-----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, F+G6MaYcI9q8o3+Qu4m18D6FCJOCz/o7aAV72g12J7/sIfy0nRm6Vsc8uN3AXUEy GLX5v17jUDfScTp5BqwDuw== 0000950117-04-000309.txt : 20040123 0000950117-04-000309.hdr.sgml : 20040123 20040123172609 ACCESSION NUMBER: 0000950117-04-000309 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20040123 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: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-27476 FILM NUMBER: 04541463 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 40-F 1 a36888.txt COOLBRANDS INTERNATIONAL INC. ------------------------- OMB APPROVAL ------------------------- OMB Number: 3235-0381 Expires: April 30, 2006 Estimated average burden hours per response....427 ------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 40-F [Check one] [_] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2003 Commission File Number 000-27476 --------------- --------- COOLBRANDS INTERNATIONAL INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) ________________________________________________________________________________ (Translation of Registrant's name into English (if applicable)) Province of Nova Scotia, Canada ---------------------------------------------------------------- (Province or other jurisdiction of incorporation or organization) 2024 ------------------------------------------------------------------------ (Primary Standard Industrial Classification Code Number (if applicable)) ________________________________________________________________________________ (I.R.S. Employer Identification Number (if applicable)) 8300 Woodbine Avenue, 5th Floor Markham, Ontario Canada L3R 9Y7 (905) 479-8762 ________________________________________________________________________________ (Address and telephone number of Registrant's principal executive offices) Integrated Brands Inc. 4175 Veterans Hwy. Ronkonkoma, NY 11775 Attn Gary P. Stevens (631) 737-9700 ----------------------------------------------------------------------------- (Name, Address (including zip code) and telephone number (including area code) of agent for service in the United States) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registered NOT APPLICABLE - ------------------------------------ ----------------------------------------- - ------------------------------------ ----------------------------------------- SEC 2285 (08-03) Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. Securities registered or to be registered pursuant to Section 12(g) of the Act. NOT APPLICABLE - -------------------------------------------------------------------------------- (Title of Class) ________________________________________________________________________________ (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. Subordinate Voting Shares Multiple Voting Shares - -------------------------------------------------------------------------------- (Title of Class) For annual reports, indicate by check mark the information filed with this Form: [X] Annual information form [X] Audited annual financial statements Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Subordinate Voting Shares: 45,628,788 Multiple Voting Shares: 6,178,686 Indicate by check mark whether the Registrant by filing 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 (the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. Yes 82- No X ---- ---- ----- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- A. Undertaking The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities. B. Consent to Service of Process The Registrant has previously filed with the Commission a written consent to service of process and power of attorney on Form F-X in connection with the Subordinate Voting Shares and Multiple Voting Shares. C. Disclosure Controls and Procedure (a) Evaluation of disclosure controls and procedures. Based on the evaluation of the Registrant's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the fiscal year ended August 31, 2003, the Registrant's co-chief executive officers and its chief financial officer have concluded that the Registrant's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Registrant in the reports that the Registrant files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission and are operating in an effective manner. (b) Changes in internal controls. During the fiscal year ended August 31, 2003, there were no changes in the Registrant's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect these internal controls over financial reporting. D. Audit Committee Financial Expert The Registrant's board of directors has determined that it has at least one audit committee financial expert serving on its audit committee. Mr. Romeo DeGasperis has been determined to be such audit committee financial expert. Mr. DeGasperis is independent, as that term is defined by the Nasdaq listing standards. The SEC has indicated that the designation of Mr. DeGasperis as an audit committee financial expert does not make Mr. DeGasperis an "expert" for any purpose, impose any duties, obligations or liability on Mr. DeGasperis that are greater than those imposed on members of the audit committee and board of directors who do not carry this designation or affect the duties, obligations or liability of any other member of the audit committee. E. Code of Ethics The Registrant has adopted a code of ethics (the "Code of Business Conduct and Ethics") that applies to all employees and officers, including its principal executive officers, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is attached as an exhibit to this annual report on Form 40-F. 3 F. Principal Accountant Fees and Services BDO Dunwoody LLP has served as the Registrant's auditing firm for the previous two fiscal years. Fees payable for the years ended August 31, 2003 and August 31, 2002 to BDO Dunwoody LLP and its affiliates are U.S. $355,250 and CND $12,000 and U.S. $288,000. Fees payable to BDO Dunwoody LLP in 2003 and 2002 are detailed below.
Year ended Year ended August 31, 2003 August 31, 2002 --------------- --------------- Audit Fees US $331,000 US $188,000 Audit-related fees US $ 24,250 US $100,000 Tax fees CN $ 12,000 -- All other fees -- --
The nature of each category of fees is described below. Audit Fees Audit fees were paid for professional services rendered by the auditors for the audit of the Registrant's annual financial statements or services provided in connection with statutory and regulatory filings or engagements. Audit-Related Fees Audit-related fees were paid which related to the performance of the audit or review of the annual financial statements and not reported under the audit fees item above. These services consisted of reviewing the Company's financial statements and disclosure in connection with the issuance of special warrants, due diligence in connection with acquisitions and audit of a subsidiary's 401K plan. Tax Fees Tax fees were paid for tax compliance. These services consisted of tax compliance including the preparation of original tax returns. All Other Fees No accountant fees were paid for products and services other than the audit fees, audit-related fees and tax fees described above. Pre-Approval Policies and Procedures The Audit Committee has considered whether the provision of services other than audit services is compatible with maintaining the auditors' independence and has adopted a policy of pre-approving all of the provision of these services. For the year ended August 31, 2003, all of the services described above were approved by the Audit Committee pursuant to paragraph(c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Approximately 90% of the hours expended on the principal accountant's engagement to audit the Registrant's financial statements for the fiscal year ended August 31, 2003 were attributed to work performed by BDO Seidman LLP, a member firm of BDO International, of which BDO Dunwoody LLP is also a member. 4 G. Tabular Disclosure of Contractual Obligations as of August 31, 2003 (in Thousands of Canadian Dollars)
- ------------------------------------------------------------------------------------------------------ Contractual Obligations Payments due by period - ------------------------------------------------------------------------------------------------------ Less than 1 1-3 3-5 More than 5 Total year years years years - ------------------------------------------------------------------------------------------------------ Long-Term Debt Obligations $42,692 $ 5,131 $26,910 $10,651 -- - ------------------------------------------------------------------------------------------------------ Capital Lease Obligations 1,662 552 778 332 -- - ------------------------------------------------------------------------------------------------------ Operating Lease Obligations 25,656 8,011 10,471 5,107 2,067 - ------------------------------------------------------------------------------------------------------ Purchase Obligations -- -- -- -- -- - ------------------------------------------------------------------------------------------------------ Other Long-Term Liabilities Reflected on the Public Company's Balance Sheet under GAAP 3,984 554 554 2,876 - ------------------------------------------------------------------------------------------------------ Total Contractual Obligations $73,994 $13,694 $38,713 $16,644 $4,943 - ------------------------------------------------------------------------------------------------------
5 SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant hereby certifies that it meets all of the requirements for filing on Form 40-F and that it has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized. COOLBRANDS INTERNATIONAL INC. (Registrant) By: /s/ David J. Stein --------------------------------------- Name: David J. Stein Title: President and Co-Chief Executive Officer Date: January 21, 2004 6 Index to Exhibits 1. Annual Information Statement of the Registrant for the fiscal year ended August 31, 2003. 2. Audited Financial Statements for the fiscal years ended August 31, 2003 and August 31, 2002 together with the reconciliation of Canadian Generally Accepted Accounting Principles to United States Generally Accepted Accounting Principles and Management's Discussion and Analysis for the fiscal years ended August 31, 2003 and August 31, 2002. 3. CoolBrands International Inc. Code of Business Conduct and Ethics. 23.1 Consent of BDO Dunwoody LLP, Independent Auditors 23.2 Consent of BDO Dunwoody LLP, Independent Auditors 31.1 Exchange Act Rule 13a-14(a)/15d-14(a) Certification of David J. Stein, Co-Chief Executive Officer 31.2 Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Richard E. Smith, Co-Chief Executive Officer 31.3 Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Gary P. Stevens, Chief Financial Officer 32.1 18 U.S.C. Section 1350 Joint Certification of David J. Stein, Co-Chief Executive Officer, Richard E. Smith, Co-Chief Executive Officer and Gary P. Stevens, Chief Financial Officer. 7 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as............................. 'TM' The registered trademark symbol shall be expressed as.................. 'r' EX-99 3 ex1.txt EXHIBIT 1 Exhibit 1 ANNUAL INFORMATION FORM OF COOLBRANDS INTERNATIONAL INC. Fiscal Year Ended August 31, 2003 January 13, 2004 TABLE OF CONTENTS ITEM 1: CORPORATE STRUCTURE.............................................. 1 ITEM 2: GENERAL DEVELOPMENT OF THE BUSINESS.............................. 2 ITEM 3: NARRATIVE DESCRIPTION OF THE BUSINESS............................ 5 ITEM 4: SELECTED CONSOLIDATED FINANCIAL INFORMATION...................... 16 ITEM 5: MANAGEMENT DISCUSSION AND ANALYSIS............................... 18 ITEM 6: MARKET FOR SECURITIES............................................ 18 ITEM 7: DIRECTORS AND OFFICERS........................................... 18 ITEM 8: ADDITIONAL INFORMATION........................................... 22
i ITEM 1: CORPORATE STRUCTURE 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) and reorganized its share capital to provide for multiple voting shares and subordinate voting shares. On March 15, 2000, the Corporation amended its articles to change its name to CoolBrands International Inc. ("CoolBrands" or the "Corporation"). The principal office of the Corporation is located at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario, L3R 9Y7. The registered address of the Corporation is Suite 800, 1959 Upper Water Street, Halifax, Nova Scotia, Canada, B3J 2X2. Corporate Chart The following chart illustrates all of the principal wholly-owned subsidiaries and other entities of the Corporation, their jurisdiction of incorporation and the percentage ownership by the Corporation of the voting and non-voting securities of each subsidiary or other entity. COOLBRANDS INTERNATIONAL INC. (Nova Scotia) 100% 100% 100% INTEGRATED YOGEN FRUZ YOGEN FRUZ BRANDS INC. CANADA INC. ACQUISITIONS INC. (New Jersey) (Ontario) (Nevada) 100% KAYLA FOODS INT'L (Barbados) INC. (Barbados) 50.1% 100% 100% AMERICANA FOODS LP ESKIMO PIE FROZEN ESKIMO PIE (Texas) DISTRIBUTION INC. CORPORATION (Delaware) (Virgina) ITEM 2: GENERAL DEVELOPMENT OF THE BUSINESS The Corporation markets Dreamery'r' Ice Cream, Whole Fruit'TM' Sorbet, Eskimo Pie'r', Chipwich'r' and Fruit-A-Freeze'r' branded frozen novelties and frozen dessert products. Eskimo Pie'r' created the frozen novelty industry in 1921 when founder, Christian K. Nelson, invented the chocolate-coated ice cream bar. Today, 80 years later, Eskimo Pie'r' remains one of the best-known and most widely distributed of all frozen novelty brands. The Corporation also markets a broad range of ice cream, frozen novelties and frozen dessert products under the Atkins'r', Godiva'r', Tropicana'r', Welch's'r', Weight Watchers'r' Smart Ones'r', Betty Crocker'r', Trix'r', Yoplait'r' and Colombo'r' brand names, pursuant to long-term licensing agreements. The Corporation distributes a wide variety of ice cream and frozen dessert products through Eskimo Pie Frozen Distribution for itself and numerous other ice cream brands, including Nestle, Dreyer's, Edy's, Haagen-Dazs, Friendly's and Carvel. The Corporation manufactures soft serve yogurt and ice cream mixes, a wide variety of hard pack ice cream, frozen dessert novelties and dairy mixes for the foodservice channel at Americana's Dallas, Texas production facility. The Corporation produces soft serve frozen yogurt and ice cream mixes at its production facility in Russellville, Arkansas. Eskimo Pie'r' Foodservice is a leading manufacturer and supplier of premium soft serve ice cream, frozen yogurt, custard and smoothies to the foodservice industry. The Corporation also 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 Corporation's brands. The Corporation is the world's largest franchisor and licensor of stores and other locations serving primarily frozen yogurt. As of August 31, 2003, the Corporation had franchise operations and strategic partnerships in approximately 80 countries. The Corporation franchises and licenses a Family of Brands under the names Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r' Ice Cream and Premium Frozen Yogurt, Swensen's'r' Ice Cream, Ice Cream Churn'r', Paradise'r', Golden Swirl'r' and certain other names. The Corporation also franchises and licenses gourmet coffee shop outlets in 22 countries under the name Java Coast'r' Fine Coffees. The predecessor of the Corporation commenced operations in August 1986 with the opening of the first Yogen Fruz'r' store in Vaughan, Ontario. The store served yogurt as a frozen dessert under a unique concept pursuant to which individually packaged portions of frozen yogurt were blended with fresh frozen fruit in front of the customer. The Yogen Fruz'r' concept was developed by the Corporation's founders, Michael Serruya, Co-Chairman of the Board of the Corporation, and his brother, Aaron Serruya, Executive Vice-President of the Corporation. The first Yogen Fruz'r' store experienced immediate success, prompting the Corporation to commence a franchising program. The first franchised Yogen Fruz'r' store opened in London, Ontario in August 1987 with an additional 62 stores opening in Canada over the next four years. The expansion of the Corporation's operations was further accelerated by the establishment of an international master franchise program in June 1991, when a regional franchise was granted in Latin America. The Corporation's operations have been significantly expanded through a series of strategic acquisitions and through the development of strategic partnerships. In June 1991, Yogen Fruz Canada Inc., a subsidiary of the Corporation through which all of the Corporation's operations were then carried on, acquired its largest competitor in Canada, Yogurty's Yogurt Discovery, from Silcorp Limited. Strategic partnerships were recently established by the Corporation with National Amusements Inc. and Wal-Mart Stores Inc. in the United States, Tricon Global Restaurants (Canada) Inc. in Ontario, Canada and internationally by master franchisees with such chains as Dunkin Donuts, Kentucky Fried Chicken, KLM Dutch Airlines and Esso. In July 1995, the Corporation completed the acquisition of Bresler's Industries, Inc., an established U.S. franchisor and licensor of ice cream and frozen yogurt outlets. In March 1996, the Corporation completed the acquisition of I Can't Believe Its Yogurt, then the second largest franchisor and licensor of frozen yogurt outlets in the United States and a significant franchisor of frozen yogurt outlets outside North America. In June 1997, the 2 Corporation completed the acquisition of Golden Swirl Frozen Yogurt Inc. and GS Associates Inc., the sole partners of Golden Swirl Management Company, an owner and operator of a chain of frozen yogurt stores in Utah, California, Nevada, and Arizona under the name Golden Swirl. In January 1998, the Corporation acquired the business of U.S.-based Ice Cream Churn Inc. and Ice Cream Churn Enterprises, which have the right to operate outlets in Wal-Mart Stores Inc. stores. In March 1998, the Corporation acquired Integrated Brands Inc. ("Integrated Brands") which markets, sells and distributes Godiva'r' ice cream, Atkins'r' Endulge'TM' super premium ice cream products, Tropicana'r' frozen desserts, as well as a variety of other branded frozen dessert products under the Betty Crocker'r', Yoplait'r', Colombo'r', Trix'r' and Lucky Charms'r' brand names pursuant to long-term exclusive license agreements. Integrated Brands, directly and through subsidiaries, also operates, franchises and licenses Swensen's'r' Ice Cream, Steve's'r' Ice Cream and triple trademark frozen dessert stores throughout the United States and certain foreign countries. In May 1999, the Corporation acquired specific assets of Greater Pacific Foods, Inc., including the Honey Hill Farms trademarks. The Honey Hill Farms business consists of marketing and distributing Honey Hill Farms soft serve frozen yogurt and ice cream mixes to outlets located primarily in the western United States. Early in fiscal 1999, the Corporation began to explore the opportunity to invest in Eskimo Pie Corporation ("Eskimo Pie") in order to benefit from Eskimo Pie's strong brand names and U.S. based manufacturing facilities. On October 6, 2000, the acquisition of Eskimo Pie was completed by purchasing the 2.9 million shares not owned by the Corporation for U.S.$10.25 a share or U.S.$29.7 million. Integrated Brands Inc. borrowed U.S.