-----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, UD6p9M9Fp/dXvhLdLjY3xSaJX2ijX1bXYk8uFwtePfl0VO/pHK6XwrdMBz5PwL/B UReSlvU910YYgGzsfGBypA== 0000950117-04-000515.txt : 20040204 0000950117-04-000515.hdr.sgml : 20040204 20040204145053 ACCESSION NUMBER: 0000950117-04-000515 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040131 FILED AS OF DATE: 20040204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COOLBRANDS INTERNATIONAL INC CENTRAL INDEX KEY: 0001005531 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 000000000 STATE OF INCORPORATION: A5 FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27476 FILM NUMBER: 04566388 BUSINESS ADDRESS: STREET 1: 8300 WOODBINE AVE 5TH FL STREET 2: MARKHAM ONTARIO CITY: CANADA L3R 9Y7 STATE: A6 BUSINESS PHONE: 5167379700 MAIL ADDRESS: STREET 1: 8300 WOODBINE AVENUE STREET 2: MARKHAM ONTARIO CITY: CANADA L3R 9Y7 STATE: A6 ZIP: L3R 9Y7 FORMER COMPANY: FORMER CONFORMED NAME: YOGEN FRUZ WORLD WIDE INC DATE OF NAME CHANGE: 19960103 6-K 1 a37000.txt COOLBRANDS INTERNATIONAL INC. FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of January, 2004 Commission File No. 000-27476 Coolbrands International Inc. ----------------------------- (Translation of registrant's name into English) 8300 Woodbine Avenue, Markham, Ontario Canada L3R 9Y7 ----------------------------------------------------- (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F [_] Form 40-F [X] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1)________ Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7)________ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [_] No [X] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-_________ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COOLBRANDS INTERNATIONAL INC. Date: February 3, 2004 By: /s/ Aaron Serruya -------------------------------- Name: Aaron Serruya Title: Executive Vice President EXHIBIT INDEX 99.1 2003 Annual Report to Shareholders 99.2 Notice of Annual Meeting of Shareholders and Form of Proxy STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as.............................. 'TM' The registered trademark symbol shall be expressed as................... 'r' EX-99 3 ex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 COOLBRANDS INTERNATIONAL INC. ANNUAL REPORT 2003 financial highlights
Selected Financial Data Year Ending 8/31/03 8/31/02 %Change - -------------------------------------- ------- ------- ------- Revenues 357,273 242,222 47 Net Earnings 31,704 20,984 51 Earnings Per Share - Basic 0.61 0.44 39 Earnings Per Share - Diluted 0.59 0.42 40 EBITDA 58,575 40,064 46 Return On Average Shareholders' Equity 17.7% 13.8% 28 Price / Earnings (P/E) Ratio 29.7 17.6 69 Weighted Average Number Of Shares Outstanding 51,746 48,050 8 Working Capital 85,734 57,354 49 Total Assets 313,850 283,662 11
Table of Contents 1 Introduction 2 Shareholder Letter 4 5 Point Strategic Plan 6 Better For You 10 Super Premium 12 Classic Brands 14 Direct Store Delivery 16 Franchise Operations 18 Manufacturing 21 Management's Discussion & Analysis 25 Auditors' Report 26 Consolidated Financial Statements Inside Back Cover Directors and Officers Corporate Information Manufacturing Plants TRADEMARKS AND SERVICE MARKS INFORMATION NutraSweet'r'is the registered trademark of The NutraSweet Company. Welch's'r'is the registered trademark of Welch Foods, Inc., a Cooperative ("Welch's"). Tropicana'r'is the registered trademark of Tropicana Products, Inc. ("Tropicana"). Weight Watchers'r'on food and beverages is the registered trademark of WW Foods LLC. Weight Watchers for services and Points'r'are the registered trademarks of Weight Watchers International, Inc. ("Weight Watchers"). Smart Ones'r'is the registered trademark of H.J. Heinz Company. Trix'r'and Betty Crocker'r'are the registered trademarks of General Mills, Inc. ("General Mills"). Yoplait'r'is the registered trademark of Sodima, Paris, France. Splenda'r'is the registered trademark of McNeil-PPC, Inc. Atkins'r'and Atkins(R)Endulge'TM'are trademarks of Atkins Nutritionals, Inc. Godiva'r'is the registered trademark of Godiva Chocolatier, Inc. All rights reserved. introduction Better for You Ice cream is the food more people want to eat more of than any other. The best way to increase consumer purchases in today's growing health-conscious environment is to make products that combine the rich, creamy flavor people love with "healthy lifestyle" benefits. That is why Better for You frozen desserts form the fastest-growing segment in the ice cream category. CoolBrands International is the leader in Better for You frozen desserts, a position that has helped make us the fastest-growing ice cream company and one of the overall category leaders in the United States. Last year we launched a new five point growth strategy to make CoolBrands Better for You, our shareholders, by targeting strategic opportunities for vertical integration and expanded market penetration to increase profitability and create new revenue streams. In the very first year of implementing our plan, we made dramatic progress. We now have three new Super Premium brands, a direct- store-delivery (DSD) distribution network that reaches retailers' shelves at sales outlets across America, new franchise offerings that promise renewed growth in that high-margin segment, and new production capabilities that enhance our ability to innovate and grow sales and profits. Our goal is to make CoolBrands Better for You - better for each retailer and franchisee, for each consumer to whom they sell our products and, thereby, better for each of you, our shareholders. In 2003, we made great strides toward that goal. And we enter 2004 fully committed to advance on our goal more rapidly than ever. shareholder letter Dear Fellow Shareholders, CoolBrands International had an outstanding 2003. We achieved unprecedented growth, realizing the highest revenues and earnings in our history. Despite an uncertain economy in which many companies struggled, we continued to be one of the fastest-growing companies in any industry. Most important, our achievements in 2003 set the stage for continued success in 2004 and beyond. Financial Highlights Our financial results for 2003 demonstrate the soundness of our strategy and its execution. Revenues increased by 47% to $357.3 million, primarily driven by increased sales of our prepackaged consumer products. In fact, 2003 saw the most aggressive program of new product introductions and distribution gains in our history. Net earnings increased by 51% to $31.7 million. Earnings per share increased by double digits each quarter for the third year in a row and finished the year up 40%. Cash flow from operating