ------- ------- $49,955 $49,076 ======= =======
Write-downs of obsolete and slow moving inventories in 2005 and 2004 were $12,723 and $1,165, respectively. Note 6. Property, plant and equipment
2005 2004 ------- ------- Land $ 1,577 $ 924 Buildings 19,292 10,826 Machinery and equipment 35,412 24,341 Leasehold improvements 1,740 2,342 ------- ------- 58,021 38,433 Less Accumulated depreciation and amortization Buildings 1,906 1,030 Machinery and equipment 7,497 7,769 Leasehold improvements 979 904 ------- ------- $47,639 $28,730 ======= =======
-18- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 7. Intangible and other assets and Goodwill Definite life intangible assets are amortized over their estimated useful lives. The Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During the fourth quarter of 2005, the Company completed its annual review of goodwill and intangible assets. This review resulted in a $2,941 non-cash pre tax charge related to intangible asset impairment and a non-cash pre tax charge of $52,101 related to goodwill impairment. At August 31, 2005 and 2004 goodwill by reportable segment was as follows:
2005 2004 ------- ------- Frozen desserts $ 3,752 $52,461 Yogurt 27,582 Foodservice 11,302 11,302 Dairy components 745 488 Franchising and licensing 4,446 7,837 ------- ------- Total Goodwill $47,827 $72,088 ======= =======
Intangible assets at August 31, 2005 and 2004 were as follows:
2005 2004 ----------------------- ----------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization -------- ------------ -------- ------------ Non-amortizable intangible assets $15,000 $ $ $ Amortizable intangible assets 8,126 3,362 12,567 4,305 Other assets 2,605 3,918 ------- ------ ------- ------ Total Intangible assets and other assets $25,731 $3,362 $16,485 $4,305 ======= ====== ======= ======
Non-amortizable intangible assets are substantially comprised of trademark rights purchased through the acquisitions. Amortizable intangible assets consist primarily of certain trademarks, license agreements and franchise agreements and rights. Pre-tax amortization expense for intangible assets was $745 and $872 for the years ended August 31, 2005 and 2004 respectively. Amortization expense for each of the next five years is currently estimated to be $745 or less. -19- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 7. Intangible and other assets and Goodwill (cont'd) The movement in goodwill and gross carrying amounts of intangible and other assets is as follows:
2005 2004 ------------------------- ------------------------- Intangible and Intangible and Goodwill other assets Goodwill other assets -------- -------------- -------- -------------- Balance at August 31 $ 72,088 $16,485 $71,977 $19,928 Changes due to: Acquisitions 27,840 15,000 111 Goodwill impairment (52,101) Intangible asset impairment (2,941) Other (2,813) (3,443) -------- ------- ------- ------- Balance at August 31 $ 47,827 $25,731 $72,088 $16,485 ======== ======= ======= =======
Note 8. Short-term borrowings
2005 ------- Unsecured $30,000 Secured 4,553 ------- $34,553 =======
There were no short term borrowings during the year ended August 31, 2004. Unsecured In Connection with the acquisition of the Breyer's yogurt business from Kraft in March 2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The unsecured term loan requires monthly payments of interest and repayment of the $40,000 principle balance on November 1, 2005. Interest is payable monthly with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates plus applicable margin are the lower of prime plus 0.5% or libor plus 2.5% (6.02% at August 31, 2005). On August 23, 2005, the Company made a principal payment of $10,000 in anticipation of the September 2, 2005 amendment as discussed in Note 9. As of August 31, 2005 the term loan balance was $30,000. Secured On April 27, 2005 Americana Foods LP ("Americana"), which is owned 50.1% by the Company, borrowed $4,553 to purchase a building and adjacent acreage. The loan terms requires monthly, interest-only payments until the April 27, 2006 anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The agreement provides a one-time right to extend the maturity date by two years until April 27, 2008. Monthly payments during the two year extension period will be based on a 25-year amortization period. -20- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 8. Short-term borrowings (Cont'd) Americana may also at the extension date choose to continue an interest rate at Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender. Due to the one year maturity date of April 27, 2006 (before exercise of the extension option), this note is classified as a current liability. Note 9. Long-term debt
2005 2004 ------- ------- Term loan, unsecured $10,500 $13,587 Term loan, secured 8,610 9,117 Revolving loan, secured 7,145 4,483 Capitalized leases 154 567 ------- ------- 26,409 27,754 Less: Current maturities 18,161 8,492 ------- ------- $ 8,248 $19,262 ======= =======
In connection with the acquisition of Eskimo Pie Corporation, a subsidiary borrowed $30,000, to finance the acquisition. The unsecured term loan is payable in monthly installments of $250, with the remaining principal balance due November 1, 2005. Interest is payable monthly on the unpaid principal balance with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates, plus applicable margins were the lower of prime plus 0.5% or libor plus 2.0% (5.49% at August 31, 2005). As of August 31, 2005 and 2004, the term loan balance was $10,500 and $13,500, respectively. All borrowings under the above unsecured term loan agreement are guaranteed by the Company. The agreement contains restrictions relating to the payment of dividends, rental obligations, liens, indebtedness, dispositions of property, change in the nature of its business, change in ownership and requires that the net proceeds from the sale (other than in the ordinary course of business) of any assets of Eskimo Pie Corporation must be utilized to reduce the then outstanding principal balance of the term loan. In addition, the Company must maintain certain financial ratios and limit capital expenditures to $5,000 during any fiscal year. The company was in default of it's financial covenants at May 31, 2005 and August 31, 2005. On September 2, 2005 the company entered into an amendment to its existing credit facilities. The Amendment extends the maturity of the existing facilities from November 1, 2005 until January 3, 2006 and waives defaults in its financial covenants resulting from the company's financial performance. The September 2, 2005 amendment eliminated all of the financial covenants from the loan agreements through the remainder of the term and grants a security interest in the personal property assets (other than certain excluded assets relating to the operations of the Company's 50.1% owned limited partnership), reduced its outstanding indebtedness to the bank to $40,500, including short term borrowings of $30,000. The Company agreed to an increase of the interest rate from libor plus 2.0% on all remaining outstanding balances to libor plus 4.5%. In addition, the amendment reduced the Company's $5,000 revolving credit facility to $925 and required -21- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 9. Long-term debt (cont'd) the Company to maintain $20,000 of cash balances, of which $10,000 is restricted to use as approved by the lender. The increases in interest rates as a result of this amendment increases the fair value of the related short term borrowings and long-term debt by approximately $331. Term loan, secured On November 19, 2002, Americana entered into a credit agreement with a financial institution that includes a term loan of $10,000. This term loan is secured by Americana's property, plant and equipment. Principal payments are payable in fixed monthly installments of $81 based upon a fifteen-year amortization and matures on November 19, 2007. The loan bears interest at prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). As of August 31, 2005 and 2004 the term loan balance was $8,610 and $9,117, respectively. On March 19, 2005 Americana executed an amendment to the credit agreement. Pursuant to this amendment, a fixed charge coverage ratio of 1.25:1 and a debt-to-tangible net worth ratio of 2:1 must be maintained. The minimum tangible net worth requirement was increased to $20,500 effective March 19, 2005. The partnership is in compliance with its loan covenants at August 31, 2005. Revolving loan, secured Americana's credit agreement includes a revolving loan up to $9,000, subject to a borrowing base calculation, and bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and is due on November 30, 2005. At August 31, 2005 approximately $1,855 was available to the Partnership under this loan. The revolving loan is secured by Americana's accounts receivable and inventory and is classified as a current liability. On November 30, 2005 Americana executed an amendment to the credit agreement which extends the maturity date of the revolving note to January 10, 2006. Repayments of long-term debt due in each of the next five years are as follows
2006 $18,161 2007 416 2008 7,832 2009 -- 2010 -- ------- $26,409 =======