$30 million to finance the acquisition. Eskimo Pie created the frozen novelty industry in 1921 with the invention of the Eskimo Pie ice cream bar. Eskimo Pie's strengths include national brand recognition, quality products and the management of complex sales and distribution networks. Eskimo Pie's growth has come primarily as a result of the development and introduction of Eskimo Pie brand frozen dessert products, the development and marketing of frozen dessert products under the licensing of other well-known national brands and the use of a select group of quality-oriented manufacturers who provide a cost effective means to manufacture products. Integrated Brands then markets, sells and distributes the products. Today, Integrated Brands markets a broad range of frozen novelties, ice cream and sorbet products under the Eskimo Pie, Welch's and Weight Watchers Smart Ones brand names. The Corporation engages in product/concept development, and advertising and sales promotion expense generally includes trade promotion and introductory costs, price-off and feature price promotions, regional consumer promotion, couponing and other trial purchase generating programs. Certain key ingredients (such as chocolate coatings and powders) and wrappers used in the manufacture of Eskimo Pie and other licensed frozen novelties and ice cream products are produced at the Corporation's owned facilities located in New Berlin, Wisconsin and Bloomfield, New Jersey. In addition to products manufactured for use in its business, the Corporation sells various other ingredients to the dairy industry produced at its New Berlin, Wisconsin facility. This business involves blending, cooking and processing basic flavours and fruits to produce products which subsequently are used by customers to flavour frozen desserts, ice cream novelties and fluid dairy products. The Corporation also manufactures flexible packaging, such as private label ice cream novelty wraps, at its Bloomfield, New Jersey plant. These products are sold to the dairy industry, including many of the Corporation's manufacturers. The Corporation also manufactures soft serve yogurt and premium ice cream mixes in a leased facility in Russelville, Arkansas. Soft serve mix is sold under the Eskimo Pie brand name to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft serve ice cream and yogurt products to consumers. The sale of soft serve yogurt and ice cream mixes, is managed by a separate sales force working within Eskimo Pie's wholly-owned subsidiary, Sugar Creek Foods, Inc. 3 Effective July 1, 2003, the Corporation acquired the general partner interest and a majority of the total partnership interest in Americana Foods LP. Americana Foods is one of the largest and most versatile frozen dessert manufacturing facilities in the U.S. and currently supplies a wide variety of soft serve mixes, packaged ice cream, frozen yogurt and sorbet products and frozen novelties for the Corporation and to well known national retailers, food companies and restaurant chains, including Sam's Club, TCBY Enterprises and Silhouette. Americana Foods also manufacturers and sells products for the foodservice channel such as dairy mixes for preparing mashed potatoes which are extensively used to standardize quality and reduce labor costs in on-site food preparation. Americana Foods strengthens CoolBrands ability to support its brands with state of the art manufacturing, product innovation and quality assurance. On July 7, 2003, the Corporation acquired the Dreamery'r' ice cream and Whole Fruit'TM' sorbet brands from Dreyer's Grand Ice Cream, as well as the rights to the license for the Godiva'r' ice cream brand, which was assigned by Dreyer's. The acquisition of these ice cream brands give the Corporation significant share in the packaged ice cream segment, complimenting the Corporation's strong position in the frozen novelty segment. In this transaction, the Corporation also acquired substantially the entire Haagen-Dazs Ice Cream distribution system in the U.S. from Nestle, including distribution assets in the States of Washington, Oregon, Florida, California, Pennsylvania, New Jersey, Utah, Minnesota, Maryland, and The District of Columbia. The acquisition of the Haagen-Dazs distribution assets from Nestle enhances the Corporation's ability to drive downstream distribution of its products in all channels. Effective September 26, 2003 CoolBrands International began initial shipments of its line of Atkins Endulge'TM' super premium ice cream products to U.S. retailers. The products have been accepted and will ship through CoolBrands' distribuition system into customers such as Kroger, Wal-Mart, Albertson's, Publix, ShopRite and other major U.S. retail chains. Atkins Endulge'TM' super premium ice cream products will also be available in Natural Food Stores along with the balance of the Atkins food line through major natural foods distributors such as UNFI and Tree of Life. CoolBrands manufactures, distributes and markets Atkins Endulge'TM' under license from Atkins Nutritionals, Inc. Atkins Endulge'TM' is rich, creamy, super premium ice cream with no sugar added to control carbohydrates, marketed in a variety of flavors in pint-size containers, ice cream bars, fudge bars, and other frozen snacks. At four or fewer Net Carbs (carbohydrates that affect blood sugar) per serving, Atkins Endulge'TM' has up to 85% fewer Net Carbs than other super premium brands. The Company expects full distribution by December 2003 and our national DSD distribution system has been critical in achieving unprecedented speed to market, demonstrating CoolBrands' successuful integration of the DSD system acquired from Nestle, as well as the power of this system to drive future growth. Concurrently with the acquisition in March 1998 of Integrated Brands, CoolBrands continued under the laws of Nova Scotia and reorganized its share capital. As a result, the share capital of CoolBrands consists of Multiple Voting Shares (10 votes per share) and Subordinate Voting Shares (1 vote per share). The Subordinate Voting Shares trade on The Toronto Stock Exchange under the symbol "COB.A". 4 ITEM 3: NARRATIVE DESCRIPTION OF THE BUSINESS Overview CoolBrands International is a leader in the consumer products and franchising segments of the frozen dessert industry, marketing a diverse range of frozen dessert products under nationally and internationally recognized brand names. CoolBrands is the pre-eminent company in the fast-growing "Better for You" ice cream category with offerings such as fat free, non-dairy Whole Fruit'TM' Sorbet, Weight Watchers'r' Smart Ones'r' low-fat and fat-free frozen desserts and new Atkins'r' Endulge'TM' controlled carbohydrate super premium ice cream. CoolBrands also competes in the super premium ice cream category with the Dreamery'r' Ice Cream and Godiva'r' Ice Cream brands. In addition, CoolBrands markets a wide variety of "all family" premium ice creams, frozen novelties and frozen desserts under the Eskimo Pie'r', Chipwich'r', Tropicana'r', Welch's'r', Betty Crocker'r' and Trix'r' brand names. CoolBrands' subsidiary, Eskimo Pie Frozen Distribution, operates the second largest "direct store delivery" (DSD) ice cream distribution system in the U.S., serving these CoolBrands products and a growing family of Partner Brands to supermarkets, convenience stores and other retail customers. CoolBrands' subsidiary, Americana Foods, is a leading U.S. manufacturer and supplier of packaged ice cream, frozen yogurt, sorbet products, frozen novelties and soft serve mixes to well-known national retailers, food companies and restaurant chains. Americana Foods also manufactures and sells products for the foodservice channel which are extensively used to standardize quality and reduce labor costs in on-site food preparation. CoolBrands' Foodservice Division manufactures and sells premium soft serve ice cream and frozen yogurt to the foodservice industry, yogurt and ice cream shops. CoolBrands also 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 also 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'r', Bresler's'r' Premium Ice Cream, Golden Swirl'r' and Ice Cream Churn'r', with company-owned, franchised and non-traditional partnership locations around the world. CoolBrands' operations consist of four distinct segments: (1) the manufacture, sale and distribution of pre-packaged frozen dessert products under the Eskimo Pie'r', Dreamery'r', Whole Fruit'TM', Chipwich'r' and Fruit-A-Freeze'r' trademarks and under the Atkins'r' Endulge'TM', Godiva'r', Tropicana'r', Welch's'r', Weight Watchers Smart Ones'r', Betty Crocker'r', Yoplait'r', Colombo'r', Trix'r' trademarks and a variety of other trademarks, pursuant to exclusive long-term license agreements (the "Consumer Products Business"); (2) the franchising and licensing of Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r', Swensen's'r', Ice Cream Churn'r', Java Coast'r' Fine Coffees and Golden Swirl'r' outlets and other activities related thereto, including the operation of a limited number of company-owned ice cream and yogurt stores (the "Franchising and Licensing Business"); (3) the manufacture of soft serve yogurt and ice cream mixes sold primarily to foodservice distributors, yogurt shops and other foodservice establishments (the "Foodservice Business"); and (4) the manufacture of flavours, ingredients and packaging sold primarily to frozen novelty manufacturers and the dairy industry (the "Dairy Components Business"). 5 The following table sets forth the contribution to revenue of each of the above-described segments by geographic region: Revenue by Industry Segments and Classes of Product and Services Year ended August 31, 2003 (in thousands of dollars)
- ------------------------------------------------------------------------------------------------ Prepackaged consumer Franchising Dairy products and licensing Foodservice components Corporate Revenue Source $ $ $ $ $ - ------------------------------------------------------------------------------------------------ United States 275,446 13,400 26,234 41,594 - ------------------------------------------------------------------------------------------------ Canada 947 3,996 214 - ------------------------------------------------------------------------------------------------ International 741 3,494 - ------------------------------------------------------------------------------------------------ Inter-segment revenues (5,389) (991) (2,943) (214) - ------------------------------------------------------------------------------------------------ Other revenues 575 126 43 - ------------------------------------------------------------------------------------------------ Total Consolidated revenues 272,320 21,016 25,243 38,651 43 - ------------------------------------------------------------------------------------------------
Year ended August 31, 2002 (in thousands of dollars)
- ------------------------------------------------------------------------------------------------ Prepackaged consumer Franchising Dairy products and licensing Foodservice components Corporate Revenue Source $ $ $ $ $ - ------------------------------------------------------------------------------------------------ United States 154,863 16,239 26,285 37,743 - ------------------------------------------------------------------------------------------------ Canada 1,570 4,472 286 - ------------------------------------------------------------------------------------------------ International 904 3,991 - ------------------------------------------------------------------------------------------------ Inter-segment revenues (122) (92) (1,218) (3,133) (235) - ------------------------------------------------------------------------------------------------ Other revenues 380 245 44 - ------------------------------------------------------------------------------------------------ Total Consolidated revenues 157,595 24,855 25,067 34,610 95 - ------------------------------------------------------------------------------------------------
The Prepackaged Consumer Products Segment The Corporation manufactures, distributes and sells a variety of pre-packaged frozen dessert products 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, Dreamery'r' ice cream, Godiva'r' ice cream, Whole Fruit'TM' sorbet, Chipwich'r' novelties, Fruit-A-Freeze'r' novelties, Welch's'r' frozen novelties and frozen dessert specialties, Atkins'r' Endulge'TM' super premium ice cream products, Betty Crocker'r' frozen novelties and frozen dessert specialties, Yoplait'r' ready to eat frozen yogurt products; Colombo'r' ready to eat frozen yogurt and sorbet products and 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 Atkins'r', Welch's'r', Weight Watcher Smart Ones'r', Betty Crocker'r', Yoplait'r' and Colombo'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 prepackaged frozen dessert products under the Atkins'r' Endulge'TM', Godiva'r', Tropicana'r', Welch's'r', Weight Watcher Smart-Ones'r', Betty Crocker'r', Yoplait'r', Colombo'r' and Trix'r' trademarks is accomplished pursuant to exclusive long-term license agreements. The Corporation, through its subsidiary, Integrated Brands has the right to develop and on an on-going basis is developing additional products under the foregoing trademarks. Integrated Brands incurs significant expenses to obtain shelf space in connection with the introduction of its new products. 6 Integrated Brands purchases packaging and ingredients for its products directly from unaffiliated suppliers. Integrated Brands then sells the packaging and ingredients to unaffiliated manufacturers. Certain of these manufacturers also manufacture other ice cream and related frozen dessert products for other companies, including companies affiliated with Richard E. Smith, who is a significant CoolBrands shareholder and Co-Chairman of the CoolBrands board of directors and Co-Chief Executive Officer of the Corporation. 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 LP also manufactures numerous products which are sold by Integrated Brands and distributed by Eskimo Pie Frozen Distribution. Calip Dairies, Inc. ("Calip"), of which Richard E. Smith is Chairman of the Board and Mr. Smith and his family are the sole stockholders, 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. The Corporation has agreed to guarantee the performance of the agreement. The Franchising and Licensing Segment A full franchising program has been developed for each of the Tropicana'r' Smoothies, Jucices & 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, 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. Master franchisees and franchisees are selected on the basis of their financial resources, operational skills and business experience. Master franchisees and franchisees are required to complete in-depth training programs. The training programs typically include instruction relating to business management, accounting, operations, ordering, store opening and closing procedures and staff hiring. Franchisees are also provided with detailed operating procedures and marketing, construction, employee and management manuals. Generally, preliminary layouts and plans for all new sites are reviewed and representatives of CoolBrands are sent to the opening of each new location. Representatives of CoolBrands also make visits to sites around the world. Local master franchisees are required to visit each site in their franchise area. Yogen Fruz Canada Inc. acts as its own master franchisee in the U.S. and Canada (except for Yogen Fruz franchises in British Columbia). 7 Company-Owned Stores The Corporation owns and operates a limited number of corporate stores in Canada and the United States. Generally, it is the Corporation's policy to own and operate a limited number of corporate stores that are used to test market new products and train new franchisees. At August 31, 2003, there were one and four company-owned stores operating in Canada and the United States, respectively. Master Franchising and Strategic Partnership Arrangements Master franchise agreements generally authorize master franchisees to franchise and license Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r' , Swensen's'r' or Java Coast'r' Fine Coffees outlets in the territory covered by their respective master franchises. In certain instances, such as where the territory covered by the master franchises is comprised of more than one country, master franchisees may also be allowed to grant master franchises for portions of their territory. Master franchisees are generally subject to substantially all of the requirements imposed on retail franchisees and are obliged to enforce those requirements in respect of their own franchisees. In addition, master franchisees are usually required to open a minimum number of outlets each year. Master franchises are generally granted for periods varying between ten and twenty years, and are usually renewable for an additional period of ten to twenty years. Master franchisees pay CoolBrands an initial fee for their master franchise as well as, in the case of Yogen Fruz'r', Bresler's'r' , Swensen's'r' and Java Coast'r' Fine Coffees master franchisees, additional fees for each franchise sold or license granted by them, and a portion of the royalties earned by them from their franchisees. The initial fee for a master franchise varies depending on a number of different factors, including the size of the territory covered by the master franchise. CoolBrands, through its subsidiaries and master franchisees, has entered into strategic partnership arrangements with a number of retail chains both in North America and internationally. These arrangements are usually structured as license agreements pursuant to which CoolBrands or its master franchisee licenses the strategic partner to install Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r', Java Coast'r' Fine Coffees and/or Golden Swirl'r' mini-counters in some or all of its locations. Similarly, a strategic partner may license CoolBrands to offer that partner's products at Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r' and/or Java Coast'r' Fine Coffees and/or Golden Swirl'r' outlets. The mutual offering of products is sometimes referred to as "cross-branding". CoolBrands views these forms of arrangements as strategic since they typically exploit the complementary name of the Yogen Fruz'r', I Can't Believe It's Yogurt'r', Bresler's'r', Java Coast'r' and Golden Swirl'r' Businesses with the business of the strategic partners and result in incremental business for both parties. CoolBrands has established a co-branding program between I Can't Believe It's Yogurt'r' and Bresler's'r' outlets in the United States. As a result of this program, 30 I Can't Believe It's Yogurt'r' outlets now feature a limited selection of Bresler's'r' ice cream and 39 Bresler's'r' outlets feature a limited selection of I Can't Believe It's Yogurt'r' frozen yogurt. CoolBrands formed a partnership for its I Can't Believe It's Yogurt'r' brand when the Corporation's Master Franchisee in Amsterdam signed an agreement with KLM Dutch Airlines. As a result, the Corporation's I Can't Believe It's Yogurt'r' frozen dessert is now served as a complimentary dessert on all KLM flights along its European and Intercontinental routes. During fiscal 1998, CoolBrands strengthened its alliance with National Amusements Inc., an international entertainment company operating 1,180 motion picture screens in the U.S., Great 8 Britain and Latin America. A five year co-marketing pact was signed whereby the Bresler's'r' and Yogen Fruz'r' mix-in frozen yogurt brands were introduced to more than 50 theatres throughout the U.S. and Great Britain. The Corporation expanded its relationship with Wal-Mart during fiscal 1998. The Corporation acquired American-based Ice Cream Churn in January 1998. At the time, Ice Cream Churn had 22 outlets in Wal-Mart stores throughout the Southern U.S. Further inroads were made in February, 1998, when the Corporation signed a deal with American retailer Sam's Club, a division of Wal-Mart, to roll out the Bresler's'r' yogurt line in 440 Sam's Club locations throughout the U.S. During fiscal 2001, sales to Sam's Club was converted to Eskimo Pie's soft serve ice cream product. CoolBrands signed an agreement with Tricon Global Restaurants (Canada) Inc. to place I Can't Believe It's Yogurt'r' on the menu of its 250 Pizza Hut restaurants across Canada. Beginning in June, 2000, I Can't Believe It's Yogurt'r' was served as the centerpiece of a widely publicized launch of Pizza Hut's dessert bar. Retail Franchising Arrangements CoolBrands, either directly or through a master franchisee, enters into a franchise agreement with each franchisee for each location. The franchise agreement authorizes the franchisee to operate the location under the Yogen Fruz'r', Bresler's'r', Swensen's'r', Java Coast'r' Fine Coffees or Golden Swirl'r' name and trademarks in accordance with such methods, standards, specifications and procedures as CoolBrands may prescribe from time to time. Only products approved by CoolBrands may be sold at the location and the franchisee must buy such products solely from CoolBrands or from suppliers and manufacturers designated by it. The franchisee must pay the costs of leasehold improvements and must purchase the necessary equipment to operate the location from CoolBrands or suppliers designated by it. Generally, Yogen Fruz'r', Bresler's'r', Swensen's'r', Java Coast'r' Fine Coffees or Golden Swirl'r' franchisees are required to devote their full time and best efforts to their franchise. Except for Bresler's'r' franchises, which are granted for as long as the franchisee holds a lease for the franchise location, franchises are granted for a specific term and are usually renewable if certain conditions are satisfied, including, in some instances, the achievement of minimum sales levels. Yogen Fruz'r' franchises are granted for periods varying between five and ten years (often corresponding to the term of the lease for the location of the franchise) and are usually renewable for an additional period of five years. Franchisees must pay their master franchisee an initial franchise fee as well as royalties based on their gross sales. In addition, a renewal fee is usually paid on the renewal of the franchise. The franchise fee for a Yogen Fruz'r' store franchise in Canada is $25,000. Internationally, franchise fees are set by master franchisees and, for a Yogen Fruz'r' store, typically vary between U.S.