activities before changes in working capital increased by 44% to a very robust $40 million, which was sufficient to provide internal funding for the increases in working capital, mainly increased receivables and inventory related to our fourth quarter acquisitions. Selling, general and administrative expenses declined as a percentage of total revenues to 26.6% from 32% last year, reflecting diligent cost management during our rapid growth. Our balance sheet, always strong, grew even stronger, as current assets to liabilities increased by a ratio of 2.1 to 1. These outstanding results were the work of a talented and committed team of managers, a strong business model and a focused strategy, all of which we will bring to bear on the even greater opportunities that are before us in 2004. Better Positioned For Growth In 2004, there remain three keys to continued growth for CoolBrands: great brands, great products and great distribution. Going into 2004, we are stronger on each count than ever before. Atkins'r' Endulge'TM' joins our brand portfolio as a significant addition to our already category-leading lineup of Better for You frozen desserts. Atkins is far and away the leading brand for foods intended for "low carb" dieting, the fastest-growing approach to losing weight. And our new Atkins Endulge Super Premium ice cream pints and frozen novelties promise to secure leading market share for CoolBrands in an important new Better for You segment. The addition of Dreamery'r' Ice Cream, Whole Fruit'TM' Sorbet, and Godiva'r' ice cream - three brands that account for approximately 25% of all Super Premium pints sold in U.S. supermarkets - establishes CoolBrands as one of just three major competitors in the Super Premium segment. Together with Atkins Endulge pints, these brands give CoolBrands the most varied and effectively segmented lineup of Super Premium frozen desserts. Eskimo Pie Frozen Distribution, our new name for the direct-store-delivery (DSD) distribution system acquired from Nestle, dramatically enhances our control over downstream distribution of our products. DSD enables us to keep the optimal flavor assortment in stock at all times in each store to maximize sales. DSD also increases our speed to market with new products and the market penetration of all our brands. And, as one of only two major DSD systems operating in most of the major markets coast to coast, Eskimo Pie Frozen Distribution creates a new revenue stream from the distribution of our partner brands, such as Unilever and M&M/Mars, who have chosen us to take their products to market in many areas. Finally, DSD gives us direct access to the out-of-home distribution channel, which includes convenience stores, gas stations and other difficult-to-reach points of sale. Americana Foods provides us with the capability to produce high quality, innovative products using state-of-the-art manufacturing technology and develop our brands in ways that competitors will find hard to duplicate. Americana Foods also creates a new revenue stream from the manufacture of products for our partner brands and private label products for retailers. Tropicana Smoothies, Juices and More!, our exciting new franchising concept, promises renewed growth in the high-margin franchising and licensing segment. We reaped great rewards in 2003 from our work in previous years establishing leading brands with high-margin products. We also laid the foundation - in particular, through the addition of the license for Atkins Endulge and the acquisitions of Americana Foods, the Dreamery, Godiva Ice Cream and Whole Fruit Sorbet brands and our new DSD distribution system - for continued increases to our revenue and profit-producing potential as we go forward. David J. Stein President, Co-CEO and Director of CoolBrands International Inc. Chief Operating Officer & Director David M. Smith (left) and President, Co-CEO & Director David J. Stein (right) proudly display many of CoolBrand's exciting new and existing products. 5 point strategic plan A Better Approach to Increasing Value In 2002, CoolBrands International saw an emerging opportunity to capture superior returns for our shareholders. We launched a 5 Point Strategic Plan to seize that opportunity. During 2003, as we implemented our plan, we made remarkable progress toward achieving our goal of becoming a dynamic and highly profitable contender in the global frozen dessert industry. CoolBrand's 5 Point Strategic Plan Our plan focuses on establishing a franchise with consumers based on brand superiority in high-growth segments of the ice cream category, then organizing and diversifying to maximize profits through vertical integration of manufacturing and distribution operations. This is our blueprint for capturing increasing market share and generating higher profitability than almost every other company in our industry. 1. Control a portfolio of powerful brands that command leading market shares in key high-growth segments. Accomplished in 2003: Continued growth of Weight Watchers'r' - Acquisition of Dreamery'r' and Whole Fruit'TM' and the license for Godiva'r' Ice Cream - Licensed Atkins'r' Endulge'TM' for low-carbohydrate frozen desserts. The engine that powers CoolBrands is our portfolio of high-performance brands, each one commanding the brand strength and selling power to be the segment leader. Today our brands include some of the world's most respected names in consumer products, among them: o Weight Watchers - The worldwide leader in weight management. o Atkins Endulge - The creator of the "low-carb" lifestyle. o Tropicana'r' - The best-selling fresh juice brand. o Eskimo Pie'r' - The pioneer in no-sugar-added frozen desserts. o Godiva - The world's best chocolate, now the best chocolate ice cream. o Whole Fruit - The U.S. leader in fruit sorbet in pints and bars. o Dreamery - The flavor innovator in Super Premium ice cream. o Yoplait'r' - The leading brand for nutritious, indulgent, great-tasting yogurt. 