Interest paid during the year ended August 31, 2005 was $2,350 (2004 - $1,461). -22- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (thousands of shares) Capital Stock The Company's articles of incorporation authorize 200,000 shares of both Class A Subordinate and Class B Multiple voting no par value shares. Changes in Capital stock for the two years ended August 31, 2005 were as follows:
Paid-In-Balance --------------- Class A Subordinate voting shares $ 85,659 Class B Multiple voting shares $ 11,919
Class A Class B Subordinate Multiple voting shares outstanding voting shares outstanding # # ------------------------- ------------------------- Balance at August 31, 2003 45,629 6,179 Issuance of shares for stock options exercised 3,985 Issuance of shares for warrants exercised 100 Multiple voting shares converted to subordinate voting shares 149 (149) ------ ----- Balance at August 31, 2004 49,863 6,030 Multiple voting shares converted to subordinate voting shares 1 (1) Issuance of shares for stock options exercised 54 ------ ----- Balance at August 31, 2005 49,918 6,029 ====== =====
Class A subordinate voting shares have a preferential right to receive cash dividends when, as and if declared by the Board of Directors. Class B multiple voting shares can be converted at any time into an equivalent number of Class A subordinate voting shares. The Class A subordinate voting shares are entitled to one vote per share and the Class B multiple voting shares are entitled to ten votes per share. -23- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (cont'd) Stock options Under the Company's stock option plans, non-qualified options to purchase subordinate voting shares are granted to directors, officers, consultants and key employees at exercise prices equal to the fair market value of the stock at the date of grant. On November 1, 2002 the Company's shareholders approved The 2002 Stock Option Plan, which reserved 5.17 million options for issuance and limited the number of options that may be granted in any one fiscal year to 2.5% of outstanding shares. On February 27, 2004 the Company's shareholders approved the elimination of the limitation on the number of options that may be granted in any one fiscal year. The following table summarizes stock option activity for all stock option plans:
Weighted Weighted Average Average Exercise Contractual Shares Cnd Price Life (in years) ------ --------- --------------- Outstanding at August 31, 2003 4,362 $ 3.98 2.7 Granted 3,420 $20.03 Exercised (3,986) $ 4.00 Cancelled (20) $ 8.35 ------ Outstanding at August 31, 2004 3,776 $18.47 4.2 Granted 1,024 $ 4.03 Exercised (54) $ 1.27 Cancelled (829) $18.69 ------ Outstanding at August 31, 2005 3,917 $14.89 4.9 ====== Options exercisable at August 31, 2005 3,103 $17.58
-24- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - ------------------------------------------------------------------------------ (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (cont'd) The following table summarizes stock options outstanding, exercisable and exercise price range at August 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------- Weighted-average Range of exercise Outstanding as remaining Weighted-average Exercisable as Weighted-average prices of 08/31/2005 contractual life exercise price of 08/31/2005 exercise price - ----------------- -------------- ---------------- ---------------- -------------- ---------------- $ 1.15 - $ 1.35 128 0.2 $ 1.27 63 $ 1.26 $ 4.03 - $ 5.00 1,083 9.2 $ 4.10 393 $ 4.09 $13.75 - $15.93 1,096 3.1 $15.74 1,037 $15.80 $22.65 - $22.65 1,610 3.5 $22.65 1,610 $22.65 ----- ----- 3,917 4.9 $14.89 3,103 $17.57 ===== =====
Stock options reserved for future grant at August 31, 2005 aggregated 452,985. The Company accounts for stock-based compensation using the fair value method of accounting. Stock-based compensation expense was recognized in the amount of $1,918 (2004 - $30,983) in the Consolidated Statements of Operation. Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2005 was Cnd $4.03(2004 - Cnd $10.21) per option. The value of each option granted is estimated on the date of the grant using the Black-Scholes options pricing model with the following "weighted-average assumptions": For the year ended August 31,
2005 2004 ----- ----- Expected dividend yield Risk-free interest rate (percentage) 3.92 2.98 Expected volatility 66.73 67.39 Expect life (in years) 10 4.2
-25- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 11. Income taxes The effective income tax rate on (loss) earnings is affected from year to year by the geographic mix of the consolidated (loss) earnings before income taxes. The following table reconciles income tax (recovery) expense computed by applying the combined Canadian Federal/Provincial statutory rate with the actual income tax provision:
2005 2004 ------- ----- Combined basic Canadian Federal and Provincial income tax rate (36.12)% 36.21% Impact of operating in foreign countries with different effective rates (1.00) 1.93 Permanent differences: Non-deductible goodwill impairment 24.39 Valuation allowance 5.89 Other (3.34) (1.04) ------ ----- (10.18)% 37.10% ====== =====
In 2005 the Company established an allowance for non-capital loss carry-forwards as the utilization of such loss carry-forwards was considered unlikely. Significant components of the Company's deferred tax assets and liabilities as of August 31, 2005 are as follows:
Deferred Tax Assets - ------------------- Stock options $10,241 Federal net operating loss carry forwards 5,100 Intangible assets 4,201 Accrued liabilities 1,639 Inventory 2,188 State net operating loss carry forwards 995 Bad debts 467 Inventory reserve 124 Property, plant and equipment 92 ------- 25,047 Valuation allowance (5,100) ------- Total deferred tax assets $19,947 =======
Deferred Tax Liabilities - ------------------------ Intangible assets $3,761 Property, plant and equipment 2,423 Other 89 ------ Total deferred tax liabilities $6,273 ======
Income taxes paid during the year ended August 31, 2005 was approximately $4,731 (2004 - $16,299) Note 12. Retirement Plans A subsidiary of the Company, Eskimo Pie Corporation, had maintained two defined benefit pension plans covering substantially all salaried and executive employees. Upon the acquisition of Eskimo Pie Corporation by the Company, all future participation and all benefits under the plans were frozen. These plans provide retirement benefits based primarily on employee compensation and years of service up to the acquisition of Eskimo Pie Corporation by the Company. The above mentioned plans are referred to as the "Pension Benefits". -26- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement Plans (cont'd) In addition, Eskimo Pie Corporation entered into an agreement with Reynolds Metals Company to indemnify the cost of retiree health care and life insurance benefits for salaried employees of Eskimo Pie Corporation who had retired prior to April 1992. Under this agreement, Eskimo Pie Corporation may elect to prepay its remaining obligation. Eskimo Pie Corporation did not provide postretirement health and life insurance benefits for employees who retired subsequent to April 1992. This indemnity agreement is referred to as the "Other Benefits". The following table reconciles the changes in benefit obligations and plan assets in 2005 and 2004, and reconciles the funded status to accrued benefit cost at August 31, 2005 and August 31, 2004:
Pension Benefits Other Benefits ---------------- -------------- Benefit Obligation Beginning balance at August 31, 2003 $2,088 $1,637 Interest cost 135 166 Actuarial loss 94 Benefit payments (78) (200) ------ ------ Balance at August 31, 2004 2,239 1,603 Interest cost 139 200 Actuarial loss 277 Benefit payments (85) ------ ------ Ending balance at August 31, 2005 $2,570 $1,803 ====== ====== Plan assets - Basic value Beginning balance at August 31, 2003 $1,925 Actual return on plan assets 219 Contributions 20 Benefit payments (78) ------ Balance at August 31, 2004 2,086 Actual return on plan assets 338 Contributions 20 Benefit payments (85) ------ Ending balance at August 31, 2005 $2,359 ======
-27- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement Plans (cont'd) The funded status for the post retirement health and life insurance benefits is as follows:
Other Benefits -------------- Benefit obligations in excess of Plan assets $1,803 ====== Accrued benefit cost $1,803 ======
The accrued benefit cost of $1,803 is included in Other liabilities at August 31, 2005. The following table provides the components of the net periodic benefit cost:
Pension Benefits Other Benefits ---------------- -------------- Interest cost $ 139 $200 Expected return on Plan assets (337) Recognized net actuarial gain 187 ----- ---- Net period benefit cost (income) $ (11) $200 ===== ====
The assumptions used in the measurement of the Eskimo Pie Corporation's benefit obligations are as follows:
Pension Benefits Other Benefits ---------------- -------------- Benefit obligation, beginning of year 6.00% 7.75% Expected return on plan assets, during the year 8.00%
The weighted average annual assumed rate of increase in the per capita cost of covered benefits for the Other Benefits Plan (i.e., health care cost trend rate) is 5% for 2005 and is assumed to remain at that level thereafter. A one percentage point increase or decrease in the assumed health care cost trend rate would change the accumulated postretirement benefit obligation by approximately $177 and the net periodic postretirement benefit cost by approximately $18. -28- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement Plans (cont'd) The Company's allocation of Pension Benefit assets at August 31, 2005 and 2004, target allocations for fiscal 2006 and expected long-term rate of return by asset category are as follows:
Weighted-average Target Percentage of expected long-term rate allocation Plan Assets of return ---------- ------------- ----------------------- Fiscal Year 2006 2005 2004 2006 - ----------------------------- ---- ---- ---- ---- Asset category Large capitalization equities 35.0 35.8 36.9 2.8 Mid capitalization equities 15.0 13.0 10.4 1.8 Small Capitalization equities 9.0 7.1 8.6 1.8 International equities 25.0 27.3 28.0 .6 Fixed income bonds 12.0 12.0 12.4 2.0 Cash and cash equivalents 4.0 4.8 3.7 -- ---- ---- ---- --- 100% 100% 100% 9% ---- ---- ---- ---
The Company's investment strategy is to obtain the highest possible return commensurate with the level of assumed risk. Investments are well diversified within each of the major asset categories. The expected long-term rate of return is figured by using the target allocation and expected returns for each asset class as in the table above. The actual historical returns are also relevant. Annualized returns for periods ending August 31, 2005 have been as follows: 16.7% for one year and 16.4% for three years. The Company expects that there will be no minimum regulatory funding requirements that will need to be made during the fiscal year ending August 31, 2006. Expected benefit payments are as follows over future years:
Fiscal year Pension benefits Other benefits - ----------- ---------------- -------------- 2006 88 200 2007 96 200 2008 94 200 2009 97 200 2010 94 200 2011 - 2015 548 1,000
Note 13. Commitments The majority of distribution warehouse, store and office facility leases are under non-cancelable leases. Substantially all of the leases are net leases, which require the payment of property taxes, insurance and Notes to -29- CoolBrands International Inc. Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 13. Commitments (Cont'd) maintenance costs in addition to minimum rental payments. Certain store leases provide for additional rentals based on a percentage of sales and have renewal options for one or more periods from five to twenty years. At August 31, 2005 the future minimum lease payments under operating leases with rental terms of more than one year, net of sublease rents, amounted to: Fiscal year ending: 2006 $ 4,363 2007 3,004 2008 2,226 2009 1,360 2010 554 Later years 886 ------- Total minimum obligations $12,393 =======
Total rental expense relating to all operating leases (including those with terms less than one year) was $7,698 (2004 - $7,203). Note 14. Contingencies Legal matters The Company is a party to legal proceedings and disputes with franchisees, former franchisees and others, which arise in the ordinary course of business. In the opinion of the Company, it is unlikely that the liabilities, if any, arising from the legal proceedings and disputes will have a material adverse effect on the consolidated financial position of the Company or its operations. Subleases Several subsidiaries hold master store leases covering franchised locations. Such leases expire at varying dates to 2013. Where a subsidiary holds the master lease, these premises have been subleased to franchisees under terms and rental rates substantially the same as those in master leases. In a majority of these instances, franchisees make all lease payments directly to the landlords. The Company provides an estimated liability for lease terminations in the event of a default by a franchisee based on the expected costs of releasing or settlement with the landlord. The liability was $291 at August 31, 2005. Aggregate minimum future rental payments under these leases approximated $6,074 at August 31, 2005 (2004 - $6,144). -30- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 15. Related party transactions and amounts Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an officer, director and shareholder of the Company, had a management agreement with Integrated Brands Inc., a subsidiary of the Company which the Company acquired in March 1998. This management agreement was terminated in January 2005 by the mutual agreement of the parties. Under the agreement, Calip provided management services to Integrated Brands for an annual fee of $1,300. Such management fees incurred for the year ended August 31, 2005 were $542 (2004 - $1,300). At August 31, 2005, the $620 (2004 - $850) balance of payables - affiliates represents payables to Calip. Integrated Brands Inc., also has a distribution agreement with Calip for distribution of the Company's products in the New York Metropolitan Area, Fairfield County in the state of Connecticut, and New Jersey. The distribution agreement continues until December 31, 2007 and thereafter shall automatically renew on December 31 of each year while the agreement is in effect for an additional one-year term, unless terminated under certain conditions. The distribution agreement is terminable by either party on sixty-days' notice. Sales of products to Calip were $9,781 for the year ending August 31, 2005 (2004 - - $9,482). At August 31, 2005, $1,840 of the receivables - affiliates represent receivables from Calip (2004 - $3,883). The transactions with Calip occur in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. Note 16. Segment information CoolBrands International's reportable segments are Frozen desserts, Yogurt, Foodservice, Dairy components and Franchising and licensing, including Company-owned stores. Revenues and profits in the Frozen desserts segment are generated from selling a variety of prepackaged frozen dessert products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. Revenues and profits in the Yogurt segment are generated from selling a variety of prepackaged Yogurt products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. Revenues and profits in the Foodservice segment are generated from manufacturing and selling soft-serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft-serve ice cream and yogurt products to consumers. Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring revenues and the manufacture and sale of proprietary products to franchisees and licensees and from Company-owned stores selling ice cream and soft-serve yogurt out of Company-owned stores and outlets. CoolBrands International Inc. evaluates the performance of its segments and allocates resources to -31- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (Cont'd) them based on their operating contribution, which represents segment revenues, less direct costs of operation, excluding the allocation of corporate expenses. Industry Segments: Year Ended August 31, 2005
Franchising Frozen Dairy and desserts Yogurt Foodservice components licensing Corporate Consolidated - ----------------------------------- -------- ------- ----------- ---------- ----------- --------- ------------ Revenues $330,972 $44,007 $18,397 $22,589 $15,200 $ 280 $431,445 Interest income 797 303 132 1,232 Inter-segment revenues (43,665) (661) (3,051) (230) (47,607) -------- ------- ------- ------- ------- ------ -------- Net revenues 288,104 44,007 17,736 19,538 15,503 182 385,070 -------- ------- ------- ------- ------- ------ -------- Segment (loss) earnings (37,139) 2,376 2,142 2,593 (770) 182 (30,616) General corporate expenses (72) (72) Interest expense (1,687) (891) (8) (2,586) Asset impairment (50,102) (5,423) (55,525) Gain on sale of building 3,634 3,634 Minority interest 2,700 2,700 -------- ------- ------- ------- ------- ------ -------- (Loss) earnings before income taxes $(82,594) $ 1,485 $ 2,142 $ 2,593 $(6,201) $ 110 (82,465) ======== ======= ======= ======= ======= ====== Recovery of income taxes (8,395) -------- Net loss $(74,070) ======== Assets $157,418 $69,877 $20,593 $33,556 $14,659 $1,742 $297,845 Capital expenditures 10,784 764 325 536 12,409 Depreciation and amortization 3,439 420 328 328 510 17 5,042
-32- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Industry Segments: Year Ended August 31, 2004
Franchising Frozen Dairy and desserts Foodservice components licensing Corporate Consolidated -------- ----------- ---------- ----------- --------- ------------ Revenues $462,842 $16,382 $29,516 $14,188 $ 219 $523,147 Interest income 261 162 108 531 Inter-segment revenues (66,533) (703) (6,332) (172) (73,740) -------- ------- ------- ------- ------- -------- Net revenues 396,570 15,679 23,184 14,350 155 449,938 -------- ------- ------- ------- ------- -------- Segment earnings 32,168 1,551 3,868 2,047 155 39,789 General corporate expenses (1,868) (1,868) Interest expense (1,491) (7) (1,498) Minority interest 958 958 -------- ------- ------- ------- ------- -------- Earnings (loss) before income taxes $ 31,635 $ 1,551 $ 3,868 $ 2,040 $(1,713) 37,381 ======== ======= ======= ======= ======= Provision for income taxes 13,869 -------- Net earnings $ 23,512 ======== Assets $240,817 $17,375 $30,433 $16,425 $12,207 $317,257 Capital expenditures 13,009 110 146 98 13,363 Depreciation and amortization 5,850 335 322 807 7,314
-33- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Geographic Segments: Year Ended August 31, 2005