$10,000 and U.S.$25,000. All Yogen Fruz'r' franchisees must pay royalties to their master franchisee equal to 6% of their gross sales. Canada The principal product served, at the retail locations of franchisees and the Corporation's corporate store, is hardpack frozen yogurt which is blended with fresh frozen fruit in front of the customer and served in a cup or cone. Products served include frozen yogurt shakes, cakes and pies, fresh juices and hot and cold non-alcoholic beverages. Yogen Fruz has also developed new flavours, combinations and tastes of Smoothies, which have rapidly won wide consumer appeal. Yogen Fruz Smoothies are made in dairy and non-dairy versions, with non-fat Yogen Fruz or I Can't Believe It's Yogurt frozen yogurt and Tropicana juices. The Yogen Fruz Concept is simple, easy to operate, and can be implemented in a variety of different formats. In addition, Yogen Fruz outlets generally 9 require less space and equipment to operate, and a smaller investment by franchisees than outlets of other competing frozen yogurt store chains. The cost of construction of a Yogen Fruz store varies depending upon its size and on the level of leasehold improvement allowances received. The typical estimated required investment for a franchisee in Canada for an average size in-line store in a shopping mall is approximately $100,000, inclusive of franchise fees. United States Products served, at the retail locations of franchisees and the Corporation's corporate stores, include premium ice creams, frozen yogurts, sherbets, sorbets and ices. The standard menu includes hard-packed and dipped ice cream, soda fountain products, ice cream specialty items, yogurt products and non-alcoholic beverages. Certain corporate stores have developed a strong relationship with various major supermarket chains in the Southwestern United States, most notably with Smith's, Von's, Ralph's and Albertson's. Under these arrangements, some corporate stores operate mini locations within certain supermarkets. The related supermarket lease agreements allow the flexibility for these mini locations to franchise these locations. The cost of construction of a corporate store varies depending upon its size and on the level of leasehold improvement allowances received. The typical estimated required investment for a franchisee in the United States for a traditional single trademark store varies between U.S.$131,000 and U.S.$224,000 and for a combination store (ice cream and yogurt) varies between U.S.$161,000 and U.S.$340,800, inclusive of franchise fees. The price of yogurt sold to United States franchisees of I Can't Believe It's Yogurt'r', includes charges for support and other services instead of charging ongoing royalties on gross sales. The royalty fees paid by franchisees to their master franchisees outside the United States vary between 0% and 3% of gross sales. Franchisees of Bresler's'r', Golden Swirl'r' and Swensen's'r' stores in the United States pay an initial franchise fee of U.S.$15,000, U.S.$15,000 and U.S.$10,000, respectively. Bresler's'r' and Swensen's'r' franchisees also pay royalties equal to 6% and 3% of their gross sales, respectively. Golden Swirl'r' franchisees have to pay royalties equal to U.S.$4.40 per 4 gallon case of frozen yogurt purchased from the Corporation's designated distributors. There are currently no Java Coast'r' Fine Coffees franchises in the United States. Internationally, franchise fees for Java Coast'r' Fine Coffees franchises are set by master franchisees. Licensing Arrangements 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 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. As in the case of franchises, licenses are granted for a specific term and are usually renewable if certain conditions are satisfied. Licensees are usually charged an initial license fee or a charge for start-up and support services, but, are not usually required to pay royalty fees, except outside of North America. 10 The Foodservice Segment In addition to products manufactured for use in its business, the Corporation manufactures soft serve 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 yogurt products to consumers. The sale of soft serve yogurt and ice cream mixes, is managed by a separate sales force working within Eskimo Pie's wholly-owned subsidiary, Sugar Creek Foods, Inc. The Dairy Component 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. The Corporation also manufactures flexible packaging, such as private label ice cream novelty wraps, at its Bloomfield, New Jersey plant. These products are sold to the dairy industry, including many of the Corporation's manufacturers. Trademarks CoolBrands relies upon copyright, trademark and trade secret laws to protect its proprietary rights in its trademarks and products. CoolBrands has obtained registrations for a number of trademarks in Canada, the United States and internationally, including registrations for the trademarks and related symbols Eskimo Pie'r', Dreamery'r', Whole Fruit'TM', 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 also plans to register 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', Tropicana'r', Welch's'r', Weight Watchers Smart Ones'r', Betty Crocker'r', Yoplait'r', Trix'r', Colombo'r' and Lucky Charms'r' 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. 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 yogurt and ice cream products are also subject to licensing and regulation (including good manufacturing practices) by federal, state and municipal authorities at its facility in Russellville, Arkansas and in the states to which it ships its products. 11 Seasonality The industry in which the Corporation operates is highly seasonal with more frozen yogurt and ice cream consumed in warmer months. The Corporation's fourth quarter, during the summer, has historically been the strongest quarter of the year. The fourth quarter accounted for 43.1% and 46.8% of the Corporation's total revenues and net earnings, respectively, for the fiscal year ended August 31, 2003 and 35.7% and 43.4% of the total revenues and net earnings, respectively, for the fiscal year ended August 31, 2002. See "Item 4: Selected Consolidated Financial Information" for a comparison of seasonal and quarterly results. Competition 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 Haagen-Dazs, Inc., Klondike, Popsicle, Breyer's, Good Humor and Sealtest, owned by Unilever PLC and Nestle. 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 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', Steve'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 lower competition given the absence of any other significant frozen yogurt chain. 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 little 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. Employees As of August 31, 2003, CoolBrands had 1,305 full-time and part-time employees. Of these, 151 perform contract labor at Americana Foods through a temporary employment agency and 667 who are employed by Nestle Ice Cream Company Inc. that perform services for Eskimo Pie Frozen 12 Distribution. Eskimo Pie Frozen Distribution reimburses Nestle for payroll and related benefit expenses in connection with such individuals. All such Nestle Ice Cream Company employees will be transferred to Eskimo Pie Frozen Distribution effective January 1, 2004. CoolBrands believes that its employee relations are good. Facilities CoolBrands headquarters are located at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario, Canada, L3R 9Y7 in 6,212 square feet of leased space. Rental payments are $141,196 per annum. The lease expires on August 31, 2005. CoolBrands' U.S. office is located at 4175 Veterans Highway, Ronkonkoma, New York, 11779, U.S.A., in 8,545 square feet of leased space. Rental payments are U.S.$82,556 per annum. The lease expires on April 30, 2004. CoolBrands' international head office is located at 27 Pine Road, Belleville, St. Michael, Barbados, W.I. in 1,850 square feet of leased space. Rental payments are U.S.$40,200 per annum. The lease expires on May 1, 2005. Integrated Brands' executive offices are located at 4175 Veterans Highway, Ronkonkoma, New York, 11779. The offices are provided to Integrated Brands at no additional cost by Calip pursuant to the terms of a Management Agreement between Integrated Brands and Calip. Integrated Brands' subsidiary, CoolBrands Manufacturing Inc., leases a 25,000 square foot production and storage facility located in Norwalk, California. Rental payments are U.S. $179,000 per annum. The lease expires November 30, 2003. Integrated Brands owns a building in Paradise Valley, Arizona. The building is subject to a ground lease, which expires on December 31, 2005 and contains four five-year renewal options. The premises are leased to an unrelated third party. The remaining three Integrated Brands company operated stores are leased for terms ranging through 2007. Eskimo Pie Corporation owns an ingredients manufacturing plant in New Berlin, Wisconsin which consists of approximately 73,820 square feet on 4.0 acres. Eskimo Pie expanded its New Berlin plant by 18,000 square feet in 1990 and purchased certain new equipment at that time. Eskimo Pie completed $800,000 of capital improvements in the New Berlin facility during 1998 (consisting primarily of equipment additions) in connection with the consolidation of its flavours production at the New Berlin facility which was completed in 1997. Eskimo Pie Corporation owns a printing and packaging plant in Bloomfield, New Jersey, which consists of approximately 71,583 square feet on 2.0 acres. The Bloomfield plant was expanded and modernized in 1985 with a 35,000 square foot addition. Eskimo Pie Corporation's subsidiary, Sugar Creek Foods, Inc., is leasing from the former owner of the business a soft serve yogurt and ice cream mix production facility, consisting of approximately 23,805 square feet, and a packaging facility, consisting of approximately 16,000 square feet, both located in Russellville, Arkansas. Rental payments under these leases are U.S.$238,000 per annum. In addition, Sugar Creek Foods. Inc. owns a freezer facility, consisting of approximately 5,013 square feet, adjacent to the production facility in Russellville. In 1999, Eskimo Pie purchased a small parcel of land adjacent to the freezer facility for future potential expansion of the freezer facility. 13 Eskimo Pie Corporation owns virtually all of its equipment and replacement parts for all manufacturing equipment which are readily available. Americana Foods LP, of which 50.1% is owned by Integrated Brands, owns a soft serve mix, ice cream, and frozen dessert novelties manufacturing and freezer facility that occupies approximately 216,000 square feet on 7 acres. An additional 7 acres are available for expansion of the production and freezer facilities. Eskimo Pie Frozen Distribution leases a 45,000 square foot freezer and distribution facility on 4.9 acres located in City of Industry, California. Rental payments are U.S.$1 per annum. The lease expires June 30, 2008. The Company has an option to purchase this facility at any time during the lease for U.S.$1. Eskimo Pie Frozen Distribution leases a 3,026 square foot office trailer and loading docks facility located in Tampa, Florida. Rental payments are U.S.$ 29,000 per annum. The lease expires November 1, 2004. Eskimo Pie Frozen Distribution leases a 5,800 square foot freezer and distribution facility located in Boca Raton Florida. Rental payments are U.S.$45,223 per annum. The lease expires December 31, 2004. Eskimo Pie Frozen Distribution leases a 5,500 square foot freezer and distribution facility located in Novato, California. Rental payments are U.S.$96,966 per annum. The lease expires December 31, 2004. Eskimo Pie Frozen Distribution leases an additional 4,400 square foot freezer and distribution facility located in Novato, California. Rental payments are U.S.$61,740 per annum. The lease expires June 30, 2004. Eskimo Pie Frozen Distribution leases a 26,400 square foot freezer and distribution facility located in Hayward, California. Rental payments are U.S.$193,488 per annum. The lease expires June 30, 2005. Eskimo Pie Frozen Distribution leases an 8,100 square foot freezer and distribution facility located in San Diego, California. Rental payments are U.S.$192,348 per annum. The lease expires May 31, 2008 Eskimo Pie Frozen Distribution leases a 7,912 square foot freezer and distribution facility located in Santa Cruz, California. Rental payments are U.S.$70,536 per annum. The lease expires May 31, 2006. Eskimo Pie Frozen Distribution leases a 12,677 distribution facility located in Moorestown, New Jersey operating as a cross-dock operation. Rental payments are U.S.$68,930 per annum. The lease expires December 31, 2008. Eskimo Pie Frozen Distribution leases a 6000 square foot freezer and distribution facility located in Goleta, California. Rental payments are U.S.$94,554 per annum. The lease expires November 30, 2005. Eskimo Pie Frozen Distribution leases 756 square foot of office space and truck parking space used as a distribution facility located in Salt Lake City, Utah. Rental payments are U.S.$15,228 per annum. The lease expires March 31, 2004. 14 Eskimo Pie Frozen Distribution leases a 27,390 square foot freezer and distribution facility located in Seattle, Washington. Rental payments are U.S.$229,800 per annum. The lease expires December 1, 2008. Eskimo Pie Frozen Distribution leases a 9,700 square foot freezer and distribution facility located in Tualatin, Oregon. Rental payments are U.S.$144,000 per annum. The lease expires June 7, 2006. Eskimo Pie Frozen Distribution leases a 29,318 square foot freezer and distribution facility located in Miramar, Florida. Rental payments are U.S.$265,644 per annum. The lease expires June 30, 2007. Eskimo Pie Frozen Distribution leases a 12,500 square foot freezer and distribution facility located in Atlanta, Georgia. Rental payments are U.S.$212,712 per annum. The facility is rented on a month-to-month basis. Eskimo Pie Frozen Distribution leases a 6,500 square foot freezer and distribution facility located in Apopka, Florida. Rental payments are U.S.$49,848 per annum. The lease expires October 31, 2006. Eskimo Pie Frozen Distribution leases an 11,171 square foot freezer and distribution facility located in Fridley, Minnesota. Rental payments are U.S.$135,636 per annum. The facility is rented on a month-to-month basis. Eskimo Pie Frozen Distribution leases 11,413 square feet for truck parking located in Riverside, California. Rental payments are U.S.$21,600 per annum. The lease expires July 31, 2004. Eskimo Pie Frozen Distribution leases 3,500 square feet for truck parking located in Sacramento, California. Rental payments are U.S.$21,600 per annum. The lease expires November 30, 2004. Eskimo Pie Frozen Distribution leases truck parking located in Jessup, Maryland. Rental payments are U.S.$27,780 per annum. The lease expires October 1, 2008. Eskimo Pie Frozen Distribution leases 15,000 square feet for truck parking located in Ft. Meyer, Florida. Rental payments are U.S.$ 22,260 per annum. The lease expires September 30, 2006. Several CoolBrands subsidiaries hold master store leases or have guaranteed store leases, expiring at varying dates to 2006 covering franchised locations. Where a subsidiary holds the master lease, these premises have been subleased to franchisees under terms and rental rates substantially the same as those in master leases. In a majority of these instances, franchisees make all lease payments directly to the landlords. These leases had an aggregate future base rental liability, without regard to percentage rentals or consumer price index increases of approximately $10,691,000 at August 31, 2003. CoolBrands' current policy is not to lease or sublease premises nor to provide guarantees on leases in any manner with respect to its franchisees and it has not done so except for renewals or in special circumstances. 15 Legal Proceedings With the exception of certain legal proceedings to which certain subsidiaries of the Corporation are parties and which are described below, 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. The Honeycrest Litigation This is an action filed in March 1998 and pending in the Supreme Court of the State of New York, County of Queens, captioned Honeycrest Holdings Ltd., Plaintiff against Integrated Brands Inc., Defendant ("Integrated"). The plaintiff is an exclusive territory licensee of Integrated. The plaintiff purchases Steve's Homemade Ice Cream and other frozen dessert products from Integrated for sale in the United Kingdom. Plaintiff sought a preliminary injunction restraining Integrated from replacing it as the distributor of such dessert products with another distributor in the U.K. Integrated has denied taking any such action, and the court denied the preliminary injunction. Plaintiff also seeks damages alleging that Integrated sold it substandard and defective products, failed to supply it with new products, and failed to deliver recipes, technology and know how as provided for in the license agreement. Integrated denies that the products were substandard or defective, and in its counterclaims seeks termination of the license agreement and damages by reason of plaintiff's being in default of the license agreement in failing to open the required number of stores in the U.K. and in failing to pay certain royalties due to Integrated. Integrated also maintains that as a result of such breaches, plaintiff is not entitled to the recipes, technology or know how. The action is in the final stages of discovery. The Corporation believes that it is unlikely that the outcome of this litigation will have a material adverse affect on the Corporation's financial position. ITEM 4: SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table presents selected historical consolidated financial data of CoolBrands, including the accounts of all companies acquired, for the periods indicated. These companies, all of which were acquired in transactions accounted for as purchases during the past five (5) years, are included from their respective dates of acquisition. The selected historical consolidated financial data for CoolBrands as of and for the five years ended August 31, 2003 is derived from the audited Consolidated Financial Statements of CoolBrands. The selected consolidated financial information for the year ended August 31, 2001 reflects to the acquisition of Eskimo Pie Corporation which occurred October 6, 2000. The selected consolidated financial information for the year ended August 31, 2000 reflects $26,513,000 of non-cash special charges. These transactions affect the comparability of the information of these years with the corresponding prior year. 16 Statement of Operations Data: (000 omitted) For the Year Ended August 31,
2003 2002 2001 2000 1999 $ $ $ $ $ ------- ------- ------- ------ ------- Revenues 357,273 242,222 177,610 97,488 112,607 Net Earnings (loss) 31,704 20,984 11,128 (27,826) 3,184 Earnings (loss) Per Share - Basic 0.61 0.44 0.24 (0.61) 0.07 - Diluted 0.59 0.42 0.24 (0.61) 0.07
Balance Sheet Data: (000 omitted) As At August 31,
2003 2002 2001 2000 1999 $ $ $ $ $ ------- ------- ------- ------- ------- Working Capital 85,734 57,354 43,408 30,053 36,109 Total Assets 313,850 283,662 225,876 142,300 172,686 Total Long-Term Liabilities 50,345 38,469 42,710 1,158 4,244 Shareholders' Equity 187,851 170,708 132,637 114,091 140,174
Historical Review of the Last Eight Quarters Ending on August 31, 2003 (000 omitted) The chart below identifies the selected financial information concerning the last eight quarters.