2. Control risk and maximize growth through diversification across every major product category and distribution channel. Accomplished in 2003: Extended Weight Watchers into the foodservice channel - Launched Tropicana in the franchising segment - Finalized plans to introduce Yoplait in the frozen breakfast category. CoolBrands is quickly making inroads in food-service and out-of-home channels with fresh initiatives that leverage our brand strength in new ways. Weight Watchers Nonfat Soft Serve Ice Cream now delivers rich, creamy flavor with only 1 FlexPoint'r' per serving in foodservice outlets: cafeterias, theme parks, and other out- of-home venues. Anchored by one of the most powerful food brands anywhere, our new Tropicana Smoothies, Juices & More! offering is drawing new franchise investors. Yoplait Frozen Breakfast Bars and Sandwiches will offer a breakthrough solution to the age-old search for a complete and truly convenient nutritious break-fast that kids will eat. 3. Control quality and costs through vertical integration while capturing additional revenue and profit from related operations. Accomplished in 2003: Acquisitions of Americana Foods and Nestle's DSD distribution system. CoolBrands captures more profit from a wider range of related operations than any other ice cream company. Two major acquisitions in 2003 made CoolBrands even more vertically integrated. Americana Foods, one of the largest, best-equipped production facilities in the U.S., brings us state-of-the-art technology for making a wider variety of innovative, value-added ice cream products than ever before, including extruded novelty forms that consumers increasingly prefer. Eskimo Pie Frozen Distribution, the former Haagen-Dazs'r' distribution system, is the second-largest full-service DSD ice cream distribution network in the U.S. With access to all distribution channels - supermarkets, club stores, convenience stores, drug stores and foodservice outlets - CoolBrands now can deliver our products and partner brand products directly to retailers' shelves. With our other vertically integrated operations - Value America Flavors & Ingredients, Sam-Pak Flexible Packaging and Eskimo Pie Foodservice - CoolBrands captures profits often left for third-party distributors and creates new revenue streams by manufacturing and distributing partner brand products. Most importantly, CoolBrands now has the highest measure of control over product manufacture and distribution, helping to ensure that our brands realize full sales potential. 4. Control unique production capacity that will enable us to manufacture the innovative, value-added products that drive our brands. Accomplished in 2003: Dramatically enhanced R&D capabilities - Developed innovative manufacturing technologies to improve quality and efficiency - Expanded total production capacity to facilitate growth. Our technical teams at Americana Foods and Value America developed state-of-the-art R&D and custom manufacturing methods, allowing us to formulate new products including Weight Watchers Giant Sundae Cones and Giant Cookies & Cream Bars, already big hits with consumers. These new products are real breakthroughs in the art and science of making deliciously indulgent yet good for you frozen treats. We are expanding plant capacity substantially to make Americana Foods capable of making every variety of frozen dessert product. 5. Control the downstream distribution of our products. Accomplished in 2003: Marketwide coverage of all distribution channels in U.S. major markets. With a rapidly consolidating industry and warehouse distributors (including those operated by chain retailers) increasingly taxed for space to handle an ever-growing number of frozen food products, direct control over the distribution pipeline is critical to build market share and profitability. CoolBrands now controls one of just two major DSD systems in the U.S. This acquisition gives us access to out-of-home retail outlets (where the majority of all frozen treats are purchased each year) and offers our new ice cream products a significant advantage in reaching store shelves. CoolBrands is positioned to use this advantage to drive growth for our brands and partner brands using our DSD system. Our vision at CoolBrands International is to be the premier innovator in the global frozen desserts industry. Our portfolio of leading brands and expanding range of capabilities and revenue streams manifest this vision. We have come so far in so short a time. As the pages that follow make clear, we are moving forward faster than ever before. better for you Better Choices for Healthier Lifestyles The Better for You segment of the ice cream category is by far the fastest-growing, increasing at an annual rate of more than 30% in recent years. That makes the Better for You segment the greatest area of opportunity in our industry. And no other ice cream company has seized this opportunity more successfully than CoolBrands. CoolBrands is the leader in Better for You frozen treats. In 2003, we commanded 26% of the market, beating the closest competitor by 5 share points. We pioneered this segment with Eskimo Pie No Sugar Added frozen treats, and we have continued to lead the way with our complete lineup of Weight Watchers'r' Smart Ones'r' frozen dessert products. The Weight Watchers'r' Smart Ones'r' Phenomenon Weight Watchers is the world's leading weight management system. More people around the world turn to Weight Watchers than to any other system for help in achieving a lifestyle that helps them stay fit and healthy. The ranks of loyal Weight Watchers followers are vast and growing dramatically every year. They have helped make Weight Watchers Smart Ones the growth leader in the ice cream category in each of the last two years. Our success in satisfying the needs of Weight Watchers members (and an even larger number of consumers who have never attended a Weight Watchers classroom session) is driven by our products: deliciously decadent frozen treats that offer fat-free and low-fat snacking options with only 2 FlexPoints or less in each truly giant serving size. In 2002, Weight Watchers Smart Ones Giant Round Ice Cream Sandwiches were the best-selling new frozen treat in the entire category. Weight Watchers Smart Ones Giant Sundae Cones achieved the same feat in 2003, leading every other new product introduction. These category leaders, together with Weight Watchers Smart Ones Giant Sundae Cups and Giant Fudge Bars, have established Weight Watchers as the leader for low-fat and fat-free frozen treats that are Better for You. In 2004, CoolBrands is adding two new Weight Watchers Smart Ones Giant frozen treats to retailers' shelves: Giant Cookies & Cream Bars, loaded with delicious chocolate cookies on the inside and outside; and Peanut Butter Fudge Giant Sundae Cones, creamy peanut butter ice cream with luscious chocolate fudge and chocolate chips inside a crunchy cone, and each, incredibly, has only 2 FlexPoints. With these new offerings from CoolBrands, things keep getting better and better for the millions of consumers managing their weight by watching their intake of fat and calories, especially those using Weight Watchers FlexPoints as their guide. But, as we all know, what works for one group may not meet the needs of another. And in the world of weight management, new ideas for healthier eating are always news... The