Canada United States International Consolidated ------ ------------- ------------- ------------ Revenues $4,862 $ 422,946 $ 3,637 $431,445 Interest income 262 800 170 1,232 Inter-segment revenues (339) (47,268) (47,607) ------ --------- ------- -------- Net revenues 4,785 376,478 3,807 385,070 ------ --------- ------- -------- Segment (loss) earnings 849 (33,467) 2,002 (30,616) General corporate expenses (72) (72) Interest expense (2,586) (2,586) Asset impairment (55,024) (501) (55,525) Gain on sale of building 3,634 3,634 Minority interest 2,700 2,700 ------ --------- ------- -------- Earnings (loss) before income taxes $ 777 $ (84,743) $ 1,501 (82,465) ====== ========= ======= Recovery of income taxes (8,395) -------- Net (loss) $(74,070) ======== Assets $8,526 $ 279,210 $10,109 $297,845 Capital expenditures 737 11,650 22 12,409 Depreciation and amortization 142 4,719 181 5,042
-34- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Geographic Segments: Year Ended August 31, 2004
Canada United States International Consolidated ------- ------------- ------------- ------------ Revenues $ 4,119 $516,004 $3,024 $523,147 Interest income 216 264 51 531 Inter-segment revenues (172) (73,568) (73,740) ------- -------- ------ -------- Net revenues 4,163 442,700 3,075 449,938 ------- -------- ------ -------- Segment earnings 609 37,509 1,671 39,789 General corporate expenses (1,868) (1,868) Interest expense (1,498) (1,498) Minority interest 958 958 ------- -------- ------ -------- (Loss) earnings before income taxes $(1,259) $ 36,969 $1,671 37,381 ======= ======== ====== Provision for income taxes 13,869 -------- Net earnings $ 23,512 ======== Assets $19,061 $289,323 $8,873 $317,257 Capital expenditures 20 13,339 4 13,363 Depreciation and amortization 153 7,016 145 7,314
EX-99 6 ex99-5.txt EXHIBIT 99.5 CoolBrands International Inc. UNAUDITED INTERIM FINANCIAL STATEMENTS In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited financial statements for the period ended May 31, 2005. CoolBrands International Inc. Consolidated Balance Sheets (Restated) as at May 31, 2005 and August 31, 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
May 31, 2005 August 31, 2004 ------------ --------------- (Unaudited) Assets Current assets: Cash $ 24,843 $ 36,277 Investments 12,500 28,050 Receivables 63,555 67,152 Receivables - affiliates 3,672 3,883 Inventories 58,939 49,076 Income taxes recoverable 10,528 Prepaid expenses 3,632 1,203 Deferred income taxes 6,376 4,907 -------- -------- Total current assets 184,045 190,548 -------- -------- Deferred income taxes 13,832 13,711 Property, plant and equipment 64,627 28,730 Intangible and other assets 10,195 12,180 Goodwill 97,930 72,088 -------- -------- $370,629 $317,257 ======== ======== Liabilities and shareholders' equity Current liabilities: Accounts payable $ 48,775 $ 37,506 Payables - affiliates 250 850 Accrued liabilities 33,272 20,624 Income taxes payable 4,289 4,938 Short term borrowings 34,553 Current maturities of long-term debt 23,044 8,492 -------- -------- Total current liabilities 144,183 72,410 -------- -------- Long-term debt, less current portion 12,804 19,262 Other liabilities 2,810 2,758 Deferred income taxes 3,896 3,638 -------- -------- Total liabilities 163,693 98,068 -------- -------- Minority interest 5,841 8,088 -------- -------- Commitments and contingencies Shareholders' Equity: Capital stock 97,560 97,485 Additional paid-in-capital 44,737 44,494 Accumulated other comprehensive earnings (1,443) (1,096) Retained earnings 60,241 70,218 -------- -------- Total shareholders' equity 201,095 211,101 -------- -------- $370,629 $317,257 ======== ========
CoolBrands International Inc. Consolidated Statements of Operations (Restated) for the nine months and three months ended May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amount expressed in thousands of dollars, except for per share data)
For the nine months ended For the three months ended --------------------------- --------------------------- May 31, 2005 May 31, 2004 May 31, 2005 May 31, 2004 ------------ ------------ ------------ ------------ Net Revenues: Net sales $245,793 $288,013 $ 93,815 $117,822 Royalties, licensing, and consumer products license revenues 4,385 2,308 1,506 793 Drayage and other income 10,837 30,565 2,569 9,525 -------- -------- -------- -------- Total net revenues 261,015 320,886 97,890 128,140 -------- -------- -------- -------- Cost of goods sold 245,490 235,650 93,601 95,949 Selling, general and administrative expenses 32,484 34,573 14,684 10,736 Stock-based compensation expense 243 30,983 82 21,828 Interest expense 1,467 1,230 775 400 Asset impairment 1,401 -------- -------- -------- -------- (Loss) earnings before income taxes and minority interest (20,070) 18,450 (11,252) (773) -------- -------- -------- -------- Minority interest (2,247) 574 (790) 434 -------- -------- -------- -------- (Loss) earnings before income taxes (17,823) 17,876 (10,462) (1,207) (Recovery of) Provision for income taxes (7,846) 6,848 (4,229) 582 -------- -------- -------- -------- Net (loss) earnings $ (9,977) $ 11,028 $ (6,233) $ (625) ======== ======== ======== ======== (Loss) earnings per share: Basic and diluted $ (0.18) $ 0.20 $ (0.11) $ (0.01) ======== ======== ======== ======== Weighted average shares outstanding: Shares used in per share calculation - basic 55,916 55,291 55,935 55,777 Shares used in per share calculation - diluted 55,916 56,337 55,935 56,880
CoolBrands International Inc. Consolidated Statements of Shareholders' Equity (Restated) For the nine months ended May 31, 2005 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of US dollars, except share data)
Accumulated other Total Capital Additional comprehensive Retained stockholder Stock paid-in-capital (losses)earning earnings equity ------- --------------- --------------- -------- ----------- Balance at August 31, 2004 $97,485 $44,494 $(1,096) $70,218 $211,101 ------- ------- ------- ------- -------- Comprehensive earnings (loss): Net earnings (loss): (9,977) (9,977) Other comprehensive earnings, net of income taxes Stock issued for options exercised 75 75 Stock-based compensation expense 243 243 Currency translation adjustment (347) (347) ------- ------- ------- ------- -------- Balance at May 31, 2005 $97,560 $44,737 $(1,443) $60,241 $201,095 ======= ======= ======= ======= ========
CoolBrands International Inc. Consolidated Statements of Cash Flows (Restated) for the nine months and three months ended May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of dollars)
For the nine months ended For the three months ended -------------------------- --------------------------- May 31, 2005 May 31, 2004 May 31, 2005 May 31, 2004 ------------ ------------ ------------ ------------ Cash and short term investments provided by (used in): Operating activities: Net (loss) earnings $ (9,977) $ 11,028 $ (6,233) $ (625) Adjustments to reconcile net earnings to net cash flows from operating activities Depreciation and amortization 4,115 3,299 1,741 1,054 Stock-based compensation expense 243 30,983 82 21,828 Asset impairment 1,401 Deferred income taxes (3,254) (13,699) (1,630) (8,316) Minority interest (2,247) 574 (790) 434 Allowance for doubtful accounts 469 432 346 27 Cash effect of changes, net of the effects from businesses acquired Receivables 5,262 (21,383) (12,577) (15,317) Receivables - affiliates 211 (1,197) (618) (1,122) Inventories (4,485) (14,560) (5,709) (9,494) Prepaid expenses (2,429) (951) (286) (759) Income taxes recoverable (10,528) (10,528) 307 Other assets 156 (127) 219 53 Accounts payable 11,358 30,022 23,384 27,318 Payables - affiliates (600) 231 60 285 Accrued liabilities 12,648 2,252 1,518 1,230 Income taxes payable 649 10,047 5,711 4,749 Other liabilities 53 (112) (6) (60) -------- -------- -------- -------- Cash (used in) provided by operating activities 3,045 36,839 (5,316) 21,592 -------- -------- -------- -------- Investing activities: Acquisition, net of cash acquired (59,609) (59,609) Purchase of property, plant and equipment (8,925) (8,417) (5,738) (3,838) Purchase of license agreements (26) (354) (9) (17) Purchase of investments (2,500) (13,050) (2,500) (13,050) Redemption of investments 18,050 18,050 Collection of notes receivable (4) 22 (9) 4 -------- -------- -------- -------- Cash used in investing activities (53,014) (21,799) (49,815) (16,901) -------- -------- -------- -------- Financing activities: Proceeds from issuance of Class A and B shares 57 12,263 27 70 Proceeds from bank loan 44,553 44,553 Capital contributions from minority interest 8,907 Return of capital contributions to partnership's minority partner (2,000) Change in revolving line of credit, secured 1,223 4,765 1,623 2,241 Repayment of long-term debt (3,130) (4,997) (1,119) (1,000) -------- -------- -------- -------- Cash provided by financing activities 42,703 18,938 45,084 1,311 -------- -------- -------- -------- (Decrease) increase in cash flow due to changes in foreign exchange rates (4,168) 2,714 (3,084) 2,679 -------- -------- -------- -------- (Decrease) increase in cash and cash equivalents (11,434) 36,692 (13,131) 8,681 Cash and cash equivalents - beginning of period 36,277 21,760 37,974 49,771 -------- -------- -------- -------- Cash and cash equivalents - end of period $ 24,843 $ 58,452 $ 24,843 $ 58,452 ======== ======== ======== ========
CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 1. Significant accounting policies The financial statements of the Company have been prepared by management in accordance with generally accepted accounting principles in the United States of America for interim financial statements. The financial statements have, in management's opinion, been properly prepared using judgment within reasonable limits of materiality. These interim financial statements do not include all the note disclosures required for annual financial statements and therefore they should be read in conjunction with the company's audited financial statements for the year ended August 31, 2004. The significant accounting policies follow those disclosed in the most recently reported annual financial statements. Certain amounts have been reclassified to conform with the August 31, 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 May 31, 2005 and August 31, 2004, $12,500 and $28,050 respectively, 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 three and nine months ended May 31, 2005 and 2004. 2. Accounting estimates The preparation of 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. Actual results could differ from those estimated. 3. Changes in accounting policy and restated financial statements The Company adopted the U.S dollar as its functional and reporting currency effective September 1, 2004, the commencement of fiscal 2005. The Company adopted the U.S. dollar for its financial reporting since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars in accordance with generally accepted accounting principals. 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 expenses must be deducted from revenue. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands) Changes in accounting policy and restated financial statements (cont'd) Accordingly, our Consolidated Statements of Operations for the three and nine months ended May 31, 2005 have been restated to reflect a reduction in revenues and selling, general and administrative expenses of $21,795 and $46,703, respectively. Our Consolidated Statements of Operations for the three and nine months ended May 31, 2004 have been restated to reflect a reduction in revenues and selling, general and administrative expenses of $10,989 and $27,662, respectively. The following summarizes the impact of restatement for the change from Cnd to US GAAP for consumer trade promotion expenses in our Consolidated Statements of Operations:
For the nine months ended For the three months ended ------------------------- -------------------------- May 31, May 31, May 31, May 31, 2005 2004 2005 2004 -------- -------- -------- -------- Total net revenues in accordance with Canadian GAAP $307,718 $348,548 $119,685 $139,129 Less consumer and trade promotion expenses (46,703) (27,662) (21,795) (10,989) -------- -------- -------- -------- Total net revenues in accordance with U.S. GAAP $261,015 $320,886 $ 97,890 $128,140 ======== ======== ======== ========
For the nine months ended For the three months ended ------------------------- -------------------------- May 31, May 31, May 31, May 31, 2005 2004 2005 2004 -------- -------- -------- -------- Total selling, general and administrative expenses in accordance with Canadian GAAP $ 79,187 $ 62,235 $ 36,479 $ 21,725 Less consumer and trade promotion expenses (46,703) (27,662) (21,795) (10,989) -------- -------- -------- -------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 32,484 $ 34,573 $ 14,684 $ 10,736 ======== ======== ======== ========
Product introduction expenses (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 expenses are recognized as expenses at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported Net loss for the three months ended May 31, 2005 has been decreased by $465 and our previously reported Net loss for the nine months ended May 31, 2005 has been increased by $3,687. Our previously reported Net earnings for the three months ended May 31, 2004 have been decreased by $1,877 and our previously reported Net earnings for the nine months ended May 31, 2004 have been decreased by $521. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands) Changes in accounting policy and restated financial statements (cont'd) The following summarizes the impact of restatement for the change from Cnd to US GAAP for new product introduction expenses (slotting fees) in our Consolidated Statement of Operations:
For the nine months ended For the three months ended ------------------------- -------------------------- May 31, May 31, May 31, May 31, 2005 2004 2005 2004 ------- ------- ------- ------- Net (loss) earnings in accordance with Canadian GAAP $(6,290) $11,549 $(6,698) $ 1,252 Adjustment for new product introduction expense (3,687) (521) 465 (1,877) ------- ------- ------- ------- Net (loss) earnings in accordance with U.S. GAAP $(9,977) $11,028 $(6,233) $ (625) ======= ======= ======= =======
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 adoption of this accounting policy had no effect for the three and nine months ended May 31, 2005 and reduced earnings before income tax and minority interest for the three and nine months ended May 31, 2004 by $16,658 and $24,270, respectively with a corresponding increase to additional paid-in capital. CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 4. Segment information
Franchising Frozen Dairy and desserts Yogurt Foodservice components licensing Corporate Consolidated -------- ------- ----------- ---------- ----------- --------- ------------ For the nine months ended May 31, 2005 Revenues $203,375 $17,610 $ 14,959 $ 13,787 $11,119 $ 165 $261,015 Inter-segment Revenues 29,950 440 2,500 165 33,055 Segment (loss) earnings before income taxes (22,493) 200 1,390 1,760 1,503 (183) (17,823) For the nine months ended May 31,2004 Revenues 281,342 12,758 17,216 9,465 105 320,886 Inter-segment Revenues 41,414 466 5,117 112 47,109 Segment earnings (loss) before income taxes 14,882 777 2,917 596 (1,296) 17,876 For the three months ended May 31,2005 Revenues 65,633 17,610 6,054 5,173 3,358 62 97,890 Inter-segment Revenues 9,839 178 904 62 10,983 Segment (loss) earnings before income taxes (12,753) 200 765 677 545 104 (10,462) For the three months ended May 31, 2004 Revenues 111,935 5,416 6,984 3,741 64 128,140 Inter-segment Revenues 14,984 184 2,539 40 17,747 Segment (loss) earnings before income taxes (2,710) 319 1,275 161 (252) (1,207)
CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) May 31, 2005 and May 31, 2004 - -------------------------------------------------------------------------------- 5. Capital stock The Company had the following equity securities and stock options outstanding as of July 4, 2005:
Class A Subordinate Class B Multiple Voting Shares Voting Shares Stock Options - ------------- ---------------- ------------- 49,918 6,030 3,941 ====== ===== =====
6. Acquisition On March 27, 2005, CoolBrands acquired the yogurt business of Kraft Foods, Inc. (NYSE: KFT) for approximately $57,500. The acquired brands include Breyers Fruit on the Bottom, Light and Creme Savers cup yogurt varieties and Creme Savers Smoothie drinkable yogurts. Pursuant to the agreement, CoolBrands' wholly owned subsidiary, Integrated Brands, Inc., purchased 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. CoolBrands obtained short term bank financing for approximately $40,000 of the purchase price and utilized cash for the balance of the purchase price. EX-99 7 ex99-6.txt EXHIBIT 99.6 CoolBrands International Inc. UNAUDITED INTERIM FINANCIAL STATEMENTS In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited financial statements for the period ended February 28, 2005. CoolBrands International Inc. Consolidated Balance Sheets (Restated) as at February 28, 2005 and August 31, 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
February 28, 2005 August 31, 2004 ----------------- --------------- (Unaudited) Assets Current assets: Cash $ 37,974 $ 36,277 Investments 28,050 28,050 Receivables, net 49,189 67,152 Receivables - affiliates 3,054 3,883 Inventories 47,855 49,076 Prepaid expenses 3,346 1,203 Income taxes recoverable 1,422 Deferred income taxes 6,210 4,907 -------- -------- Total current assets 177,100 190,548 Deferred income taxes 13,843 13,711 Property, plant and equipment 30,067 28,730 Intangible and other assets 10,555 12,180 Goodwill 73,846 72,088 -------- -------- $305,411 $317,257 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 26,839 $ 37,506 Payables - affiliates 190 850 Accrued liabilities 31,754 20,624 Income taxes payable 4,938 Current maturities of long-term debt 16,892 8,492 -------- -------- Total current liabilities 75,675 72,410 Long-term debt, less current portion 8,451 19,262 Other liabilities 2,816 2,758 Deferred income taxes 3,834 3,638 -------- -------- Total liabilities 90,776 98,068 -------- -------- Minority interest 6,626 8,088 Commitments and contingencies Shareholders' Equity: Capital stock 97,533 97,485 Additional paid-in-capital 44,655 44,494 Accumulated other comprehensive earnings (653) (1,096) Retained earnings 66,474 70,218 -------- -------- Total shareholders' equity 208,009 211,101 -------- -------- $305,411 $317,257 ======== ========
CoolBrands International Inc. Consolidated Statements of Operations (Restated) for the six months and three months ended February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of dollars, except for per share data)