August 31, May 31, February 28, November 30, 2003 2003 2003 2002 $ $ $ $ ---------- ------- ------------ ------------ Revenues 154,014 81,908 57,052 64,299 Net Earnings 14,836 8,957 5,188 2,723 Earnings Per Share - Basic 0.29 0.17 0.10 0.05 - Diluted 0.27 0.17 0.10 0.05
August 31, May 31, February 28, November 30, 2002 2002 2002 2001 $ $ $ $ ---------- ------- ------------ ------------ Revenues 86,365 67,989 41,081 46,787 Net Earnings 9,101 6,826 3,646 1,411 Earnings Per Share - Basic 0.18 0.14 0.08 0.03 - Diluted 0.17 0.13 0.08 0.03
17 Dividend Policy Determinations to pay future dividends and the amount thereof will be made by the Board of Directors and will depend on future earnings, capital requirements, financial condition and other relevant factors. The Corporation intends to retain future earnings to support current operations and to provide funds for future acquisitions and therefore does not anticipate paying dividends in the foreseeable future. ITEM 5: MANAGEMENT DISCUSSION AND ANALYSIS Reference is made to the information under the heading "Management's Discussion and Analysis" on pages 21 to 24 of the Corporation's 2003 Annual Report to Shareholders for management's discussion and analysis of the Corporation for the fiscal year ended August 31, 2003, which discussion and analysis are specifically incorporated herein by reference. ITEM 6: 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.a. ITEM 7: DIRECTORS AND OFFICERS The following table sets forth the name, municipality of residence, position held with the Corporation and principal occupation of each of the officers and directors of the Corporation. Each director holds office until the close of business of the annual meeting of shareholders of the Corporation following his election unless his office is earlier vacated in accordance with the Corporation's articles of association.
Name and Municipality of Residence Positions with the Corporation Principal Occupation(1) - ------------------------- ------------------------------ ----------------------- Michael Serruya(2)(3) Co-Chairman and Director Co-Chairman of the Board of the Thornhill, Ontario Corporation Richard E. Smith(2)(3) Co-Chairman, Co-Chief Executive Officer of the Corporation Southampton, New York Officer and Director David J. Stein(4) President, Co-Chief Executive Officer Officer of the Corporation Southampton, New York and Director Aaron Serruya Executive Vice-President, Officer of the Corporation Thornhill, Ontario Secretary and Director David M. Smith(2)(3) Chief Operating Officer and Director Officer of the Corporation Manhasset, New York Romeo DeGasperis(2)(3)(4) Director Vice President, Con-Drain Company Toronto, Ontario Ltd. J. Leo Glynn President, Eskimo Pie Frozen Officer of the Corporation Mahwah, New Jersey Distribution, Inc. Gary P. Stevens Chief Financial Officer Officer of the Corporation Setauket, New York
18 Stephen Bogyay Executive Vice-President, Officer of the Corporation Barbados, West Indies International Operations John R. Welty, Jr. Vice-President, Franchising and Officer of the Corporation Northport, New York Foodservice Timothy Timm Vice-President, Manufacturing and Officer of the Corporation Green Bay, Wisconsin Quality Assurance John M. Kaczynski Senior Vice-President, Sales and Officer of the Corporation Marshfield, Massachusetts Marketing William J. Weiskopf President, Value America Flavors and Officer of the Corporation Midlothian, Virginia Ingredients Paul C. Samuel Vice-President, Sam-Pack Flexible Officer of the Corporation Randolph, New Jersey Packaging V. Stephen Kangisser Vice-President, Sales Officer of the Corporation Midlothian, Virginia Fred J. Fullerton, Jr. Vice-President, Sales-Foodservice Officer of the Corporation Russellville, Arkansas John R. LeSauvage Vice-President, Operations Officer of the Corporation Chappaqua, New York
(1) The employment history of the above-noted directors and officers is disclosed below. (2) Member of Audit Committee. (3) Member of Compensation Committee. (4) Member of Corporate Governance Committee. Michael Serruya - Co-Chairman of the Board and Director of the Corporation. Mr. Michael Serruya is a co-founder of the Corporation and has been actively involved in its development since its inception in 1986. Mr. Michael Serruya has been a Director of the Corporation since 1994 when the Corporation first went public. Mr. Serruya is primarily involved in the identification of potential acquisitions and review of the Corporation's business plan. Michael Serruya was the co-recipient in 1992 and 1993 of the Academy of Collegiate Entrepreneurs Award for North America. Michael Serruya is the brother of Aaron Serruya. Richard E. Smith - Co-Chairman, Co-Chief Executive Officer and Director of the Corporation. Mr. Richard E. Smith was Chairman of the Board, Chief Executive Officer and a Director of Integrated Brands Inc. from October 1985 until the acquisition of Integrated Brands Inc. by a wholly owned subsidiary of the Corporation in March 1998. Mr. Richard E. Smith has been a Director of the Corporation since March 1998. Together with Mr. David Stein, he is responsible for development of the Corporation's business plan. Mr. Richard E. Smith has also been the Chairman of the Board, Secretary and a Director of Calip Dairies, Inc. for more than the past five years. Calip Dairies, Inc. owns the trademark and trade names of Dolly Madison Ice Cream. Mr. Smith was the founder of Frusen Gladje Ltd. in 1980 and was its Chairman of the Board and Chief Executive Officer until the sale of Frusen Gladje to Kraft, Inc. in 1985. 19 David J. Stein - President, Co-Chief Executive Officer and Director of the Corporation. Mr. David J. Stein was a Vice President of Integrated Brands Inc. since December 1989 until the acquisition of Integrated Brands Inc. by a wholly owned subsidiary of the Corporation in March 1998. Mr. David J. Stein has been a Director of the Corporation since March 1998. Together with Mr. Richard E. Smith, he is responsible for development and execution of the Corporation's business plan. Aaron Serruya - Executive Vice President and Director of the Corporation. Mr. Aaron Serruya is a co-founder of the Corporation and has been actively involved in its development since its inception in 1986. Mr. Aaron Serruya has been a Director of the Corporation since 1994 when the Corporation first went public. His day-to-day responsibilities include selling all new franchises and resales, finding new locations, and research and development. Aaron Serruya was the co-recipient in 1992 and 1993 of the Academy of Collegiate Entrepreneurs Award for North America. Aaron Serruya is the brother of Michael Serruya. David M. Smith - Vice Chairman, Chief Operating Officer and Director of the Corporation. Mr. David M. Smith was a Vice President of Integrated Brands Inc. from December 1989, and a Director of Integrated Brands Inc. from September 1993 until the acquisition of Integrated Brands Inc. by a wholly owned subsidiary of the Corporation in March 1998. Mr. David M. Smith has been a Director of the Corporation since March 1998. Mr. David M. Smith manages the overall operations of the Corporation and directly oversees the information systems for the Corporation and the marketing, and new product development functions of the Corporation. Mr. David M. Smith is Mr. Richard E. Smith's son Romeo DeGasperis is Vice President of Con-Drain Company Ltd., a family business in which he has worked for over 18 years. Mr. Romeo DeGasperis manages the operations and personnel of the company and is responsible for tendering new projects as well as all the networking and communications for the company. Mr. Romeo DeGasperis has been a Director of the Corporation since 2000. Gary P. Stevens - Chief Financial Officer of the Corporation. Mr. Stevens has been President of Integrated Brands Inc. since June 1990 and Treasurer and Chief Financial Officer since April 1989. He was a Vice Chairman of the Board of Integrated Brands from August 1988 until June 1990. Mr. Stevens became a Director of Swensen's Inc. in October 1987 and served as President of Swensen's Inc. from October 1987 until June 1990. He joined Swensen's in August 1986 as Senior Executive Vice President - Finance and Administration. Stephen Bogyay - Executive Vice-President, International Operations. Mr. Bogyay has served as Executive Vice-President and Chief Operating Officer and Director of Kayla Foods Int'l (Barbados) Inc. since 1996. Mr. Bogyay was President and Director of Bresler's (Barbados) Inc. from 1995 to 1996. Mr. Bogyay served as Vice President and Director of Yogen Fruz (Barbados) Inc. from 1994 to 1996. John R. Welty Jr. - Vice-President, Franchising and Foodservice. Mr. Welty became Vice-President, Eskimo Pie Foodservice in October 2000 and Vice-President, CoolBrands Franchise in May 1998. Mr. Welty has been President of Swensen's since July 1990. Prior to 1990, Mr. Welty held various executive positions with Swensen's. Timothy Timm - Vice-President, Manufacturing and Quality Assurance. Mr. Timm has been Vice-President, Manufacturing and Quality Assurance since March 1998. He was Vice-President of Manufacturing with Integrated Brands Inc. since 1988. Prior to 1988, Mr. Timm held various manufacturing relations positions in the ice cream industry. 20 John M. Kaczynski - Senior Vice-President, Sales and Marketing. Mr. Kaczynski has been Senior Vice-President, Sales since March 1998. From 1997 to 1998, Mr. Kaczynski was Vice-President, Sales for Integrated Brands. From 1988 to 1998, Mr. Kaczynski was Division Sales Manager with Nestle. William J. Weiskopf - President, Value American Flavors and Ingredients. Mr. Weiskopf became President of Value American Flavors and Ingredients in October 2000. Since August 1997, Mr. Weiskopf was Vice-President and General Manager, Flavors Division of Eskimo Pie Corporation. From November 1995 to August 1997, Mr. Weiskopf was National Sales Manager, Flavors. Paul C. Samuel - Vice-President, Sam-Pack Flexible Packaging. Mr. Samuel has been Vice-President, Sam-Pack Flexible Packaging since October 2000. Since July 1988, Mr. Samuel was Plant/General Manager of the packaging operation. V. Stephen Kangisser - Vice-President, Sales. Mr. Kangisser became Vice-President, Sales in October 2000. From August 1998 to October 2000, he was Vice-President, Sales with Eskimo Pie Corporation and from May 1996 to July 1998 he was Vice-President, Marketing with Eskimo Pie Corporation. Fred J. Fullerton, Jr. - Vice-President, Sales - Foodservice. Mr. Fullerton became Vice-President of National Accounts for Eskimo Pie Foodservice in October 2000 and is responsible for multiple unit chain account sales. In 1994, Mr. Fullerton became Director of Business Development for Eskimo Pie Foodservice. John R. LeSauvage - Vice-President, Operations. Mr. LeSauvage has been Vice-President, Marketing since June 1999, when he joined the Corporation. Since 1974, Mr. LeSauvage has held various sales and marketing related positions in the frozen dessert industry. J. Leo Glynn - President, Eskimo Pie Frozen Distribution, Inc. Mr. Glynn has been president of Eskimo Pie Frozen Distribution Inc. since June 2003, when he joined the Corporation. Mr. Glynn has twenty-five years of sales and general management experience in DSD distribution in the ice cream and bakery industries. The Corporation does not have an executive committee of its Board of Directors. As of August 31, 2003, all directors and officers of the Corporation, as a group beneficially own or exercise control of approximately 54.8% 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 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 248,455 subordinate voting shares held by the remaining officers of the Corporation. In addition, Michael Serruya owns 56,000 subordinate voting shares, Aaron Serruya owns 56,149 subordinate voting shares and Richard E. Smith owns 8,300 subordinate voting shares. 21 ITEM 8: ADDITIONAL INFORMATION The Corporation will provide upon request to the Secretary of the Corporation: (a) when the securities of the Corporation are in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus has been filed in respect of a distribution of its securities, (i) one copy of this Annual Information Form, together with one copy of any document, or the pertinent pages of any document, incorporated by reference in this Annual Information Form; (ii) one copy of the comparative consolidated financial statements of the Corporation for its most recently completed fiscal financial year together with the accompanying report of the auditor and one copy of any interim consolidated financial statements of the Corporation subsequent to the consolidated financial statements for its most recently completed financial year; (iii) one copy of the information circular of the Corporation in respect of its most recent Annual Meeting of Shareholders that involved the election of directors or one copy of any annual filing prepared in lieu of that information circular, as appropriate; and (iv) one copy of any documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under (i) to (iii) above; or (b) at any other time, one copy of any other documents referred to in (a)(i), (ii) and (iii) above. Additional information including directors' and officers' remuneration and indebtedness, principal holders of the Corporation's securities, options to purchase securities and interests of insiders in material transactions, where applicable, is contained in the Corporation's information circular for its most recent annual meeting of shareholders that involved the election of directors, and additional financial information is provided in the Corporation's comparative financial statements for its most recently completed financial year. The Board of Directors has approved the contents of this Annual Information Form. 22 EX-99 4 ex2.txt EXHIBIT 2 Exhibit 2 AUDITORS' REPORT To the Directors of CoolBrands International Inc.: We have audited the consolidated balance sheets of CoolBrands International Inc. as at August 31, 2003 and 2002 and the consolidated statements of earnings and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. BDO DUNWOODY LLP "BDO DUNWOODY LLP" Chartered Accountants Toronto, Ontario November 25, 2003 F-1 CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Assets Current Assets: Cash and short term investments 30,140 47,086 Receivables (note 3) 60,807 43,001 Receivables - affiliates (note 12) 3,185 3,792 Inventories 55,604 25,361 Prepaid expenses 9,722 6,752 Asset held for sale 3,432 Future income taxes (note 8) 1,930 2,415 ------- ------- Total current assets 161,388 131,839 Future income taxes (note 8) 2,977 3,433 Property, plant and equipment (note 4) 28,349 19,710 License agreements, net of accumulated amortization of $4,265 (2002 - $3,711) 12,357 13,438 Intangible and other assets (note 5) 9,084 7,332 Goodwill (note 1) 99,695 107,910 ------- ------- 313,850 283,662 ======= =======
See accompanying notes to consolidated financial statements. F-2 CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Liabilities and Shareholders' Equity Current Liabilities: Accounts payable 27,339 24,399 Payables - affiliates (note 12) 754 978 Accrued liabilities 33,530 32,880 Income taxes payable 5,204 7,347 Future income taxes (note 8) 3,144 2,566 Current maturities of long-term debt (note 6) 5,683 6,315 ------- ------- Total current liabilities 75,654 74,485 Long-term debt (note 6) 38,671 29,279 Other liabilities 3,984 4,940 Future income taxes (note 8) 4,722 3,950 ------- ------- Total liabilities 123,031 112,654 ------- ------- Minority interest 2,968 300 ------- ------- Commitments and contingencies (notes 10 and 11) Shareholders' Equity Capital stock (note 7) 122,406 122,378 Cumulative translation adjustment (8,904) 5,685 Retained earnings 74,349 42,645 ------- ------- Total shareholders' equity 187,851 170,708 ------- ------- 313,850 283,662 ======= =======
See accompanying notes to consolidated financial statements. Approved by the Board, "David J. Stein", Director - ---------------- "Romeo DeGasperis", Director - ------------------ F-3 CoolBrands International Inc. Consolidated Statements of Earnings and Retained Earnings for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (in thousands, except for earnings per share data)
2003 2002 $ $ ------- ------- Revenues: Sales 335,034 236,028 Franchising and licensing revenues: Royalty income 2,716 3,070 Franchise and license fees 1,804 1,213 Consumer products license fees 741 904 Drayage and other income 16,978 1,007 ------- ------- Total revenues 357,273 242,222 ------- ------- Operating expenses: Cost of goods sold 207,870 129,246 Selling, general and administrative expenses 95,088 77,558 Interest expense 1,990 2,544 ------- ------- Total operating expenses 304,948 209,348 ------- ------- Minority interest 541 ------- ------- Earnings before income taxes 51,784 32,874 ------- ------- Provision for income taxes (note 8): Current 17,536 9,715 Future 2,544 2,175 ------- ------- 20,080 11,890 ------- ------- Net earnings 31,704 20,984 Retained earnings - beginning of year 42,645 21,661 ------- ------- Retained earnings - end of year 74,349 42,645 ======= ======= Earnings per share: Basic 0.61 0.44 Diluted 0.59 0.42 Weighted average shares outstanding: Shares used in per-share calculation - basic 51,746 48,050 Shares used in per-share calculation - diluted 53,992 50,346
See accompanying notes to consolidated financial statements. F-4 CoolBrands International Inc. Consolidated Statements of Cash Flows for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (in thousands of dollars)
