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) |
------------ ----------- ------------------- -------------
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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,
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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
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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.
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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.
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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
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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
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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,
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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.
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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
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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.
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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:
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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;
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(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.
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(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;
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(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.
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(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.
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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.
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