Atkins'r' Revolution Better for You means many different things to the wide cross-section of consumers striving to eat - and snack - in better, healthier ways. And CoolBrands is keeping up with the latest trends in the Better for You segment. Millions of consumers around the world have embraced the Atkins Nutritional Approach'TM' an alternative nutritional plan for weight control developed by Dr. Robert C. Atkins. In 2003, Atkins spurred a virtual revolution in consumer attitudes toward healthy dieting, producing shock waves that have affected almost every company in the food industry. Unlike plans that stress the need to reduce the dietary intake of fat and calories, the Atkins Nutritional Approach focuses instead on controlling carbohydrate intake, with a minimal allowable amount of fats. The switch in emphasis from controlling fat and calories to controlling carbohydrates profoundly changes - for consumers who subscribe to the Atkins Nutritional Approach - the types of foods one may eat while following the plan. These changes are especially dramatic for dessert options, allowing an even richer, creamier texture and fuller flavor. Our new lineup of Atkins'r' Endulge'TM' Super Premium Ice Cream is deliciously indulgent proof of this. Better for You has never been better tasting than with Atkins Endulge. Atkins Endulge Super Premium Ice Cream has the rich, indulgent flavor and texture consumers expect in a Super Premium ice cream. Yet each serving contains 3 or fewer net carbs (carbohydrates affecting blood sugar levels). For those living a low-carb lifestyle, it's a fabulous new treat that meets their nutritional needs. For consumers watching their weight or just trying to eat healthier, it's one choice that lets them have it all. Atkins Endulge is available in eight indulgent flavors in pints: o Vanilla o Chocolate o Butter Pecan o Chocolate Peanut Butter Swirl o Mint Chocolate Chip o Swiss Chocolate Almond o Chocolate Fudge Brownie o Vanilla Fudge Swirl Atkins Endulge also comes in seven outrageous ice cream bar varieties: o Vanilla with Milk Chocolate Coating o Chocolate Fudge Swirl with Dark Chocolate Coating o Peanut Butter Swirl with Dark Chocolate Coating o Caramel Turtle Sundae with Dark Chocolate Coating o Butter Pecan with Dark Chocolate Coating o Vanilla Fudge Swirl with Dark Chocolate Coating o Chocolate Fudge Bar Atkins Endulge Super Premium Ice Cream first reached freezer shelves at supermarkets, club stores, and natural food stores following the end of fiscal 2003. Early indications are that the brand could approach the top of the category in record time. For CoolBrands, Atkins Endulge is the latest in a long line of successes in keeping pace with the rapidly changing tastes and preferences of consumers looking for Better for You frozen treats, which started with our flag-ship brand, Eskimo Pie'r'. Eskimo Pie'r' No Sugar Added Eskimo Pie'r' No Sugar Added was the first success on the Better for You frontier, combining the legendary flavor of the Eskimo Pie chocolate-coated ice cream bar with the benefits of reduced fat content and no added sugar. We succeeded in launching the no-sugar-added frozen novelty segment by offering a Better for You treat that did not compromise on flavor. That formula for success has never changed. And Eskimo Pie, the first national ice cream brand in Better for You is still going strong, with new line extensions that enhance the brand's franchise with consumers of no-sugar-added products. In 2003, we introduced Eskimo Pie Slender Pie'TM' No Sugar Added Round Ice Cream Sandwiches in three enticing flavors, scoring solid success in super-markets across the U.S. We are following up in 2004 by intro-ducing Eskimo Pie No Sugar Added Cookies & Cream Ice Cream Bars, the first-ever cookies & cream bars made with no sugar added. They're loaded with chocolate cookies and the "no com-promise" flavor that has long made Eskimo Pie the leader in no-sugar-added frozen treats. Better for You for Breakfast Yogurt is a core product for consumers of Better for You foods, and the No. 1 brand of yogurt in the U.S. is Yoplait'r'. Yoplait became number one by combining the healthy goodness of yogurt and it's creamy, indulgent taste and texture with an innovative approach to bringing more consumers - especially kids - - into the market with breakthrough products like Yoplait'r' Go-GURT'r'. CoolBrands is poised to continue the line of Yoplait breakthroughs with Yoplait Frozen Breakfast Bars and Sandwiches, the first-ever frozen breakfast novelties. They combine the complete, wholesome nutrition of a bowl of vitamin-fortified cereal, fruit and yogurt in a frozen novelty. They're complete, balanced breakfasts in a sandwich or on a stick for "on the go" convenience. Best of all, because they're frozen treats like ice creams bars or sandwiches, but pack the vitamin-fortified goodness of yogurt, fruit and cereal, they're healthy breakfasts that kids will really eat. Yoplait Frozen Breakfast Bars and Sandwiches will first hit supermarkets in the Baltimore-Washington D.C. area in February 2004. Another Better for You breakthrough for Yoplait ... and CoolBrands! Naturally Better for You Better for You frozen snacks include frozen fruit bars that offer great fruit flavor and nutrition in a naturally fat-free, nondairy treat. In Tropicana'r' and Welch's'r', our portfolio includes two of the world's outstanding brands for fruit juice - brands that surpass in consumer appeal any competitor in the ice cream category. Brand power like that has helped us make Welch's Fruit Juice Bars a winner in supermarkets across the U.S. and Tropicana frozen treats a success in the U.S., Canada, France, Belgium and the United Kingdom. CoolBrands topped off the year with the addition of Whole Fruit'TM' Sorbet in pints to our family of fruit based Better for You frozen treats. Whole Fruit - one of three Super Premium brands divested to CoolBrands by Dreyer's in connection with the merger of Dreyer's and Nestle - uniquely combines the hallmark Better for You benefits of fat-free and nondairy with Super Premium quality and value perception. Whole Fruit dominates the sorbet segment in supermarkets, leading such brands as Haagen-Dazs in total sales by better than 2 to 1. The presence of Whole Fruit Sorbet in our portfolio points to the next focal point of brand strength for CoolBrands. super premium The Best, with No Compromise. The Super Premium segment is second only to Better for You in annual rate of growth. In the past year, we became one of only three major Super Premium competitors by acquiring from Dreyer's the Dreamery'r' Ice Cream and Whole Fruit'TM' Sorbet brands, and the license for Godiva'r' Ice Cream from