For the six months ended For the three months ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net Revenues: Net sales $151,978 $170,191 $ 66,850 $89,645 Royalty, licensing, and consumer products license revenue 2,879 1,515 1,180 792 Drayage and other income 8,268 21,040 5,803 9,509 -------- -------- -------- ------- Total net revenues 163,125 192,746 73,833 99,946 -------- -------- -------- ------- Cost of goods sold 151,889 139,701 76,065 70,874 Selling, general and administrative expenses 17,800 23,837 9,574 12,096 Stock-based compensation expense 161 9,155 81 2,204 Interest expense 692 830 337 397 Asset impairment 1,401 1,401 -------- -------- -------- ------- (Loss) earnings before income taxes and minority interest (8,818) 19,223 (13,625) 14,375 -------- -------- -------- ------- Minority interest 1,457 (140) 815 76 -------- -------- -------- ------- (Loss) earnings before income taxes (7,361) 19,083 (12,810) 14,451 (Recovery of) provision for income taxes (3,617) 7,430 (4,733) 5,986 -------- -------- -------- ------- Net (loss) earnings $ (3,744) $ 11,653 $ (8,077) $ 8,465 ======== ======== ======== ======= (Loss) earnings per share: Basic and diluted $ (0.07) $ 0.21 $ (0.14) $ 0.15 -------- -------- -------- ------- Weighted average shares outstanding: Shares used in per share calculation - basic 55,907 55,045 55,921 55,677 Shares used in per share calculation - diluted 55,907 56,198 55,921 56,445
CoolBrands International Inc. Consolidated Statements of Shareholders' Equity (Restated) For the six months ended February 28, 2005 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of dollars)
Accumulated other Total Additional comprehensive Retained stockholders Capital Stock paid-in-capital earnings Earnings equity ------------- --------------- ----------------- -------- ------------ Balance at August 31, 2004 $97,485 $44,494 $(1,096) $70,218 $211,101 Comprehensive earnings (loss): Net loss (3,744) (3,744) Other comprehensive earnings , net of income taxes Stock issued for options exercised 48 48 Stock-based compensation expense 161 161 Currency translation adjustment 443 443 ------- ------- ------- ------- -------- Balance at February 28, 2005 $97,533 $44,655 $ (653) $66,474 $208,009 ======= ======= ======= ======= ========
CoolBrands International Inc. Consolidated Statements of Cash Flows (Restated) for the six months and three months ended February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of dollars)
For the six months ended For the three months ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Cash and short term investments provided by (used in): Operating activities: Net (loss) earnings $ (3,744) $11,653 $ (8,077) $ 8,465 Adjustments to reconcile net earnings to net cash flows from operating activities Depreciation and amortization 2,374 2,244 1,180 1,149 Stock-based compensation expense 161 9,155 81 2,204 Asset impairment 1,401 1,401 Deferred income taxes (326) (5,383) (183) (1,176) Minority interest (1,454) 140 (812) (76) Allowance for doubtful accounts 123 405 98 (52) Cash effect of changes Receivables 17,839 (6,066) 17,128 (2,136) Receivables - affiliates 829 (75) (120) 366 Inventories 1,221 (5,066) 2,635 (4,127) Prepaid expenses (2,143) (192) (837) 363 Other assets (63) (180) 83 (104) Income taxes recoverable (307) (307) Accounts payable (12,026) 2,704 (16,794) 7,160 Payables - affiliates (660) (54) (209) 11 Accrued liabilities 11,130 1,022 7,362 (5,969) Income taxes payable (6,360) 5,298 (4,076) 7,183 Other liabilities 59 (52) 17 23 -------- ------- -------- ------- Cash provided by (used in) operating activities 8,361 15,246 (1,123) 12,977 -------- ------- -------- ------- Investing activities: Purchase of property, plant, and equipment (3,187) (4,579) (1,035) (2,324) Purchase of license agreements and other intangibles (17) (337) (3) (337) Collection of notes receivable 5 18 1 16 -------- ------- -------- ------- Cash used in investing activities (3,199) (4,898) (1,037) (2,645) -------- ------- -------- ------- Financing activities: Proceeds from issuance of Class A and B shares 30 12,193 30 93 Capital contributions from (paid to) partnership's minority interest 6,908 (2,000) Change in revolving line of credit, secured (400) 2,524 (2,623) 2,524 Repayment of long-term debt (2,011) (3,997) (1,042) (245) -------- ------- -------- ------- Cash (used in) provided by financing activities (2,381) 17,628 (3,635) 372 -------- ------- -------- ------- (Decrease) increase in cash flow due to changes in foreign exchange rates (1,084) 35 1,016 935 -------- ------- -------- ------- Increase (decrease) in cash and Cash equivalents 1,697 28,011 (4,779) 11,639 Cash and short-term investments - beginning of period 36,277 21,760 42,753 38,132 -------- ------- -------- ------- Cash and cash equivalents - end of period $ 37,974 $49,771 $ 37,974 $49,771 ======== ======= ======== =======
CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 1. Significant accounting policies The financial statements of the Company have been prepared by management in accordance with generally accepted accounting principles in the United States of America for interim financial statements. The financial statements have, in management's opinion, been properly prepared using judgment within reasonable limits of materiality. These interim financial statements do not include all the note disclosures required for annual financial statements and therefore they should be read in conjunction with the Company's audited financial statements for the year ended August 31, 2004. The significant accounting policies follow those disclosed in the most recently reported annual financial statements. Certain amounts have been reclassified to conform with the August 31, 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 February 28, 2005 and August 31, 2004, $28,050 and $28,050 respectively, as investments. 2. Accounting estimates The preparation of 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. Actual results could differ from those estimated. 3. Changes in accounting policy and restated financial statements The Company adopted the U.S dollar as its functional and reporting currency effective September 1, 2004, the commencement of fiscal 2005. The Company adopted the U.S. dollar for its financial reporting since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars in accordance with generally accepted accounting principals. 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 expenses must be deducted from revenue. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Changes in accounting policy and restated financial statements (cont'd) Accordingly, our Consolidated Statements of Operations for the three and six months ended February 28, 2005 have been restated to reflect a reduction in revenues and selling, general and administrative expenses of $13,716 and $24,908, respectively. Our Consolidated Statements of Operations for the three and six months ended February 28, 2004 have been restated to reflect a reduction in revenues and selling, general and administrative expenses of $5,571 and $16,673, respectively. The following summarizes the impact of restatement for the change from Cnd to US GAAP for consumer trade promotion expenses in our Consolidated Statements of Earnings:
For the six months ended For the three months ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Total net revenues in accordance with Canadian GAAP $188,033 $209,419 $ 87,549 $105,517 Less consumer and trade promotion expenses (24,908) (16,673) (13,716) (5,571) -------- -------- -------- -------- Total net revenues in accordance with U.S. GAAP $163,125 $192,746 $ 73,833 $ 99,946 ======== ======== ======== ========
For the six months ended For the three months ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Total selling, general and administrative expenses in accordance with Canadian GAAP $ 42,708 $ 40,510 $ 23,290 $ 17,667 Less consumer and trade promotion expenses (24,908) (16,673) (13,716) (5,571) -------- -------- -------- -------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 17,800 $ 23,837 $ 9,574 $ 12,096 ======== ======== ======== ========
Product introduction expenses (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 expenses are recognized as expenses at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported Net earnings for the three and six months ended February 28, 2005 have been decreased by $3,229 and $4,152, respectively. Our reported net earnings for three and six months ended February 29, 2004 have been increased by $488 and $1,356, respectively. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Changes in accounting policy and restated financial statements (cont'd) The following summarizes the impact of restatement for the change from Cnd to US GAAP for new product introduction expenses (slotting fees) in our Consolidated Statement of Operations:
For the six months ended For the three months ended --------------------------- --------------------------- February 28, February 29, February 28, February 29, 2005 2004 2005 2004 ------------ ------------ ------------ ------------ Net (loss) earnings in accordance with Canadian GAAP $ 408 $10,297 $(4,848) $7,977 Adjustment for new product introduction expense (4,152) 1,356 (3,229) 488 ------- ------- ------- ------ Net (loss) earnings in accordance with U.S. GAAP $(3,744) $11,653 $(8,077) $8,465 ======= ======= ======= ======
