CoolBrands of Eskimo Pie Fame Reports 2Q Results

    April 14, 2005

CoolBrands adopted the U.S. dollar as its functional and reporting currency effective September 1, 2004, the commencement of fiscal 2005.

CoolBrands adopted the U.S. dollar for its financial reporting since the majority of its business is conducted in the United States, which will make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements have been restated into U.S. dollars in accordance with generally accepted accounting principles.

David J. Stein, co-chairman and chief executive officer, said, “Our results this quarter reflect the ongoing transition in our business to a more diversified product base with great potential. Revenue decline during the quarter resulted primarily from a more rapid-than expected drop-off in sales of our discontinued Weight Watchers Smart Ones brand, as well as sales declines of our Atkins brand, which continued to be affected by adverse “low carb” segment trends, and our super premium pint brands, which faced increased competition from new and existing super premium brands. At the same time, our net income was impacted by approximately $6.2 million in write-downs, the majority of which were related to the discontinued Weight Watchers Smart Ones business. Excluding these write-offs, for the quarter and the six months ended February 28, 2005, CoolBrands would have earned $0.00 and $0.04, per basic and diluted share, respectively.

“We continue to make progress in our efforts to introduce new brands and products in a growing number of categories. As we look forward, we are confident that we are getting our business back on track. During the quarter, we began to see encouraging sales of our new No Pudge! products and continued to secure shelf authorizations for our other new products under the Crayola, Snapple, Care Bears, Justice League and Dogsters brands. In addition, we believe there will be further growth opportunities as we continue to develop and expand our newly acquired Breyer’s yogurt business. With good customer and consumer response for our products, we expect to continue gaining traction for our strategy resulting in profitable growth over time.”

As a result of a previously announced change in the business arrangement with Dreyer’s Grand Ice Cream Inc. (“Dreyer’s”) effective September 1, 2004, CoolBrands began accounting for 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 are still 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, except for Dreyer’s scanned based trading customers which are still delivered on a drayage basis. Sales for the second quarter decreased to $80,566,000 as compared with $95,216,000 for the second quarter of 2004, a 15.4% decline. Drayage and other income declined by $3,706,000 to $5,803,000 in the second quarter of fiscal 2005 as compared with $9,509,000 recognized in the second quarter of fiscal 2004 due to the change in the business arrangement with Dreyer’s. Drayage income in 2005 represents the fees paid to CoolBrands by Dreyer’s for the delivery of products invoiced by Dreyer’s to its scanned based trading customers.

Gross profit declined to $4,501,000 for the quarter, compared with $24,342,000 for the same quarter last year. Gross profit percentage for second quarter of fiscal 2005 declined to 5.6% as compared to 25.6% for the second quarter of fiscal 2004. This decline was due to the impact of lower margins generated and by Americana Foods’ manufacturing operations and Eskimo Pie Frozen Distribution’s distribution operations. In addition, the Company recorded a write down of $3,835,000 in connection with packaging, ingredients and finished goods inventories that will not be used or sold as a result of 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. In connection with the settlement of the Weight Watchers litigation, CoolBrands agreed to discontinue the sale of all Weight Watchers Smart Ones products on May 1, 2005. Due to the decline in revenues, selling, general and administrative expenses (SG&A) for the quarter increased as a percentage of revenues to 21.1%, compared with 17.1% for second quarter of fiscal 2004. SG&A for the quarter were adversely impacted by approximately $2,358,000, including the write off of deferred package design costs, primarily related to Weight Watchers Smart Ones, and a $1,401,000 write off of certain license agreements with General Mills.

Cash and short term investments increased to $66,024,000 at February 28, 2005 from $64,327,000 at August 31, 2004. Working capital declined to $108,448,000 at February 28, 2005 from $121,026,000 at August 31, 2004. CoolBrands’ current ratio declined to 2.5 to 1 at February 28, 2005 from 2.6 to 1 at August 31, 2004. The declines in working capital and the current ratio were due to the net reduction in accounts receivable and accounts payable and the classification of certain bank debt which is due November 1, 2005 as a current liability at February 28, 2005 as compared with the classification as a long-term liability at August 31, 2004.

The Company adopted, on a retroactive basis without restatement, the recommendation of CICA Handbook Section 3870, “Stock-based compensation and other stock-based payments”, which now requires 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. The effect of this change in accounting policy reduced retained earnings at September 1, 2004 by $15,436,000 with a corresponding increase to reported contributed surplus.

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