2003 2002 $ $ ------- ------- Cash and short term investments provided by (used in): Operating activities: Net earnings 31,704 20,984 Items not affecting cash Depreciation and amortization 4,801 4,646 Future income taxes 2,544 2,175 Loss on sale of asset held for sale 390 Minority interest 541 Changes in current assets and liabilities, net of businesses acquired Receivables (5,172) (8,156) Receivables - affiliates 844 (927) Allowance for doubtful accounts (1,087) (980) Inventories (9,065) (7,500) Prepaid expenses (2,900) (2,285) Accounts payable (7,476) 58 Payables - affiliates (240) 257 Accrued liabilities (2,293) 11,520 Income taxes payable (2,292) 4,587 Other assets 364 (336) Other liabilities (1,023) 19 ------- ------- Cash provided by operating activities 9,640 24,062 ------- ------- Investing activities: Increase in notes receivable (5) (44) Repayment of notes receivable 345 91 Purchase of leasehold improvements and equipment (5,736) (6,338) Purchase of intangible assets (113) (260) Purchase of license agreements (1,482) Acquisitions, net of cash acquired (13,409) (8,628) Proceeds from asset held for sale 3,283 ------- ------- Cash used in investing activities (17,117) (15,179) ------- ------- Financing activities: (Expense) proceeds from special warrants (144) 13,908 Proceeds from revolving line of credit, unsecured 2,770 Proceeds from issuance of Class A and B shares 172 2,507 Repayment of long-term debt (9,495) (6,662) ------- ------- Cash (used in) provided by financing activities (6,697) 9,753 ------- ------- (Decrease) in cash flows due to changes in foreign exchange rates (2,772) (3,118) ------- ------- (Decrease) increase in cash and short term investments (16,946) 15,518 Cash and short term investments - beginning of year 47,086 31,568 ------- ------- Cash and short term investments - end of year 30,140 47,086 ======= =======
See accompanying notes to consolidated financial statements. F-5 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies CoolBrands International Inc. (the "Company") manufactures, markets, distributes, sub-licenses and sells a variety of branded frozen dessert products to supermarkets, grocery stores, club stores, convenience stores, gourmet shops and delicatessens in Canada, the United States and certain foreign countries and also franchises frozen yogurt and ice cream stores, dip shops and family style restaurants throughout Canada, the United States and over 80 foreign countries. The Company also manufactures and sells soft serve frozen yogurt and ice cream mixes, a variety of flavours and ingredients and flexible packaging. The Company also operates a "direct store delivery" (DSD) frozen distribution system in the United States that delivers the Company's frozen dessert products, as well as those of third party "partner brand" manufacturers, directly to retailers' store locations. The Company also manufactures frozen desserts and other food products on a contract basis, including "store brand" (private label) products for retailers. Basis of presentation The consolidated financial statements are prepared by management using accounting principles generally accepted in Canada and include all wholly and majority owned subsidiaries. All significant intercompany transactions of consolidated subsidiaries are eliminated. Acquisitions recorded as purchases are included in the statement of earnings from the date of acquisition. All amounts are reported in Canadian dollars unless otherwise indicated. Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimated. Cash and short term investments All highly liquid commercial paper purchased with maturities of three months or less is classified as a cash equivalent. Cash equivalents are stated at cost, which approximates market value. Inventories Inventories consist primarily of ice cream, frozen yogurt and frozen dessert products, food supplies and packaging. Inventories are valued at the lower of cost and net realizable value, with cost determined principally by the first-in, first-out (FIFO) method. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of buildings and leasehold improvements and equipment is provided by the straight-line or declining balance methods, using the estimated useful lives of the assets, principally 20 to 38 years and 3 to 10 years, respectively. Store leasehold improvements are amortized on a straight-line basis over the terms of the leases, principally 5 to 10 years. Trademarks, license agreements and franchise agreements and rights Trademarks, license agreements and franchise agreements and rights are stated at cost less accumulated amortization. Amortization is provided by the straight-line method using the terms of the agreements, which range from 3 to 20 years. F-6 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies (cont'd) Goodwill Goodwill is evaluated annually for possible impairment. The Company uses an estimate of the related reporting units' discounted future cash flows in determining if the fair value of the reporting units is recoverable. Any permanent impairment in the value of goodwill would be written off against earnings. Based on the impairment tests performed, there was no impairment of goodwill in fiscal 2003. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. Revenue recognition Revenue from sales of the Company's products is recognized at the time of sale, which is generally when products are shipped to customers. Revenue from sales by Company-owned and operated stores is recognized when products are purchased by customers. Master franchise fee revenues are recognized at the time the Company has received the deposit specified in the master franchise agreement, has substantially performed all significant services to be provided in accordance with the terms of the agreement and when collectibility is reasonably determinable. Single store franchise fees are recognized as revenue when the franchise application is approved, cash payments are received, and the Company has performed substantially all services required under the agreement. Continuing franchise royalties are based on a percentage of gross sales as reported by the franchisees or gross products purchased by the franchisees. These fees are recognized on an accrual basis as they are earned. Revenue from Drayage income is recognized at the time the product is delivered for the vendor to their customer by the Company. Advertising The Company spends a significant amount of its advertising dollars with its supermarket customers in the form of co-operative advertising in the chains' weekly circulars. The remainder of the Company's advertising is spent on media and other direct advertising. All advertising costs are expensed as incurred. The Company spent $5,131,000 on advertising for the year ended August 31, 2003 (2002 - $5,991,000). Product introductory costs The Company capitalizes certain product introductory placement costs (i.e. slotting fees) paid to customers, which are incurred to develop new markets for new and existing products sold for the first time. The payment of such fees is common in the industry. These costs are expensed over a twelve month period. Product introductory expense was $11,713,000 for the year ended August 31, 2003 (2002 - $6,700,000). Financial instruments The carrying amount of financial instruments including cash and short term investments, receivables, receivables - affiliates, accounts payable, payables - affiliates and accrued liabilities approximates fair value at August 31, 2003, because of the relatively short maturity of these instruments. The Company is exposed to interest rate risk on its long-term debt, however, the Company mitigates some of this exposure through an interest rate swap as described in note 6. F-7 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 1. Description of business and summary of significant accounting policies (cont'd) Concentration of credit risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and short-term investments and receivables. The Company attempts to minimize credit risk with respect to receivables by reviewing customers' credit history before extending credit, and by regularly monitoring customers' credit exposure. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Earnings per share The Company uses the treasury stock method to determine the dilutive earnings per share. Foreign currency translation Translation gains or losses of accounts of foreign subsidiaries considered financially and operationally self-sustaining are deferred as a separate component of shareholders' equity until there has been a realized reduction in the net investment. Foreign currencies are translated into Canadian dollars using the average exchange rate for the year for items included in the consolidated statements of operations. Foreign currencies are translated into Canadian dollars using the current rate for assets and liabilities included in the consolidated balance sheets except for earnings reinvested in the business, which are translated at historical rates. Income taxes Income taxes are calculated using the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. Stock Option Plan The Company has a stock option plan for directors, officers, consultants and key employees. No compensation expense is recognized in accounting for stock options in the Company's Consolidated Statements of Earnings, except for stock-based compensation expense for stock options granted to consultants which is measured at the estimated fair value at the date of grant and expensed. When options are exercised the amount received is credited to share capital. Pro forma stock based compensation expense information is included in note 7. Derivative Instruments Under an agreement expiring April 1, 2004, the U.S. based subsidiary of the Company entered into an interest-rate swap as a derivative to modify the interest characteristics on a portion of its outstanding float rate senior unsecured term loan, in an attempt to reduce its exposure to fluctuations in interest rates. The fair value of the contract has not been reflected in the Consolidated Financial Statements. The Company does not enter into such contracts for speculative purposes. Reclassifications Certain 2002 amounts have been reclassified to conform with the 2003 presentation. F-8 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 2. Acquisitions a. 2003 Acquisitions Effective July 1, 2003, the Company acquired the general partner interest and majority of the total partnership interests in Americana Foods LP, located in Dallas, Texas. Americana Foods is one of the largest and most versatile frozen dessert manufacturing facilities in the U.S., and currently supplies a wide variety of soft serve mixes, packaged ice cream, frozen yogurt and sorbet products and frozen novelties to well known national retailers, food companies and restaurant chains, including Sam's Club, TCBY Enterprises and Silhouette Brands. Americana Foods also manufactures and sells products for the foodservice channel such as dairy mixes for preparing mashed potatoes which are extensively used to standardize quality and reduce labor costs in on-site food preparations. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase Consideration: $ ---------------------- ------ ----------------------- ----- Current assets 22,396 Property, plant and equipment 7,879 ------ 30,275 Less: Liabilities 30,275 ------ ----- Nil Nil ====== =====
On July 6, 2003, the Company acquired the Dreamery'r' ice cream and Whole Fruite'TM' sorbet brands from Dreyer's Grand Ice Cream, Inc., as well as the right to the license for the Godiva'r' ice cream brand, which was assigned by Dreyer's and substantially all of the Haagen-Dazs frozen dessert distribution assets in the States of Washington, Oregon, Florida, California, Pennsylvania, New Jersey, Utah, Minnesota, Georgia, Maryland, and the District of Columbia from Nestle' Ice Cream Company, LLC. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $ ----------------------------- ------ ----------------------- ----- Current assets 10,971 Cash 13,409 Option to purchase City of Industry, CA. facility 2,438 ------ ------ 13,409 13,409 ====== ======
F-9 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 2. Acquisitions (cont'd) b. 2002 Acquisitions On June 30, 2002, the Company acquired the business and assets of Fruit-a-Freeze, Incorporated. Fruit-a-Freeze, Incorporated began making frozen fruit bars in 1977, and was a pioneer in establishing the market for frozen novelties made from whole fruit and all natural ingredients. In its home market in Southern California, Fruit-a-Freeze products are consistently top ranked sellers among frozen novelties. The acquisition included the Fruit-a-Freeze leased frozen novelty manufacturing facility in Norwalk, CA, and Fruit-a-Freeze's frozen distribution center and direct store delivery route distribution system, operated out of a frozen storage warehouse located at the Norwalk facility. The Fruit-a-Freeze distribution system services supermarket chains, club stores, independent grocers, convenience stores and independent distributors throughout Southern California. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $ -------------------- ----- ----------------------- ----- Current assets 2,814 Cash 137 Equipment 970 Future payment Other assets 23 contingent upon year Intangible assets 153 one sales 2,280 Goodwill 4,921 ----- 8,881 Less: Liabilities 6,464 ----- ----- 2,417 2,417 ===== =====
In addition to the $2,280,000 cash payment contingent upon sales in year one, the Agreement specifies additional payments contingent upon the sales of Fruit-a-Freeze branded products in excess of U.S. $11,173,000 in both years two and three. However, since it is unlikely that any additional payments will be required for years two and three, the Company has not recorded a liability for such additional contingent consideration payments. On August 16, 2002, the Company purchased the business and assets of Chipwich, Inc., maker of the Chipwich Ice Cream Cookie Sandwich. A Chipwich is premium ice cream sandwiched between two specially formulated chocolate chip cookies and rolled in pure chocolate chips. When it was introduced in 1981, Chipwich created the adult premium ice cream novelty category. Since then, Chipwich has established itself as one of the best-known brand names for frozen novelties. The following is a summary of the assets acquired and the fair value assigned thereto, and the purchase consideration given:
Fair value acquired: $ Purchase consideration: $ -------------------- ----- ------------------------ ----- Current assets 379 Cash 8,491 Plant equipment 550 Cash payment, Due: Intangible assets 156 January 15, 2003, Goodwill 8,187 subject to certain potential adjustments 391 Warrants issued 390 ----- ----- 9,272 9,272 ===== =====
F-10 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 3. Receivables
2003 2002 $ $ ------ ----- Trade accounts receivable 64,217 45,502 Franchise and license fees receivable 423 2,326 Notes receivable, current maturities 167 196 ------ ------ 64,807 48,024 Less: Allowance for doubtful accounts 4,000 5,023 ------ ------ 60,807 43,001 ====== ======
4. Property, plant and equipment
2003 2002 $ $ ------ ----- Land 1,280 1,032 Buildings 8,432 4,651 Machinery and equipment 25,290 19,438 Leasehold improvements 3,257 2,629 ------ ------ 38,259 27,750 Less: Accumulated depreciation and amortization Buildings 866 641 Machinery and equipment 8,057 6,612 Leasehold improvements 987 787 ------ ------ 28,349 19,710 ====== ======
5. Intangible and other assets
2003 2002 $ $ ------ ----- Trademarks 4,421 4,857 Franchise agreements and rights 756 825 Territorial agreements 425 479 Purchase option - land and building 2,495 Notes receivable 168 538 Other 2,715 2,374 ------ ----- 10,980 9,073 Less: Accumulated amortization Trademarks 1,203 1,103 Franchise agreements and rights 280 256 Territorial agreements 413 382 ------ ----- 9,084 7,332 ====== =====
F-11 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 6. Long-term debt
2003 2002 $ $ ------ ------ Term loan, unsecured 22,518 33,516 Term loans, secured 13,292 507 Revolving line of credit, unsecured 2,770 1,052 Revolving loan, secured 4,112 Capitalized leases 1,662 519 ------ ------ 44,354 35,594 Less: Current maturities 5,683 6,315 ------ ------ 38,671 29,279 ====== ======
In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30,000,000, to finance the acquisition. The unsecured term loan is payable in monthly installments of U.S. $250,000, with the remaining principal balance due November 1, 2005. Interest is payable monthly on the unpaid principal balance with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates, plus applicable margins were fixed through August 31, 2001 at the lower of prime plus 1/2% or libor plus 2 1/2% (3.125% at August 31, 2003). As of August 31, 2003, the term loan balance was U.S. $16,250,000. All borrowings under the above unsecured term loan agreement are guaranteed by the Company. The agreement contains restrictions relating to the payment of dividends, rental obligations, liens, indebtedness, dispositions of property, change in the nature of its business, change in ownership and requires that the net proceeds from the sale (other than in the ordinary course of business) of any assets of Eskimo Pie Corporation must be utilized to reduce the then outstanding principal balance of the term loan. In addition, the Company must maintain certain financial ratios and limit capital expenditures to U.S. $5 million during any fiscal year. The U.S. based subsidiary entered into an interest rate protection agreement on April 1, 2001 covering U.S. $15,000,000 of the then outstanding principal balance of the senior unsecured term loan with a fixed libor interest rate of 5.18%, plus applicable margin. This interest rate protection agreement terminates on April 1, 2004. At August 31, 2003, the fair value of this interest rate protection agreement was U.S. $413,000 in favor of the bank and is not reflected in the Consolidated Financial Statements. The subsidiary also has a U.S. $10 million unsecured revolving credit facility. The revolving credit facility is available for general corporate purposes and has a maturity date of November 30, 2004. Interest is payable monthly on the unpaid principal balance of borrowings under this facility with an interest rate of libor plus 2%. The subsidiary agreed to pay a fee of 1/4% per annum on the unused portion of the commitment. As of August 31, 2003, the subsidiary has U.S. $8 million of available credit under the revolving credit facility. A U.S. $750,000 revolving line of credit with a maturity date of June 1, 2003, certain term loans and capitalized leases were assumed by a U.S. subsidiary in connection with the June 2002 acquisition of the business and assets of Fruit-A-Freeze, Inc. The secured term loans are payable in monthly installments of U.S. $21,521. Interest at prime plus 1% is payable monthly on the unpaid principal balance with interest rates fluctuating with changes in the prime lending rate. The U.S. $750,000 revolving line of credit and certain term loans were paid off on December 2, 2002. F-12 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 6. Long term debt (cont'd) On November 19, 2002, a limited partnership, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that includes a term loan of U.S. $10,000,000, which is secured by the partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80,739 and matures on February 1, 2016. The term of the loan bears interest at prime plus 0.5% (4.5% at August 31, 2003.) The partnership's credit agreement also includes a revolving loan up to U.S. $5 million, subject to a borrowing base calculation, which bears interest at prime plus 0.5% (4.5% at August 31, 2003) and is due on November 19, 2004. At August 31, 2003, approximately U.S. $2,031,000, was available to the partnership under this loan. The revolving loan is secured by the partnership's receivable and inventory. In April 2003, the partnership executed an amendment to the credit agreement. Pursuant to this amendment, the minimum tangible net worth requirement was raised to U.S. $6,000,0000 beginning June 29, 2003. In addition, the financial institution waived all other covenant requirements for the remaining term of the agreement. Repayments of long-term debt due in each of the next five years are as follows:
$ ------ 2004 5,683 2005 12,426 2006 15,262 2007 10,968 2008 15 ------ 44,354 ======
Interest paid during the year ended August 31, 2003 was $1,980,000 (2002 -$2,472,000). 7. Capital Stock Authorized number of shares: Class A Subordinate voting shares 200,000,000 Class B Multiple voting shares 200,000,000
Class A subordinate voting shares have a preferential right to receive cash dividends when, as and if declared by the Board of Directors. Class B multiple voting shares can be converted at any time into an equivalent number of Class A subordinate voting shares. The Class A subordinate voting shares are entitled to one vote per share and the Class B multiple voting shares are entitled to ten votes per share. F-13 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 7. Capital stock (cont'd) The Company had the following share transactions during the years ended August 31, 2003 and 2002:
Class A Class B subordinate multiple voting shares voting shares Warrants Amount # # # $ ------------- ------------- -------- ------- Balance at August 31, 2001 39,649 6,240 105,573 Shares issued upon the exercise of special warrants 3,750 13,908 Shares issued for cash for stock options exercised 1,894 173 2,507 Multiple voting shares converted to Subordinate voting shares 204 (204) Warrants issued in connection with acquisition 100 390 ------------- ------------- -------- ------- Balance at August 31, 2002 45,497 6,209 100 122,378 Expenses related to the exercise of special warrants (144) Shares issued for cash for stock options exercised 102 172 Multiple voting shares converted to Subordinate voting shares 30 (30) ------------- ------------- -------- ------- Balance at August 31, 2003 45,629 6,179 100 122,406 ============= ============= ======== ======= Paid-in-balance $ 104,716 $17,300 $390 ============= ============= ======
The Company has granted options to purchase subordinate and multiple voting shares to directors, officers, consultants and key employees under the Company's stock option plans. A summary of the activity of the Company's stock option plans for the years ended August 31, 2003 and 2002 is summarized below: F-14
2002 Stock 1998 Stock Integrated Option Option Brands Stock Plan Plan Option Plan ------------- ----------- --------------------------- Weighted Subordinate Multiple Subordinate Average Subordinate Voting Voting Voting Exercise Voting Shares Shares Shares Shares Price ------------- ----------- ------------ ----------- -------- Outstanding at August 31, 2001 4,807 300 236 2.57 Granted 55 1.24 Exercised (1,658) (173) (236) 1.21 Cancelled (28) 1.24 ----- ------ ---- ---- ---- Outstanding at August 31, 2002 3,176 127 3.41 Granted 1,298 5.40 Exercised (102) 1.69 Expired (127) 5.72 Cancelled (10) 1.25 ----- ------ ---- ---- ---- Outstanding at August 31, 2003 1,298 3,064 3.98 ===== ===== ==== ==== ==== Options exercisable at August 31, 2003 1,025 2,778 3.97 ===== ===== ==== ==== ====
F-15 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 7. Capital stock (cont'd) Stock options outstanding at August 31, 2003, aggregating 4,362,000 shares, have a weighted-average contractual life of 2.7 years and a weighted-average exercise price of $3.98 per share. Stock options exercisable at August 31, 2003 have a weighted-average exercise price of $3.97 per share. The price range was $1.15 to $1.35 (1,527,000 outstanding and 1,241,000 exercisable), $4.30 (1,000,000 options exercisable), $5.00 (1,238,000 outstanding and 1,025,000 exercisable), $7.80 (537,000 options exercisable) and $13.75 (60,000 options outstanding) at August 31, 2003. Stock options reserved for future grant at August 31, 2003 aggregated 4,048,502. On November 1, 2002 The Company's shareholders approved The 2002 Stock Option Plan, which reserved 5.17 million options for issuance and limited the number of options that may be granted in any one fiscal year to 2.5% of outstanding shares. The Company records no compensation expense when options are issued to employees. The Company estimates the fair value of each share option on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.46%; expected volatility of 68.38%; expected live of 2.7 years; and no dividend payments. Pro forma net earnings and earnings per share if compensation expense had been recorded for stock options granted to employees would be as follows:
2003 For the year ended August 31, $ ------ Pro forma net earnings 30,351 ====== Pro forma earnings per share: Basic 0.59 Diluted 0.56
8. Income taxes The effective income tax rate on earnings is affected from year to year by the geographic mix of the consolidated earnings before income taxes. The following table reconciles income taxes computed by applying the combined Canadian federal/provincial statutory rate with the actual income tax provision:
2003 2002 % % ----- ----- Combined basic Canadian Federal and Provincial income tax rate 38.00 44.62 Impact of operating in foreign countries with different effective rates 0.04 (9.63) Permanent differences 0.74 1.18 ----- ----- 38.78 36.17 ===== =====
The Company's subsidiaries have operating loss carry-forwards for income tax purposes amounting to approximately $5,084,000 (2002 - $5,393,000). These losses expire in various amounts through the year 2019. F-16 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 8. Income taxes (cont'd) Significant components of the Company's future tax assets and liabilities as of August 31, 2003 are as follows:
Future Tax Assets $ Future Tax Liabilities $ - ----------------- ----- ---------------------- ----- Non-capital loss carry-forwards 1,876 Tax amortization in excess of book amortization 2,731 Accounting allowances not deducted for tax 1,294 Tax depreciation in excess of book depreciation 123 Other 1,737 Product introductory costs 3,291 Other 1,721 ----- ----- Total Future Tax Assets 4,907 Total Future Tax Liabilities 7,866 ===== =====
Income taxes paid during the year ended August 31, 2003 were $17,268,000 (2002 - $4,739,000). 9. Retirement Plans Eskimo Pie Corporation had maintained two defined benefit pensions plans covering substantially all salaried employees. Upon the acquisition of Eskimo Pie Corporation by the Company all future participation and all benefits under the plans were frozen. These plans provide retirement benefits based primarily on employee compensation and years of service up to the acquisition of Eskimo Pie Corporation by the Company. The above mentioned plans are referred to as the "Pension Benefits". In addition, Eskimo Pie Corporation entered into an agreement with Reynolds Metals Company to indemnify the cost of retiree health care and life insurance benefits for salaried employees of Eskimo Pie Corporation who had retired prior to April 1992. Under this agreement, Eskimo Pie Corporation may elect to prepay its remaining obligation. Eskimo Pie Corporation did not provide postretirement health and life insurance benefits for employees who retired subsequent to April 1992. This indemnity agreement is referred to as the "Other Benefits". The following table reconciles the changes in benefit obligations and plan assets in 2003, and reconciles the funded status to accrued benefit cost at August 31, 2003:
Pension Benefits Other Benefits Benefit Obligation $ $ - -------------------------------- ----- ----- Beginning balance 2,973 2,834 Interest cost 196 195 Actuarial loss 171 Lump sum purchase of obligations (12) Benefit payments (108) (463) Translation gain (328) (298) ----- ----- Ending balance 2,892 2,268 ===== ===== Plan assets - Basic value Beginning balance 2,806 Actual return on plan assets 243 Contributions 42 Benefit payments (120) Translation gain (305) ----- Ending balance 2,666 =====
F-17 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 9. Retirement Plans (cont'd) The funded status for the post retirement health and life insurance benefits is as follows:
Other Benefits $ ----- Benefit obligations in excess of Plan assets 2,268 ===== Accrued benefit cost 2,268 =====
The accrued benefit cost of $2,268,000 is included in Other liabilities at August 31, 2003. The following table provides the components of the net periodic benefit cost:
Pension Benefits Other Benefits ---------------- -------------- $ $ ---- --- Interest cost 196 195 Expected return on Plan assets (243) Recognized net actuarial gain 43 ---- --- Net period benefit cost (income) (4) 195 ==== ===
The assumptions used in the measurement of the Eskimo Pie Corporation's benefit obligations are as follows:
Pension Benefits Other Benefits ---------------- -------------- Benefit obligation, beginning of year 6.75% 7.75% Expected return on plan assets, during the year 8.0%
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is 5% for 2003 and is assumed to remain at that level thereafter. A one percentage point increase or decrease in the assumed health care cost trend rate would change the accumulated postretirement benefit obligation by approximately $232,500 and the net periodic postretirement benefit cost by approximately $23,250. 10. Commitments The majority of distribution warehouse, store and office facility leases are under non-cancelable leases. Substantially all of the leases are net leases, which require the payment of property taxes, insurance and maintenance costs in addition to minimum rental payments. Certain store leases provide for additional rentals based on a percentage of sales and have renewal options for one or more periods from five to twenty years. F-18 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 10. Commitments (cont'd) At August 31, 2003 the future minimum lease payments under operating leases with rental terms of more than one year, net of sub lease rents, amounted to:
Fiscal year ending: $ ------------------------- ------ 2004 8,011 2005 5,711 2006 4,760 2007 2,756 2008 2,351 Later years 2,067 ------ Total minimum obligations 25,656 ======
Total rental expense relating to all operating leases (including those with terms less than one year) was $2,973,000 (2002 - $1,302,000). 11. Contingencies The Company is a party to legal proceedings and disputes with franchisees, former franchisees and others, which arise in the ordinary course of business. In the opinion of the Company, it is unlikely that the liabilities, if any, arising from the legal proceedings and disputes will have a material adverse effect on the consolidated financial position of the Company or its operations. Several subsidiaries hold master store leases or have guaranteed store leases covering franchised locations. Such leases expire at varying dates to 2013. Where a subsidiary holds the master lease, these premises have been subleased to franchisees under terms and rental rates substantially the same as those in master leases. In a majority of these instances, franchisees make all lease payments directly to the landlords. The Company provides an estimated liability for lease terminations in the event of a default by a franchisee based on the expected costs of releasing or settlement with the landlord. The liability was $410,000 at August 31, 2003. Aggregate minimum future rental payments under these leases approximated $10,691,000 at August 31, 2003 (2002 - $11,329,000). 12. Related party transactions and amounts Receivables - affiliates at August 31, 2002 were $266,000 in advances which are unsecured, non-interest bearing and due on demand. The affiliates include directors and officers of the Company. Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an officer, director and shareholder of the Company, has a management agreement with Integrated Brands Inc., which the Company acquired in March 1998. This agreement terminates on December 31, 2013 and thereafter shall automatically renew December 31 of each year for an additional one year term, unless terminated under certain conditions. Under the agreement, Calip provides management services to Integrated Brands for an annual fee of U.S.$1,300,000 effective July 1, 2003, prior to which the fee was U.S. $1,000,000. Such management fees incurred for the year ended August 31, 2003 were $1,556,000 (U.S. $1,050,000) (2002 - $1,559,000 (U.S.$1,000,000)). At August 31, 2003, the $754,000 (2002 - $978,000) balance of payables - affiliates represents payables to Calip. Integrated Brands Inc., also has a distribution agreement with Calip for distribution of the Company's products in the New York Metropolitan Area, Fairfield County in the state of Connecticut, and New Jersey. The distribution agreement continues until December 31, 2007 and thereafter shall automatically renew on December 31st of each year while the agreement is in effect for an additional one year term, unless terminated under certain conditions. The distribution agreement is terminable by either party on sixty days notice. Sales of products to Calip were $12,624,000 for the year ending August 31, 2003 (2002 - $11,709,000). At August 31, 2003, $3,185,000 of the receivables - affiliates represent receivables from Calip (2002 - $3,526,000). The transactions with Calip occur in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. F-19 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information CoolBrands International's reportable segments are Prepackaged consumer products, Foodservice, Dairy components and Franchising and licensing, including Company-owned stores. Revenues and profits in the Prepackaged consumer products segment are generated from selling a variety of prepackaged frozen dessert products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. Revenues and profits in the Foodservice segment are generated from manufacturing and selling soft serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft serve ice cream and yogurt products to consumers. Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring revenues and the manufacture and sale of proprietary products to franchisees and licensees and from Company-owned stores selling ice cream and soft serve yogurt out of company-owned stores and outlets. CoolBrands International Inc. evaluates the performance of its segments and allocates resources to them based on their operating contribution, which represents segment revenues, less direct costs of operation, excluding the allocation of corporate expenses. F-20 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2003 ------------------------------------------------------------------------------ Prepackaged Franchising consumer Dairy and products Foodservice components licensing Corporate Consolidated INDUSTRY SEGMENTS: $ $ $ $ $ $ - ----------------------------- ----------- ----------- --------- ----------- --------- ------------ Revenues 277,134 26,234 41,594 20,890 214 366,066 Interest income 575 126 43 744 Inter-segment revenues (5,389) (991) (2,943) (214) (9,537) ------- ------ ------ ------ ------ ------- Net revenues 272,320 25,243 38,651 21,016 43 357,273 ------- ------ ------ ------ ------ ------- Segment earnings 45,152 2,678 6,026 2,123 43 56,022 General corporate expenses (1,707) (1,707) Interest expense (1,970) (20) (1,990) Minority interest (541) (541) ------- ------ ------ ------ ------ ------- Earnings before income taxes 42,641 2,678 6,026 2,103 (1,664) 51,784 ======= ====== ====== ====== ====== Provision for income taxes 20,080 ------- Net earnings 31,704 ======= Assets 189,686 21,335 36,143 63,453 3,233 313,850 Capital expenditures 3,849 236 231 1,420 5,736 Depreciation and amortization 2,635 631 469 1,066 4,801
F-21 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2002 ------------------------------------------------------------------------------ Prepackaged Franchising consumer Dairy and products Foodservice components licensing Corporate Consolidated INDUSTRY SEGMENTS: $ $ $ $ $ $ - ----------------------------- ----------- ----------- --------- ----------- --------- ------------ Revenues 157,337 26,285 37,743 24,702 286 246,353 Interest income 380 245 44 669 Inter-segment revenues (122) (1,218) (3,133) (92) (235) (4,800) ------- ------ ------ ------ ------ ------- Net revenues 157,595 25,067 34,610 24,855 95 242,222 ------- ------ ------ ------ ------ ------- Segment earnings 26,101 2,289 4,077 3,867 95 36,429 General corporate expenses (1,011) (1,011) Interest expense (2,526) (18) (2,544) ------- ------ ------ ------ ------ ------- Earnings before income taxes 23,575 2,289 4,077 3,849 (916) 32,874 ======= ====== ====== ====== ====== Provision for income taxes 11,890 ------- Net earnings 20,984 ======= Assets 176,937 15,249 44,118 42,070 5,288 283,662 Capital expenditures 5,236 397 78 627 6,338 Depreciation and amortization 2,212 823 492 1,119 4,646
F-22 CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 13. Segment information (cont'd)