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 adoption of this accounting policy had no effect for the three and six months ended February 28, 2005 and reduced earnings before income tax and minority interest for the three and six months ended February 29, 2004 by $1,818 and $7,226, respectively with a corresponding increase to additional paid-in capital. CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 4. Segment information
Franchising Frozen Dairy and desserts Foodservice components licensing Corporate Consolidated --------- ----------- ---------- ----------- --------- ------------ For the six months ended February 28, 2005 Revenues $137,742 $8,905 $ 8,614 $7,761 $ 103 $163,125 Inter-segment Revenues 20,111 262 1,596 103 22,072 Segment (loss) earnings before income taxes (9,740) 625 1,083 958 (287) (7,361) For the six months ended February 29, 2004 Revenues $169,407 $7,342 $10,232 $5,724 $ 41 $192,746 Inter-segment Revenues 26,430 282 2,578 72 29,362 Segment (loss) earnings before income taxes 17,592 458 1,642 435 (1,044) 19,083 For the three months ended February 28, 2005 Revenues $ 61,336 $4,294 $ 3,549 $4,595 $ 59 $ 73,833 Inter-segment Revenues 8,317 147 999 60 9,523 Segment (loss) earnings before income taxes (13,874) 239 265 732 (172) (12,810) For the three months ended February 29, 2004 Revenues $ 89,098 $3,428 $ 4,617 $2,781 $ 22 $ 99,946 Inter-segment Revenue 12,162 145 1,389 31 13,727 Segment (loss) earnings before income taxes 13,283 110 709 340 9 14,451
CoolBrands International Inc. Notes to Unaudited Consolidated Interim Financial Statements (Restated) February 28, 2005 and February 29, 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 5. Capital stock The Company had the following equity securities and stock options outstanding as of April 7, 2005:
Class A Subordinate Class B Multiple Voting Shares Voting Shares Stock Options - ------------------- ---------------- ------------- 49,891 6,030 3,740 ====== ===== =====
6. Subsequent event On March 27, 2005, CoolBrands acquired the yogurt business of Kraft Foods, Inc. (NYSE: KFT) for approximately $57,500. The acquired brands include Breyers Fruit on the Bottom, Light and Creme Savers cup yogurt varieties and Creme Savers Smoothie drinkable yogurts. Pursuant to the agreement, CoolBrands' wholly owned subsidiary, Integrated Brands, Inc., purchased 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. CoolBrands obtained financing for $40,000 of the purchase price and utilized cash for the balance of the purchase price. CoolBrands estimates that this acquisition will contribute approximately $40,000 to $45,000 in revenues and net earnings of approximately $2,000 to $2,500 for the remainder of the 2005 fiscal year. EX-99 8 ex99-7.txt EXHIBIT 99.7 CoolBrands International Inc. UNAUDITED INTERIM FINANCIAL STATEMENTS In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited financial statements for the period ended November 30, 2004. CoolBrands International Inc. Consolidated Balance Sheets (Restated) as at November 30, and August 31, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed in thousands of dollars)
November 30, August 31, 2004 2004 ------------ ---------- (Unaudited) Assets Current assets: Cash $ 42,753 $ 36,277 Investments 28,050 28,050 Receivables, net 66,416 67,152 Receivables - affiliates 2,934 3,883 Inventories 50,490 49,076 Prepaid expenses 2,509 1,203 Deferred income taxes 5,060 4,907 -------- -------- Total current assets 198,212 190,548 Deferred income taxes 13,835 13,711 Property, plant and equipment 30,073 28,730 Intangible and other assets 12,261 12,180 Goodwill 74,779 72,088 -------- -------- $329,160 $317,257 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 42,274 $ 37,506 Payables - affiliates 399 850 Accrued liabilities 24,392 20,624 Income taxes payable 2,654 4,938 Current maturities of long-term debt 20,192 8,492 -------- -------- Total current liabilities 89,911 72,410 Long-term debt 8,816 19,262 Other liabilities 2,800 2,758 Deferred income taxes 3,772 3,638 -------- -------- Total liabilities 105,299 98,068 -------- -------- Minority interest 7,446 8,088 -------- -------- Commitments and contingencies Shareholders' Equity: Capital stock 97,485 97,485 Additional paid-in-capital 44,574 44,494 Accumulated other comprehensive earnings (195) (1,096) Retained earnings 74,551 70,218 -------- -------- Total shareholders' equity 216,415 211,101 -------- -------- $329,160 $317,257 ======== ========
CoolBrands International Inc. Consolidated Statements of Operations (Restated) for the three months ended November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed thousands of dollars, except for per share data)
For the three months ended --------------------------- November 30, November 30, 2004 2003 ------------ ------------ Net Revenues: Net sales 85,128 80,546 Royalties, licensing, and consumer products license revenue 1,699 723 Drayage and other income 2,465 11,531 ------ ------ Total net revenues 89,292 92,800 ------ ------ Cost of goods sold 75,824 68,827 Selling, general and administrative expenses 8,226 11,741 Stock-based compensation expense 80 6,951 Interest expense 355 433 ------ ------ Earnings before income taxes and minority interest 4,807 4,848 Minority interest (642) 216 ------ ------ Earnings before income taxes 5,449 4,632 Provision for income taxes 1,116 1,444 ------ ------ Net earnings 4,333 3,188 ====== ====== Per share data: Earnings per share: Basic and diluted 0.08 0.06 ====== ====== Weighted average shares outstanding: Shares used in per share calculation - basic 55,893 54,413 Shares used in per share calculation - diluted 56,109 55,891
CoolBrands International Inc. Consolidated Statements of Shareholder's Equity (Restated) For the three months ended November 30, 2004 - -------------------------------------------------------------------------------- (Unaudited) (Amounts are expressed in thousands of dollars)
Accumulated other Total Additional comprehensive Retained Stockholder Capital Stock paid-in-capital earnings Earnings Equity ------------- --------------- ------------- -------- ----------- Balance at August 31, 2004 $97,485 $44,494 $(1,096) $70,218 $211,101 Comprehensive earnings: Net earnings 4,333 4,333 Other comprehensive earnings, net of income taxes: Stock-based compensation expense 80 80 Currency translation adjustment 901 901 ------- ------- ------- ------- -------- Balance at November 30, 2004 $97,485 $44,574 $ (195) $74,551 $216,415 ======= ======= ======= ======= ========
CoolBrands International Inc. Consolidated Statements of Cash Flows (Restated) for the three months ended November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Unaudited) (Amounts expressed thousands of dollars)
For the three months ended --------------------------- November 30, November 30, 2004 2003 ------------ ------------ Cash and short term investments provided by (used in): Operating activities: Net earnings $ 4,333 $ 3,188 Adjustments to reconcile net earnings to net cash flows from operating activities Depreciation and amortization 1,194 1,096 Stock-based compensation expense 80 6,951 Deferred income taxes (143) (4,207) Minority interest (642) 216 Cash effect of changes Receivables 711 (3,930) Receivables - affiliates 949 (441) Allowance for doubtful accounts 25 457 Inventories (1,414) (939) Prepaid expenses (1,306) (555) Other assets (146) (76) Accounts payable 4,768 (4,456) Payables - affiliates (451) (65) Accrued liabilities 3,768 6,991 Income taxes payable (2,284) (1,885) Other liabilities 42 (75) ------- ------- Cash provided by operating activities 9,484 2,270 ------- ------- Investing activities: Purchase of property, plant and equipment (2,152) (2,255) Purchase of license agreements (14) Collection of notes receivable 4 2 ------- ------- Cash used in investing activities (2,162) (2,253) ------- ------- Financing activities: Proceeds from issuance of Class A and B shares 12,100 Capital contributions from minority interest 8,907 Change in revolving line of credit, secured 2,223 Repayment of long-term debt (969) (3,752) ------- ------- Cash provided by financing activities 1,254 17,255 ------- ------- (Decrease) in cash flow due to changes in foreign exchange rates (2,100) (900) ------- ------- Increase in cash and cash equivalents 6,476 16,372 Cash and cash equivalents - beginning of period 36,277 21,760 ------- ------- Cash and cash equivalents -end of period $42,753 $38,132 ======= =======
CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 1. Significant accounting policies The financial statements of the Company have been prepared by management in accordance with generally accepted accounting principles in the United States of America for interim financial statements. The financial statements have, in management's opinion, been properly prepared using judgment within reasonable limits of materiality. These interim financial statements do not include all the note disclosures required for annual financial statements and therefore they should be read in conjunction with the company's audited financial statements for the year ended August 31, 2004. The significant accounting policies follow those disclosed in the most recently reported annual financial statements. Certain amounts have been reclassified to conform with the August 31, 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 November 30, 2004 and August 31, 2004, $28,050 and $28,050 respectively, as investments. 2. Accounting estimates The preparation of 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. Actual results could differ from those estimated. 3. Changes in accounting policy and restated financial statements The Company adopted the U.S dollar as its functional and reporting currency effective September 1, 2004, the commencement of fiscal 2005. The Company adopted the U.S. dollar for its financial reporting since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars in accordance with generally accepted accounting principals. 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. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Changes in accounting policy and restated financial statements (cont'd) 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 expenses must be deducted from revenue. Accordingly, our Consolidated Statements of Operations for the three months ended November 30, 2004 and 2003 have been restated to reflect a reduction in revenues and selling, general and administrative expenses of $11,192 and $11,102, respectively. The following summarizes the impact of restatement for the change from Cnd to US GAAP for consumer trade promotion expenses in our Consolidated Statements of Operations:
For the three months ended --------------------------- November 30, November 30, 2004 2003 ------------ ------------ Total net revenues in accordance with Canadian GAAP $100,484 $103,902 Less consumer and trade promotion expenses (11,192) (11,102) -------- -------- Total net revenues in accordance with U.S. GAAP $ 89,292 $ 92,800 ======== ========
For the three months ended --------------------------- November 30, November 30, 2004 2003 ------------ ------------ Total selling, general and administrative expenses in accordance with Canadian GAAP $ 19,418 $ 22,843 Less consumer and trade promotion expenses (11,192) (11,102) -------- -------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 8,226 $ 11,741 ======== ========
Product introduction expenses (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 expenses are recognized as expenses at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported Net earnings for the three months ended November 30, 2004 have been decreased by $923. Our reported net earnings for the three months ended November 30, 2003 was increased by $868. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Changes in accounting policy and restated financial statements (cont'd) The following summarizes the impact of restatement for the change from Cnd to US GAAP for new product introduction expenses (slotting fees) in our Consolidated Statement of Operations:
For the three months ended --------------------------- November 30, November 30, 2004 2003 ------------ ------------ Net earnings in accordance with Canadian GAAP $5,256 $2,320 Adjustment for new product introduction expense (923) 868 ------ ------ Net earnings in accordance with U.S. GAAP $4,333 $3,188 ====== ======
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 adoption of this accounting policy had no effect for the three months ended November 30, 2004 and reduced earnings before income tax and minority interest for the three months ended November 30, 2003 by $5,794 with a corresponding increase to additional paid-in capital. CoolBrands International Inc. Consolidated Notes to Interim Financial Statements (Restated) (Unaudited) November 30, 2004 and 2003 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) 4. Segment information
Franchising Frozen Dairy and desserts Foodservice components licensing Corporate Consolidated -------- ----------- ---------- ----------- --------- ------------ For the three months ended November 30, 2004 Revenues $76,406 $4,611 $5,065 $3,166 $ 44 $89,292 Inter-segment revenues 11,794 115 597 44 12,550 Segment earnings before income taxes 4,134 386 818 226 (115) 5,449 For the three months ended November 30, 2003 Revenues $80,309 $3,914 $5,615 $2,943 $ 19 $92,800 Inter-segment revenues 14,268 137 1,189 41 15,635 Segment earnings before income taxes 4,309 348 933 95 (1,053) 4,632
5. Capital stock The Company had the following equity securities and stock options outstanding as of January 12, 2005:
Class A Subordinate Class B Multiple Voting Shares Voting Shares Stock Options - ------------- ---------------- ------------- 49,891 6,030 3,740
6. Subsequent event On December 22, 2004, CoolBrands announced that it entered into an agreement to acquire the yogurt business of Kraft Foods, Inc. (NYSE: KFT) for approximately $ 59,000. The acquired brands include Breyers Fruit on the Bottom, Light and Creme Savers cup yogurt varieties and Creme Savers Smoothie drinkable yogurts. Pursuant to the agreement, CoolBrands' wholly owned subsidiary, Integrated Brands, Inc., will purchase 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 transaction, which is subject to regulatory approval, is expected to be completed in the first calendar quarter of 2005. CoolBrands expects to finance approximately $ 45,000 in bank debt and utilize cash to pay for the remainder of the purchase price. CoolBrands estimates that this acquisition will contribute approximately $40,000 to $45,000 in revenues and net earnings of approximately $2,000 to $2,500 in the last half of fiscal 2005. EX-99 9 ex99-8.txt EXHIBIT 99.8 FORM 52-109F2 Certification of Interim Filings I, David J. Stein, President and Chief Executive Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending November 30, 2004; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "David Stein" - ------------------------------------- David J. Stein President and Chief Executive Officer FORM 52-109F2 Certification of Interim Filings I, David J. Stein, President and Chief Executive Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending February 28, 2005; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "David Stein" - ------------------------------------- David J. Stein President and Chief Executive Officer FORM 52-109F2 Certification of Interim Filings I, David J. Stein, President and Chief Executive Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending May 31, 2005; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "David Stein" - ------------------------------------- David J. Stein President and Chief Executive Officer EX-99 10 ex99-9.txt EXHIBIT 99.9 FORM 52-109F2 Certification of Interim Filings I, Gary Stevens, Chief Financial Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending November 30, 2004; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "Gary Stevens" - ----------------------------- Gary Stevens Chief Financial Officer FORM 52-109F2 Certification of Interim Filings I, Gary Stevens, Chief Financial Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending February 28, 2005; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "Gary Stevens" - ----------------------------- Gary Stevens Chief Financial Officer FORM 52-109F2 Certification of Interim Filings I, Gary Stevens, Chief Financial Officer, certify that: 1. I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of CoolBrands International Inc., (the "Issuer") for the interim period ending May 31, 2005; 2. Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings; 3. Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the Issuer, as of the date and for the periods presented in the interim filings; 4. The Issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared. December 13, 2005 "Gary Stevens" - ----------------------------- Gary Stevens Chief Financial Officer EX-99 11 ex99-10.txt EXHIBIT 99.10 FORM 52-109F1 Certification of Annual Filings I, David J. Stein, President and Chief Executive Officer, certify that: 1. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of Coolbrands International Inc., (the "Issuer") for the annual period ending August 31, 2005; 2. Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; 3. Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; 4. The issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have: (a) designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; and (b) evaluated the effectiveness of the issuer's disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation. December 13th, 2005 "David Stein" - --------------------------------- David J. Stein President and Chief Executive Officer FORM 52-109F1 Certification of Annual Filings I, Gary Stevens, Chief Financial Officer, certify that: 1. I have reviewed the annual filings (as this term is defined in Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) of Coolbrands International Inc., (the "Issuer") for the annual period ending August 31, 2005; 2. Based on my knowledge, the annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the annual filings; 3. Based on my knowledge, the annual financial statements together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings; 4. The issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have: (a) designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual filings are being prepared; and (b) evaluated the effectiveness of the issuer's disclosure controls and procedures as of the end of the period covered by the annual filings and have caused the issuer to disclose in the annual MD&A our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings based on such evaluation. December 13th , 2005 "Gary Stevens" - -------------------------------- Gary Stevens Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----