Godiva Chocolatier. These brands combine to account for 25% of all Super Premium pints sold in U.S. Supermarkets. The simultaneous growth in the Better for You and Super Premium segments demonstrates the importance of market segmentation and the need to focus on satisfying the diverse preferences of distinct groups of consumers. CoolBrands is focused on seizing opportunities in emerging growth segments. That's how we've grown so quickly: by staying firmly on trend. Today, people are working harder and for longer hours than ever before. Millions of these consumers prefer to spend their precious time and hard-earned money on nothing but the best, from gourmet coffee to fine wines and chocolates. And for such consumers, ice cream is no place to compromise. CoolBrands enters 2004 with a complement of superbrands to drive sales of Super Premium ice cream and sorbet to these demanding consumers. Superbrands in Super Premium Each of our superbrands speaks to a distinct sub-segment of the overall Super Premium market. Dreamery'r' Ice Cream, ranked the best vanilla ice cream on the market,* is known to consumers as a flavor innovator, helping to expand segment sales with unique flavors like Coney Island Waffle Cone'TM', Black Raspberry Avalanche and Chocolate Truffle Explosion. New innovations in 2004 include Hot Fudge Sundae, Give Me S'Mores and Blue Ribbon Berry Pie. For many consumers, ice cream and chocolate are the most desirable foods. And Godiva'r', maker of the world's finest chocolate, is now also rated the best chocolate ice cream.* Godiva Belgian Dark Chocolate Ice Cream is the best- selling chocolate ice cream in U.S. supermarkets and anchors a lineup of sophisticated chocolate-inspired flavors (including, new for 2004, Chocolate Covered Cookies & Cream) that outclasses any other Super Premium brand. Super Premium and Better for You Brands The best and the best for you. Imagine the ultimate in guilt-free indulgence: Super Premium frozen treats that deliver Better for You benefits. That's the unique positioning of Atkins'r' Endulge'TM' Super Premium ice cream and Whole Fruit'TM' Sorbet. With Atkins Endulge Super Premium ice cream (with only 3 net carbs per serving) and Whole Fruit Super Premium fat-free and nondairy sorbet, in refreshingly cool flavors filled with luscious chunks of real mangoes, blueberries, boysenberries, peaches, strawberries and raspberries, CoolBrands is zeroing in on a new growth segment that taps the twin energies of the Better for You and Super Premium segments. And that's what consumers have come to expect from CoolBrands: leading the way through innovation and a commitment to excellence. * Consumer Reports Magazine, June 2003. classic brands Better Brands for More Choices More than ever before, today's busy shoppers favor brands they know and trust. When consumers select frozen treats for themselves and their families, they look for products they know will meet their taste expectations and quality standards. They rely on brands that do not disappoint. That's why brands are so important, and why our brands are second to none. Every CoolBrands product whether new or a time-tested favorite is made to live up to the expectations inspired by the brand name it bears. Each of our brands speaks uniquely to an im-portant market segment, and each product must be true to - and carry forward - that priceless brand heritage. It all began years ago with Eskimo Pie. Eskimo Pie'r' - An American Original In 1920 Christian K. Nelson, owner of a confectionery store in Iowa, created a new ice cream treat by coating ice cream with chocolate. The next year, he and chocolate maker Russell C. Stover gave it an improved chocolate coating. They named it "Eskimo Pie," and the frozen novelty industry was born. More than 80 years later, Eskimo Pie remains one of the best loved and most widely distributed ice cream novelties. Eskimo Pie is still pleasing consumers with a growing line of Better for You and traditional frozen treats. Eskimo Pie No Sugar Added frozen treats still set the pace in a growing segment that satisfies rising numbers of diabetic consumers and others moderating their sugar intake. In 2004 we'll introduce an entirely new line of premium ice cream novelties for supermarket and club stores, including traditional favorites such as Strawberry Shortcake Bars, Chocolate Eclairs and Toasted Almond Bars made for the first time using extrusion technology, and classics such as Premium Vanilla Ice Cream Bars covered with Milk Chocolate, and even a new Premium No Sugar Added Reduced Fat Vanilla Ice Cream Bar covered with Dark Chocolate. Better yet, we're also launching a whole new line of single-serve Eskimo Pie frozen treats, including newpremium flavors, packaged for out-of-home consumption and for distribution through convenience stores, gas station food marts, drug stores and other small- format food retailers. Chipwich'r' - First and Still the Best Before the invention of the Chipwich'r' sandwich, ice cream novelties - though consumed by people of all ages - were made mainly with children in mind. Chipwich changed things forever in 1981 by sandwiching premium vanilla ice cream between two gourmet chocolate chip cookies and then rolling it in pure chocolate chips, creating the first frozen treat good enough to satisfy the most discriminating tastes among adults and children. It was so good that Chipwich created a phenomenon. Since then, adults and kids alike around the world have purchased more than a billion Chipwich sandwiches. direct store delivery Better Distribution for Better Brands Industry consolidation is making direct control over the downstream distribution of our products more critical than ever. In many channels of distribution, this control can make the difference between getting on the shelf or getting locked out, especially in the many thousands of smaller format retail outlets such as convenience stores, gas station food marts and corner delis in the out-of-home channel, where more than half of all frozen treats are purchased. CoolBrand's newest subsidiary is one of the company's most promising developments of 2003. Eskimo Pie Frozen Distribution operates one of only two major direct-store-delivery (DSD) ice cream distribution systems in the United States, with market coverage in California, Washington, Oregon, Utah, Minnesota, Florida, Georgia, Virginia, Maryland, Delaware, Pennsylvania, New Jersey, Connecticut, the District of Columbia and the Greater New York metropolitan area. DSD service provides critical benefits that enhance the power of our brands: o Increased speed to market for new products o Improved market penetration for new and existing products o Better