Year Ended August 31, 2003 ----------------------------------------------------- Canada United States International Consolidated GEOGRAPHIC SEGMENTS: $ $ $ $ - ------------------------------- ------ ------------- ------------- ------------ Revenues 5,157 356,674 4,235 366,066 Interest income 103 595 46 744 Inter-segment revenues (214) (9,323) (9,537) ------ ------- ------ ------- Net revenues 5,046 347,946 4,281 357,273 ------ ------- ------ ------- Segment earnings 668 53,342 2,012 56,022 General corporate expenses (1,707) (1,707) Interest expense (1,990) (1,990) Minority interest (541) (541) ------ ------- ------ ------- Earnings before income taxes (1,039) 50,811 2,012 51,784 ====== ======= ====== Provision for income taxes 20,080 ------- Net earnings 31,704 ======= Assets 7,752 296,113 9,985 313,850 Capital expenditures 5,736 5,736 Depreciation and amortization 204 4,387 210 4,801
Year Ended August 31, 2002 ----------------------------------------------------- Canada United States International Consolidated GEOGRAPHIC SEGMENTS: $ $ $ $ - ------------------------------- ------ ------------- ------------- ------------ Revenues 6,328 235,130 4,895 246,353 Interest income 72 559 38 669 Inter-segment revenues (316) (4,484) (4,800) ------ ------- ----- ------- Net revenues 6,084 231,205 4,933 242,222 ------ ------- ----- ------- Segment earnings 1,033 33,280 2,116 36,429 General corporate expenses (1,011) (1,011) Interest expense (2,544) (2,544) ------ ------- ----- ------- Earnings before income taxes 22 30,736 2,116 32,874 ====== ======= ===== Provision for income taxes 11,890 ------- Net earnings 20,984 ======= Assets 9,202 265,512 8,948 283,662 Capital expenditures 134 6,204 6,338 Depreciation and amortization 218 4,195 233 4,646
F-23 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- (Tabular amounts are expressed in thousands of dollars) 14. Differences between Canadian and United States generally accepted accounting principles The consolidated financial statements of the Company have been prepared in accordance with Canadian GAAP. The following adjustments and/or additional disclosures, would be required in order to present the financial statements in accordance with U.S. GAAP, as required by the United States Securities Exchange Commission ("SEC"). (a) Comprehensive income Under United States GAAP, comprehensive income must be presented for certain items that are required by U.S. GAAP to be recognized directly in stockholders' equity rather than net income.
2003 2002 ------ ------ $ $ Net earnings 31,704 20,984 Unrealized gain (loss) on derivative investments (net of income tax of $(103) in 2003 and $44 in 2002) 164 (71) Foreign currency translation 14,589 178 ------ ------ Comprehensive earnings 17,279 21,091 ====== ======
(b) Accounting for consideration given by a vendor to a customer or reseller of the vendor's products In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenses classified as selling, general and administrative expenses, must be deducted from revenue. The reclassification for the year ended August 31, 2003 would be $31,057,000 (2002 - $26,979,000). Under U.S. GAAP, total revenues and selling, general and administrative expenses for the years ended August 31, 2003 and 2002 would be classified as follows:
Total Selling, general and revenues administrative expenses ----------------- ------------------------ 2003 2002 2003 2002 ------- ------- ------- ------- $ $ $ $ Canadian GAAP 357,273 242,222 95,088 77,558 Adjustment for consideration given to customers (31,057) (26,979) (31,057) (26,979) ------- ------- ------- ------- U.S. GAAP 326,216 215,243 64,031 50,579 ======= ======= ======= =======
F-24 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- 14. Differences between Canadian and United States generally accepted accounting principles (cont'd) (c) Stock based compensation Under United States GAAP, the Company accounts for stock options granted to employees under the intrinsic value method whereby compensation expense is recognized to the extent the market price exceeds the exercise price at the date of grant. Stock options grants to non-employees are recorded at fair value. In 2002 the application of the intrinsic value method would have resulted in an additional compensation expense, however the amount involved was not material. (d) Outlets The following is a schedule summarizing the number of franchised, licensed and other outlets and company-owned outlets:
Franchised, Licensed and Company-owned Total Other Outlets Outlets Outlets ------------- ------------- ------- Outlets - August 31, 2001 4,458 5 4,463 Outlets converted to franchised outlets Outlets opened (closed) (34) (34) ----- -- ----- Outlets - August 31, 2002 4,424 5 4,429 Outlets converted to franchised outlets Outlets opened (closed) 23 23 ----- -- ----- Outlets - August 31, 2003 4,447 5 4,452 ===== == =====
The number of outlets opened are net of those closed. Certain franchised outlets are subject to master area franchise agreements. The Company does not have the same control over licensed and other outlets as it does with franchised and company-owned outlets. F-25 CoolBrands International Inc. Notes to Consolidated Financial Statements For the years ended August 31, 2003 and 2002 - -------------------------------------------------------------------------------- 14. Differences between Canadian and United States generally accepted accounting principles (cont'd) (e) Other items In December 2002, the FASB issued SFAS No. 148, " Accounting for Stock-Based Compensation-Transition and Disclosure- an amendment of FASB Statement No. 123". This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensations and the effect of the method used on reported results. The Company intends to continue to account for stock-based compensation using the intrinsic value method. FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, was issued in November 2002. FIN 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. Implementation of this standard did not have a material effect in the current year. In January 2003, the FASB issued FASB Interpretation ("FIN") 46, "Consolidation of Variable Interest Entities an interpretation of ARB No. 51" (the "Interpretation"). The Interpretation introduces a new consolidation model -- the variable interests model -- which determines control [and consolidation] based on potential variability in gains and losses of the entity being evaluated for consolidation. The Interpretation requires disclosure of certain information in financial statements initially issued after January 31, 2003, if it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when Interpretation 46 becomes effective. For foreign private issuers, Interpretation 46 will be applicable from the beginning of their first standalone U.S. GAAP reporting period that begins after June 15, 2003. The Company has not determined the impact of this pronouncement, if any, on the reconciliation to U.S. GAAP. F-26 Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of 2003 and 2002 We manage our business based on four industry segments: Prepackaged consumer products, foodservice, dairy components, and franchising and licensing. Sales Sales for each segment are summarized in the following table:
Amount Percentage of Sales ----------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % - ------------------------- ------- ------- ----- ----- Prepackaged consumer products 255,197 156,691 76.2 66.4 Foodservice 25,243 25,067 7.5 10.6 Dairy components 38,651 34,610 11.5 14.7 Franchising and licensing 15,943 19,660 4.8 8.3 ------- ------- ----- ----- Total 335,034 236,028 100.0 100.0 ======= ======= ===== =====
Sales in fiscal 2003 increased by $99,006,000 or 41.9% from $236,028,000 in fiscal 2002 to $335,034,000. This increase was primarily related to an increase in sales of new prepackaged consumer products introduced for sale in fiscal 2003, expanded sales and distribution of our foodservice and dairy components products, sales generated by the brands and distribution assets acquired in July 2003 from Dreyer's Grand Ice Cream, Inc. and Nestle' and from the acquisition of 50.1% of Americana Food LP which was effective July 1, 2003. Gross profit margin The following table presents the gross profit margin dollars by industry segment and gross profit percentage for each industry segment:
Amount Percentage of Sales ----------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % - ------------------------- ------- ------- ---- ---- Prepackaged consumer products 104,594 83,030 41.0 53.0 Foodservice 9,898 10,297 39.2 41.1 Dairy components 8,921 7,135 23.1 20.6 Franchising and licensing 3,751 6,320 23.5 32.2 ------- ------- ----- ----- Total 127,164 106,782 38.0 45.2 ======= ======= ===== =====
Gross profit dollars increased to $127,164,000 in fiscal 2003 from $106,782,000 in fiscal 2002 due to the increased sales in 2003 versus 2002. However, the Company's overall gross profit percentage for fiscal 2003 decreased to 38% as compared with 45.2% for fiscal 2002, due to the impact of lower gross profit margins generated by Americana Foods' manufacturing operations and Eskimo Pie Frozen Distribution Inc's distribution operations. Franchising and licensing gross profit percentage for fiscal 2003 was adversely impacted by the losses of Company owned stores. Management's Discussion and Analysis of Financial Condition and Results of Operations Drayage and other income Drayage and other income increased to $16,978,000 in fiscal 2003 from $1,007,000 in fiscal 2002 due to drayage fees received from Dreyer's/Nestle for the delivery of their products to customers utilizing the Company's "Direct Store Delivery" (DSD) services. Selling, general and administrative expenses Selling, general and administrative expenses are summarized by industry segment in the following table:
Amount Percentage of Sales --------------- ------------------- 2003 2002 2003 2002 Year Ended August 31, $ $ % % - ------------------------- ------ ------ ---- ---- Prepackaged consumer products 76,616 58,500 30.0 37.3 Foodservice 7,222 8,008 28.6 32.0 Dairy components 2,908 3,058 7.5 8.8 Franchising and licensing 6,639 6,981 41.6 35.5 Corporate 1,703 1,011 n/a n/a ------ ------ Total 95,088 77,558 ====== ======
Selling, general and administrative expenses increased by $17,530,000 from $77,558,000 in 2002 to $95,088,000 in 2003 due primarily to the increase in selling, general and administrative expenses in the prepackaged consumer products' segment due to the increased level of sales. Prepackaged consumer products selling, general and administrative expenses increased as a result of increased spending on promotions, marketing and advertising and an increase in product introductory expenses (slotting) associated with the sale of new products introduced in 2003. The Company continues to control spending over selling, general and administrative expenses, such that prepackaged consumer products selling, general and administrative expenses declined as a percentage of sales to 30% in fiscal 2003 from 37.3% in fiscal 2002, and selling, general and administrative expenses as a percentage of total revenues declined to 26.6% in fiscal 2003 from 32% in fiscal 2002. Interest expense Interest expense was $1,990,000 in fiscal 2003 compared with $2,544,000 in fiscal 2002. The decrease in interest expense was primarily due to the reduction in long-term debt associated with the acquisitions of Eskimo Pie Corporation in 2001 and the assets of Fruit-A-Freeze in 2002. Interest expense will increase in fiscal 2004 as a result of the Company's fourth quarter acquisition of 50.1% of Americana Foods LP which included U.S. $12,625,000 of secured term and revolver bank debt. Provision for income taxes The effective tax rate was 38.8% in fiscal 2003 and 36.2% for fiscal 2002. The effective tax rate differs from the Canadian Federal/Principal Statutory Rate primarily due to our operations in foreign countries with lower effective tax rates. Future effective tax rates could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates or changes in the valuation of our future income tax assets or liabilities. Management's Discussion and Analysis of Financial Condition and Results of Operations Net Earnings Net earnings improved to $31,704,000 in 2003 as compared to $20,984,000 in 2002 and improved to 8.9% of total revenues in 2003 as compared to 8.7% of total revenues in 2002. Liquidity and capital resources Working capital at August 31, 2003 was $85,734,000 compared with $57,354,000 at August 31, 2002. The increase was primarily due to an increase in receivables of $17,806,000 and inventory of $30,243,000, offset by a decrease in cash of $16,946,000. The Company believes its working capital plus internally generated funds and the funds available from a U.S. $10 million revolving credit facility will be sufficient to meet its cash and working capital requirements for its established operations for the current fiscal year. At August 31, 2003, the Company had $30,140,000 of cash and short-term investments as compared with $47,086,000 at August 31, 2002. The Company generated cash flow from operating activities before changes in working capital of $39,980,000 for the year ended August 31, 2003 as compared with $27,805,000 for the year ended August 31, 2002 due primarily to the increase in net earnings for 2003 as compared with 2002. Payment requirements In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30 million to finance the acquisition. The loan is payable in monthly installments of U.S. $250,000, which began December 1, 2000, with the remaining principal balance due on November 1, 2005. Interest on the term loan is payable monthly on the unpaid principal balance. All borrowings under the above loan agreement are guaranteed by the Company and all of its significant subsidiaries. The principal balance outstanding at August 31, 2003 was U.S. $16,250,000. On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that included a term loan of U.S. $10,000,000, which is secured by the Partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80,739 and matures on November 19, 2007. The term of the loan bears interest at prime plus 0.5%( 4.5% at August 31, 2003.) The Partnership's credit agreement also included a revolving loan of up to U.S. $5 million, subject to a borrowing base calculation, which bears interest at prime plus 0.5% (4.5% at August 31, 2003) and is due on November 19, 2004. At August 31, 2003, approximately U.S. $2,031,000, was available to the partnership under this loan. The revolving loan is secured by the Partnership's receivables and inventory. Impact of inflation Inflation can significantly impact ice cream and frozen yogurt ingredients, including butterfat and packaging costs. In 2003 and 2002, the Company passed on ingredient, energy and freight cost increases by raising prices on selected product lines. In 2004, the Company believes that it will be able to pass on any cost increases, if any, in the normal course of business within a relatively short period of time. However, the ability of the Company to pass on cost increases will depend, to some extent, on whether its competitors have also done so. The Company believes that, in the past, its competitors have passed on cost increases in a relatively short period of time. Management's Discussion and Analysis of Financial Condition and Results of Operations Risk factors and uncertainties CoolBrands products are ultimately purchased by the global retail consumer, whose tastes and preferences are subject to variation and change. Although carefully monitored, these changes cannot be controlled and are difficult to predict. Management believes that CoolBrands' family of products is based on well established brand names and is easily adaptable to meet changes in consumer tastes and demands. CoolBrands operates in some countries that are subject to potential political and economic uncertainty. Such factors, beyond the control of CoolBrands, are lessened because of international diversification and the sharing of risks with Master and Sub-franchisees. CoolBrands is subject to currency exchange risks since most of its subsidiaries report and transact in U.S. dollars. Risks are minimized by the subsidiaries transacting purchases and recording the related sales in the same currency. From time to time, the Company has also used forward exchange contracts to minimize exchange risk exposure. The Corporation derives a substantial portion of its revenues from its operations in the United States. The U.S. market for frozen desserts is highly competitive. As competitors introduce new products or revise their supply or pricing strategies, the Corporation may encounter additional and more intense competition. Such competitors have greater name recognition and more extensive financial, technological, marketing and personnel resources than the Corporation. In addition, the Corporation may experience increased competition in its other markets as its competitors expand their international operations. The Corporation is subject to risks with respect to its cost of raw materials, some of which are subject to changes in commodity prices, particularly the cost of butterfat, which is used to produce ice cream products. From time to time, the Corporation has used hedging contracts to reduce its exposure to such risks with respect to its raw material costs. Seasonality The ice cream and frozen yogurt industry generally experiences its highest volume during the spring and summer months and its lowest volume in the winter months. Outlook In the past year, the Company acted through acquisition, internal expansion and pursuit of new strategic relationships to promote future profitable growth. The Company added new brands to its portfolio, including Dreamery and Whole-Fruit acquired from Dreyer's Grand Ice Cream, Inc., and the Godiva ice cream license assigned to the Company from Dreyer's in the fourth quarter of fiscal 2003. Management's Discussion and Analysis of Financial Condition and Results of Operations Outlook (cont'd) The Company also continued to increase its leverage and returns on its investment in brand equity through the vertical integration of our supply chain, including the acqusition from Nestle' of substanially all of the Haagen-Dazs frozen dessert direct store distribution assets in the U.S. and the acquisition of 50.1% of Americana Foods LP which owns one of the largest and most versatile frozen dessert manufacuring facilities in the U.S., both of which occurred in the fourth quarter of 2003. Management believes that the gains in revenues and earnings realized in 2003 continued to build a foundation to support continued profitable growth in 2004. Management will continue to monitor