in-stock performance and SKU management at store level o Superior control over product quality throughout the distribution chain o Enhanced merchandising and display-building capabilities o Direct access to all potential purchasers throughout the market With Eskimo Pie Frozen Distribution, CoolBrands now controls one of the two major DSD systems in the U.S. This operation opened new, unrestricted access to the out-of-home distribution channel. Delivering directly to these stores ensures that CoolBrands products are stocked in freezers all along consumers' daily routes. Pie Frozen Distribution also will achieve cost-savings and efficiencies that can't be counted on with Eskimo third-party warehouse distributors. Growing numbers of frozen food products are being pushed to market through third-party distributors. Freezer space is at a premium and costs are rising. Delivering our own products means CoolBrands can count on the visibility needed for rising sales. Distribution agreements with partner brands like Unilever and M&M/Mars are bringing us new revenue streams and added profitability. Most important, CoolBrands is now closer to complete vertical integration. With greater control over - and more profits related to - our products right up to the moment consumers take them off the shelf, we can be sure that consumers will buy more and more of our products. franchise operations Better Brands for Better Franchises We made significant strides in our franchising and licensing business in 2003, successfully testing the Tropicana'r' Smoothies, Juices & More! franchise concept in several markets prior to a full-scale launch in the U.S. and Canada in 2004. Prevailing economic conditions favor expanded opportunities for franchise growth, and Cool-Brands is well positioned to capitalize on these opportunities. In 2004, our focus for Yogen Fruz, Swensen's and Bresler's will be on developing new stores in Asia, Europe and the Middle East. In North America, however, we're turning on the juice ... Tropicana'r' Smoothies, Juices & More! Tropicana Smoothies, Juices & More! is ready for rollout after extensive test marketing. In one test store after another, in a wide variety of markets and retail formats, Tropicana'r' Smoothies, Juices & More! has proven its strong revenue - generating and profit - returning potential. Full-scale launch in North America is planned to commence in 2004. The Tropicana Smoothies, Juices & More! concept combines the peerless brand equity of Tropicana - the world's leading brand for premium chilled juices - with CoolBrands' expertise in developing franchise systems and retail store locations. Yogen Fruz'r' International expansion of Yogen Fruz franchises continued in 2003, with new store openings in Japan, Panama and Trinidad, while the brand maintained its position as the leading frozen yogurt brand in Canada. Swensen's'r' Swensen's Ice Cream was the first national ice cream parlor to serve a premium all-natural ice cream. Swensen's began in 1949 when Earle Swensen offered ice cream "as good as father used to make," and it's still enjoyed by customers around the world. Swensen's continued to demonstrate exceptional vitality in both the Pacific Rim and Middle East, with new store openings in China, Malaysia and Vietnam. Growth in the Middle East initiated in Kuwait, and additional areas are in negotiations. Bresler's'r' The Bresler's Ice Cream marquee is a magnet for anyone who loves the delicious taste of premium ice cream, frozen yogurt, sorbets and Italian ices. Founded during the Great Depression in the American Midwest, Bresler's remains one of America's premier ice cream brands. I Can't Believe It's Yogurt'r' I Can't Believe It's Yogurt pioneered the development of nonfat frozen yogurt and, in doing so, launched an entirely new market segment. Recognized as an industry leader in product innovation, ICBY was the first to develop complete product lines featuring fat-free frozen yogurt as well as fat-free, sugar-free frozen yogurt. manufacturing Better Technology for Better Brands & Products CoolBrands has engineered custom techniques that make us one of the fastest, most efficient ice cream producers in the world. Our vertical integration in manufacturing ingredients, products and packaging allows CoolBrands to better control costs and quality while capturing added revenue and profit by serving other customers as well as CoolBrands products. Our drive to be the premier innovator in the frozen dessert industry isn't limited to originality in consumer products and franchises. CoolBrands also leads the industry in developing new manufacturing technologies that help us improve efficiency and create products that satisfy the needs of consumers and our competitors find hard to duplicate. Better Through Vertical Integration Vertical integration enables us to control costs and quality and capture more of the total profit related to our brands. Our vertical supply chain operations - ingredient and packaging supply, finished goods manufacturing and DSD distribution - also create new profit centers from relationships with partner brands and elimination of non-essential vendors. Vertical integration is central both to our brand steward-ship and to our financial imperative to maximize profits. Americana Foods In 2003 CoolBrands acquired controlling interest in Americana Foods, substantially enhancing our manufacturing asset base. Americana Foods, as one of the largest and most versatile of all U.S. manufacturing facilities for frozen desserts, gave CoolBrands the additional production capacity we needed to support our rapid growth. It also augmented our technical resources - in particular, our ability to produce the extruded novelty forms increasingly desired by consumers - so that we could develop our brands in exciting new ways, as evidenced by our new products for 2004. Americana Foods operates a sophisticated pilot plant with a fully operational R&D laboratory. This gives CoolBrands a unique ability to make trial test runs of new products and samples for evaluation without impacting normal production operations, that's a luxury not available to ordinary frozen dessert plants, and it helps CoolBrands in its drive to innovate our way to category leadership. Value America Value America is the premier expert in the development of new flavors, ingredients, coatings and bases used in dairy products. Throughout its 75-year history, Value America has earned its reputation for quality with every product, including proprietary blends and specialty formulations. For CoolBrands' latest generation of Better for You products, Value America has been instrumental in developing cutting-edge solutions for