and assess its systems, controls and personnel to execute the Company's growth strategy and maximize returns. EX-99 5 ex3.txt EXHIBIT 3 EXHIBIT 3 COOLBRANDS INTERNATIONAL INC. CODE OF BUSINESS CONDUCT AND ETHICS Introduction This Code of Business Conduct and Ethics (this "Code") applies to CoolBrands International Inc. and its subsidiaries (collectively, the "Company"). We expect the Company's employees and officers ("employees") and members of its Board of Directors ("directors") to use sound judgment to help us maintain appropriate compliance procedures and to carry out our business with honesty and in compliance with laws and high ethical standards. Each employee and director is expected to read this Code and demonstrate personal commitment to the standards set forth in this Code. Employees and directors who do not comply with the standards set forth in this Code may be subject to discipline in light of the nature of the violation, including termination of employment. Any questions about this Code or the appropriate course of conduct in a particular situation should be directed to the Company's Co-Chief Executive Officers. Any evidence of improper conduct, violations of laws, rules, regulations or this Code should be reported immediately. The Company will not allow retaliation against an employee or director for such a report made in good faith. Any waiver of the provisions of this Code for executive officers or directors of the Company may be made only by our Board of Directors or a committee thereof and must be promptly disclosed to our stockholders. A copy of this Code of Business Conduct and Ethics will be disclosed annually in the Company's annual report on Form 40-F filed with the SEC. Responsibilities I. Compliance with Laws, Rules and Regulations All employees and directors must respect and obey all laws applicable to the Company's business, including state and local laws in the geographic areas in which the Company operates. Any questions as to the applicability of any law should be directed to the Company's Co-Chief Executive Officers. II. Conflicts of Interest A conflict of interest occurs when the private interest of an employee or director interferes in any way - or appears to interfere - with the interests of the Company as a whole. For example, conflicts of interest also arise when an employee or director, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Company. Conflicts of interest also can arise when an employee or director takes action or has interests that may make it difficult to make objective decisions on behalf of the Company or to perform his or her duties objectively and effectively. Except as pre-approved in accordance with Company policy and procedures, transactions that involve a conflict of interest are prohibited as a matter of corporate policy. Any employee or director who becomes aware of a conflict or potential conflict, or who has a question about whether a conflict exists, must bring it to the attention of the Company's Co-Chief Executive Officers. III. Corporate Opportunities Employees and directors are prohibited from (a) taking for themselves personally any opportunities that arise or are discovered through the use of corporate property, information or position, (b) using corporate property, information or position for personal gain, and (c) directly or indirectly competing with the Company. Employees and directors owe a duty to the Company to advance the Company's legitimate interests when the opportunity to do so arises. IV. Insider Trading The Company has a securities trading policy and all employees and directors must abide by its terms. This policy, among other things, provides that employees and directors may not buy or sell shares of the Company when they are in possession of material, non-public information. They also are prohibited from passing on such information to others who might make an investment decision based on such information. Employees and directors also may not trade in stocks of other companies about which they learn material, non-public information through the course of their employment or service. Any questions as to whether information is material or has been adequately disclosed should be directed to the Company's Co-Chief Executive Officers. V. Confidentiality Employees and directors should maintain the confidentiality of confidential information entrusted to them by the Company or its customers and suppliers, except when disclosure is authorized or legally mandated. "Confidential information" includes all non-public information that might be of use to competitors, or harmful to the Company or its customers or suppliers, if disclosed. This obligation to protect confidential information does not cease when an employee or director leaves the Company. Any questions about whether information is confidential should be directed to the Company's Co-Chief Executive Officers. VI. Fair Dealing Each employee and director should endeavor to deal fairly with the Company's competitors, suppliers, customers and employees. No employee or director should take unfair advantage of any other person through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other unfair practice. 2 VII. Protection and Proper Use of the Company's Assets All employees and directors have a duty to protect the Company's assets and ensure the assets' efficient use. Theft, carelessness and waste have a direct impact on the Company's profitability and financial health. The Company's assets should be used only for legitimate business purposes and employees and directors should take measures to ensure against their theft, damage or misuse. These assets include intellectual property such as patents, trademarks, trade secrets, business and marketing plans, salary information and any unpublished financial data and reports. Any unauthorized use or distribution of this information is a violation of this Code. VIII. Accuracy of Records and Reporting All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the matters to which they relate and must conform both to applicable legal requirements and to the Company's system of internal controls. The making of false or misleading records or documentation is strictly prohibited. The Company must operate in compliance with all applicable laws and regulations regarding the preservation of records. Records should be retained or destroyed only in accordance with the Company's document retention policies. Any questions about these policies should be directed to the Company's Co-Chief Executive Officers. IX. Disclosure Controls and Procedures The Company is required by SEC rules to maintain effective "disclosure controls and procedures" so that financial and non-financial information required to be reported to the SEC is timely and accurately reported both to our senior management and in the filings the Company makes. All employees are expected, within the scope of their employment duties, to support the effectiveness of these disclosure controls and procedures. To that end, it is Company policy to promote the full, fair, accurate, timely and understandable disclosure in reports and documents filed with the SEC and otherwise communicate to the public. X. Improper Influence on Conduct of Audits An employee must not take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of the Company. An employee must also not take any action to fraudulently influence, coerce, manipulate, or mislead any member of the Company's internal auditors engaged in the performance of an internal audit or investigation. An employee must cooperate in any audit or investigation being conducted by the Company's internal or external auditors. 3 XI. Interaction with Public Officials and Entertainment and Gratuities When dealing with public officials, employees and directors must avoid any activity that is or appears illegal or unethical. The giving of gifts, including meals, entertainment, transportation and lodging, to government officials in the various branches of U.S. government, as well as state and local governments, is restricted by law. Employees and directors must obtain pre-approval from the Company's Co-Chief Executive Officers before providing anything of value to a government official or employee. The foregoing does not apply to personal lawful political contributions. In addition, the U.S. Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. Illegal payments to government officials of any country are strictly prohibited. The Company believes that business decisions by its non-governmental customers should be made solely on the basis of the Company's quality, service, price and other competitive factors. Gifts and entertainment of nominal value are used to create good will with non-governmental customers. If they go beyond that and make the customer feel obligated to offer any special consideration to the Company, they are unacceptable. The Company's policy is to avoid event the appearance of favoritism based on business entertainment or gratuities. Employees should exercise good judgment and moderation and should only offer gratuities to customers to the extent they are in accordance with reasonable customers in the marketplace. Normal and reasonable entertainment of non-governmental customers and suppliers covered by standard expense account reporting is permissible when not contrary to applicable law or to the non-governmental customer's or supplier's own policy. XII. Environmental Protection The Company fully supports the belief that each employee has a responsibility to protect the environment and human life and health. It is, therefore, imperative that each employee accepts responsibility for compliance with laws and regulations governing the protection of the environment. No individual will knowingly buy for use at the Company, use or dispose of, other than in accordance with the law, any chemical or other substance which it is illegal to use or dispose of. Supervisors and managers are expected to stay current with all relevant laws and regulations concerning the protection of the environment, to seek professional guidance when necessary, and to assure compliance with the laws and regulations. In addition, we must week alternative to those methods, substances or products which are subject to regulation to assure protection of the environment and personal safety. Individuals who knowingly violate any environmental law or regulation will be subject to discharge and prosecution. Accidental incidents which affect the environment are to be 4 reported immediately, and measures are to be undertaken immediately to minimize environmental impact. XIII. Use of Electronic Technology Resources The Company's electronic technical resources - including desktop and portable computer systems, personal digital assistants, fax machines, Internet and World Wide Web (Web) access, voice mail, electronic mail (e-mail), electronic bulletin boards, and intranet, as well as the use of any company-paid accounts, subscriptions, or other technical sources - enable employees quickly and efficiently to access and exchange information throughout the Company and around the world. These technical resources are provided for the benefit of the Company and its customers and suppliers. They are provided only for use in the pursuit of company business, unless otherwise authorized. Employees are permitted to use the Company's technical resources for occasional, non-work, non-prohibited purposes. Nevertheless and other than specific legal exceptions, employees have no right or privacy as to any information or file transmitted or stored on or through the company's electronic technical resources. Employees are responsible for ensuring that they use the technical resource privilege in an effective, ethical, and legal manner. To that end, the Company has installed systems to track Internet usage. Use of the Company's technical resources may not be used for personal gain, the advancement of individual views, or the solicitation of non-Company business or activities. Your use of the Company's technical resources must not interfere with your productivity, the productivity of any other employee, or the operation of the Company's technical resources. Sending, saving, or viewing offensive material using the Company's technical resources is prohibited. Messages stored or transmitted must not contain content that may reasonably be considered offensive to any employee. Offensive material includes, but is not limited to, sexual comments, jokes or images, racial slurs, gender-specific comments, or any comments or images that would offend someone on the basis of a person's race, color, creed, sex, age, national origin, or physical or mental disability. Any use of the Company's technical resources to harass, discriminate or for other prohibited purposes is unlawful and strictly forbidden, and will be subject to discipline, up to and including discharge. Compliance Standards and Procedures We understand that no code or policy can address every scenario or answer every question. To ensure that all employees and directors can obtain prompt answers to their questions and inquiries, we have implemented the following policies and procedures: The Company's Co-Chief Executive Officers has been designated with responsibility for overseeing and monitoring compliance with this Code. These officers make periodic reports to the Company's Audit Committee regarding the implementation and 5 effectiveness of this Code as well as the Company's policies and procedures to ensure compliance with this Code. The Company's Co-Chief Executive Officers may be reached at 631-737-9700 or dstein@coolbrandsww.com and rsmith@coolbrandsww.com. If you wish to communicate any matter anonymously, the Company will maintain the confidentiality of your communication to the extent possible under applicable laws. Communications intended to be confidential should be mailed in writing, without indicating your name or address, to CoolBrands International Inc., 4175 Veterans Highway, Ronkonkoma, NY 11779, Attention: Co-Chief Executive Officer. Reporting Violations All employees are encouraged to speak with their supervisors, managers or other appropriate personnel when in doubt about the best course of action in a particular situation. In most instances, employees and directors should bring any questions regarding this Code to the attention of the Company's Co-Chief Executive Officers. We encourage all employees to promptly report to the appropriate Company personnel any actual or apparent violations of this Code or any laws, rules or regulations. The Company does not permit retaliation or discrimination of any kind against employees who reasonably believe there has been possible illegal or unethical conduct and who in good faith report the conduct to us. However, it is a violation of our policy for any employee to communicate a report claiming illegal or unethical conduct which the employee knows to be false. Investigations Reported violations will be promptly investigated. The person reporting the violation should not conduct an investigation on his or her own. However, employees and directors are expected to cooperate fully with any investigation made by the Company or any of its representatives. Accountability Employees and directors who violate this Code may be subject to disciplinary action, including termination of employment. Knowledge of a violation and failure to promptly report or correct the violation may also subject an employee or director to disciplinary action. Some violations of this Code are illegal and may subject the employee or director to civil and criminal liability. 6 EX-99 6 ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 ACCOUNTANTS CONSENT CoolBrands International Inc. We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-109213) of CoolBrands International Inc. of our report dated November 25, 2003, relating to the consolidated financial statements which is included in this Form 40-F. /s/ BDO Dunwoody LLP - ---------------------------- BDO Dunwoody LLP Toronto Ontario January 23, 2004 EX-99 7 ex23-2.txt EXHIBIT 23.2 EXHIBIT 23.2 ACCOUNTANTS CONSENT CoolBrands International Inc. We hereby consent to the use of our report dated November 25, 2003 included in the Annual Report on Form 40-F of CoolBrands International Inc. for the fiscal year ended August 31, 2003. /s/ BDO Dunwoody LLP - ---------------------------- BDO Dunwoody LLP Toronto Ontario January 23, 2004 EX-99 8 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, David J. Stein, certify that: 1. I have reviewed this annual report on Form 40-F of CoolBrands International Inc. (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: January 21, 2004 /s/ David J. Stein ----------------------------------------------- David J. Stein Title: President and Co-Chief Executive Officer EX-99 9 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATIONS I, Richard E. Smith, certify that: 1. I have reviewed this annual report on Form 40-F of CoolBrands International Inc. (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: January 21, 2004 /s/ Richard E. Smith --------------------------------- Richard E. Smith Title: Co-Chief Executive Officer EX-99 10 ex31-3.txt EXHIBIT 31.3 EXHIBIT 31.3 CERTIFICATIONS I, Gary P. Stevens, certify that: 1. I have reviewed this annual report on Form 40-F of CoolBrands International Inc. (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Dated: January 21, 2004 /s/ Gary P. Stevens --------------------------------- Gary P. Stevens Title: Chief Financial Officer EX-99 11 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 JOINT CO-CEO/CFO CERTIFICATE REQUIRED PURSUANT TO 18 U.S.C. SECTION 1350 Each of the undersigned, the Co-Chief Executive Officers and the Chief Financial Officer of Coolbrands International Inc. (the "Company"), hereby certifies, pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Company's report on Form 40-F for the fiscal year ended August 31, 2003, (the "Annual Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 21, 2004 /s/ David J. Stein --------------------------------- David J. Stein Co-Chief Executive Officer /s/ Richard E. Smith --------------------------------- Richard E. Smith Co-Chief Executive Officer /s/ Gary P. Stevens --------------------------------- Gary P. Stevens Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----