formulating the very best low-carb, fat-free and no-sugar-added frozen treats. Value America is a major supplier of best-in-class flavoring powders, eggnog and sherbet bases, fruit packs, purees and stabilizers. Its customers include the very largest dairy suppliers in the U.S. Eskimo Pie Foodservice If you're in soft-serve ice cream or frozen yogurt, there's a very high likelihood that Eskimo Pie Foodservice supplies the high quality flavors and mixes for the tastes your customers count on every time. Eskimo Pie Foodservice supplies premium soft-serve mixes to customers throughout the foodservice industry all across America. We are the exclusive supplier of soft-serve mixes to some of the largest and most recognizable names in retailing and foodservice, including Sam's Club, Universal Studios, and many other leading operators throughout the United States. Sam-Pak Flexible Packaging In the increasingly competitive world of retail, the right packaging design is as important as the right product for the market. Impulse purchases depend heavily on what consumers see when they look in the freezer case, and what they see first isn't the product itself, it's the packaging. That's why Sam-Pak's expertise in creating food packaging that sells is so important. Sam-Pak Flexible Packaging specializes in the design and high-speed printing and production of paper, film and foil wraps for foodservice operations, food and sterile goods manufacturers, and the pharmaceuticals industry. Sam-Pak's precision printing processes are ideal for single-portion food and pharmaceuticals flexible packaging, using the latest materials developed for light weight and durability. Sam-Pak has years of experience in the demands of regulatory agencies, just-in-time delivery, and the lightning-fast pace of retail. That experience translates into the ability to reduce industry standard turnaround times by up to 50%. Excellence in quality assurance has earned Sam-Pak the coveted Superior rating from the American Institute of Baking. Ideas: the Key to Growth Whether it's new production methods, innovative and changing novelty forms, new formulations, or ingenious ways to beat the retail clock, CoolBrands' vertically integrated production resources are fueled by our most important assets - ideas. As a vigorous and innovative player in the retail marketplace, CoolBrands relies as much on ingenuity and bold new ideas as we do on the know-how to bring them to market. Without new products to power continuing growth, no company can reach its full potential. Thanks to the people who make our manufacturing facilities really work, from the R&D technicians and their invaluable artistry to the indispensable men and women on bustling production lines, CoolBrands is becoming a dynamic and highly profitable contender, leading the industry to the edges of the frozen desserts frontiers and beyond. 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 ----------------- ------------------- Year Ended August 31, 2003 2002 2003 2002 $ $ % % 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 Foods 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 ----------------- ------------------- Year Ended August 31, 2003 2002 2003 2002 $ $ % % 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 --------------- ------------------- Year Ended August 31, 2003 2002 2003 2002 $ $ % % 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 2003. 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. 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 acquisition from Nestle of substantially 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 manufacturing 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. AUDITORS' REPORT To the Shareholders 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 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 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. 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) 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 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 9): 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. 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. 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. 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. 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. 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 Whold Fruit'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 ====== ======
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 ===== =====
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 d epreciation 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 ===== =====
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. 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. $6,000,000 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. 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:
2002 1998 Stock 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 ===== ===== ==== ==== ====
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:
For the year ended August 31, 2003 $ ------ 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. 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 2,806 Beginning balance Actual return on plan assets 243 Contributions 42 Benefit payments (120) Translation gain (305) ----- Ending balance 2,666 =====
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 ===== 2,268 Accrued benefit cost =====
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. 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. 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. 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
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 INDUSTRY SEGMENTS: 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
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
board of directors and officers Directors Romeo DeGasperis Director Aaron Serruya Executive Vice-President & Director Michael Serruya Co-Chairman & Director David M. Smith Vice Chairman, Chief Operating Officer & Director Richard E. Smith Co-Chairman, Co-Chief Executive Officer & Director David J. Stein President, Co-Chief Executive Officer & Director Officers Gary P. Stevens Chief Financial Officer John Welty Jr. Vice-President, Franchising & Foodservice Stephen Bogyay Executive Vice-President, International Operations Timothy Timm Vice-President, Manufacturing & Quality Assurance John M. Kaczynski Senior Vice-President, Sales & Marketing J. Leo Glynn President, Eskimo Pie Frozen Distribution Inc. William J. Weiskopf President, Value America Flavors & Ingredients Paul Samuel Vice-President, Sam-Pak Flexible Packaging V. Stephen Kangisser Vice-President, Sales Fred Fullerton Vice-President, Sales- Foodservice John R. LeSauvage Vice-President, Operations Matthew P. Smith Vice-President, Marketing Manufacturing Plants Americana Foods LP 3333 Dan Morton Drive Dallas, TX, 75236, U.S.A. Telephone: 972-709-7100 CoolBrands Foodservice 301 North El Paso Russellville, AK, 72811, U.S.A. Telephone: 501-968-1005 Value America Flavors and Ingredients 2400 South Calhoun Rd. New Berlin, WI, 53151, U.S.A. Telephone: 262-784-3010 Sam-Pak Flexible Packaging 118 JFK Drive North Bloomfield, NJ, 07003, U.S.A. Telephone: 973-743-7100 Fruit-a-Freeze CoolBrands Manufacturing 12919 Leyva St. Norwalk, CA, 90650, U.S.A. Telephone: 562-407-2881 Corporate Information Canadian Head Office: 8300 Woodbine Avenue, 5th Floor Markham, Ontario, L3R 9Y7, Canada Telephone: 905-479-8762 www.yogenfruz.com yogenfruz@yogenfruz.com U.S.A. Head Office: 4175 Veterans Highway, 3rd Floor Ronkonkoma, New York, 11779, U.S.A. Telephone: 631-737-9700 www.coolbrandsinc.com International Head Office: Kayla Foods Int'l (Barbados) Inc. 27 Pine Road, Belleville St. Michael, Barbados, W. I. Telephone: 246-228-9505 info@kaylafoodsintl.com Auditor: BDO Dunwoody LLP Royal Bank Plaza P.O. Box 32 Toronto, Ontario, M5J 2J8 Canada Listing of Subordinate Voting Shares: The Toronto Stock Exchange Trading Symbol "COB.A" Canadian Legal Representation: Stikeman Elliott LLP Commerce Court West, 53rd Floor Toronto, Ontario, M5L 1B9, Canada American Legal Representation: Blank Rome LLP The Chrysler Building 405 Lexington Avenue New York, New York, 10174-0208, U.S.A. Transfer Agent: Equity Transfer Services Inc. 120 Adelaide Street West, Suite 420 Toronto, Ontario M5H 3V1, Canada Annual Meeting: The Annual Meeting of Shareholders will be held on Friday, February 27th, 2004 at 10:00 a.m. The Hilton Toronto (Toronto I Room) 145 Richmond Street, West Toronto, Ontario M5H 2L2 This measure is disclosed at the request of Canadian investors. The following table reconciles Net earnings to Ebitda:
For the Year Ended August 31, 2003 2002 ------ ------ $ $ ------ ------ Net earnings 31,704 20,984 Income taxes 20,080 11,890 Depreciation and amortization 4,801 4,646 Interest expense 1,990 2,544 ------ ------ Ebitda 58,575 40,064 ====== ======
EX-99 4 ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 COOLBRANDS INTERNATIONAL INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS (Revised) NOTICE IS HEREBY GIVEN that the annual and special meeting of shareholders of CoolBrands International Inc. (the "Corporation") will be held at The Hilton Toronto (Toronto I Room), 145 Richmond Street West, Toronto, Ontario, on February 27, 2004, at 10:00 a.m. (Toronto time) (the "Meeting") for the following purposes: 1. to consider and receive the financial statements of the Corporation for the year ended August 31, 2003, together with the report of the auditor thereon; 2. to elect directors of the Corporation; 3. to recommend the re-appointment of BDO Dunwoody LLP as the auditor of the Corporation and to authorize the directors to fix the auditor's remuneration; 4. to consider, and if thought advisable, approve, a resolution providing for an amendment to the Corporation's 2002 Stock Option Plan; and 5. to transact such other business as properly may be brought before the meeting or any adjournments or postponements thereof. Holders of multiple voting shares and subordinate voting shares who are unable to attend the meeting in person are requested to sign and return the enclosed form of proxy in the envelope provided for that purpose. To be effective, proxies must be received before 5:00 p.m. (Toronto time) on February 24, 2004 by Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1, or by facsimile at 416-361-0470, or by the close of business on the second business day preceding the date of any adjourned or postponed meeting, or be presented prior to the commencement of the Meeting or any adjourned or postponed meeting. The Corporation's Annual Report for the year ended August 31, 2003, and management information circular are enclosed with this notice of meeting. Only shareholders of record at the close of business on January 12, 2004 are entitled to notice of the meeting and any adjournment or postponement thereof, while only shareholders of record as of the close of business on January 20, 2004 are entitled to vote at the meeting, except to the extent that a person has transferred any multiple voting shares or subordinate voting shares after that date and the new holder of such shares establishes proper ownership and demands not later than 10 days before the date of the meeting to be included in the list of shareholders eligible to vote at the meeting. DATED at Markham this 27th day of January, 2004 BY ORDER OF THE BOARD OF DIRECTORS /s/ Aaron Serruya -------------------------------------- Aaron Serruya Secretary COOLBRANDS INTERNATIONAL INCORPORATED MANAGEMENT INFORMATION CIRCULAR (Revised) Solicitation of Proxies This management information circular is furnished in connection with the solicitation of proxies by or on behalf of the management of COOLBRANDS INTERNATIONAL INC. (the "Corporation") for use at the annual and special meeting of shareholders of the Corporation (the "Meeting") to be held at the time and place and for the purposes set forth in the attached notice of annual and special meeting of shareholders (the "Notice of Meeting"). It is expected that the solicitation cost will be borne by the Corporation. All references in this management information circular to the "Meeting" include references to any adjournments or postponements thereof. Appointment And Revocation Of Proxies The persons named in the enclosed form of proxy are directors of the Corporation. A shareholder has the right to appoint a person (who need not be a shareholder) to attend and act for him and on his behalf at the Meeting other than the persons designated in the enclosed form of proxy. Such right may be exercised by striking out the names of the persons designated in the enclosed form of proxy and by inserting in the blank space provided for that purpose the name of the desired person or by completing another proper form of proxy. To be effective, proxies must be received before 5:00 p.m. (Toronto time) on February 24, 2004 by Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1, or by facsimile at 416-361-0470, or by the close of business on the second business day preceding the date of any adjourned or postponed meeting, or be presented prior to the commencement of the Meeting or any adjourned or postponed meeting. A shareholder forwarding the enclosed proxy may indicate the manner in which the appointee is to vote with respect to any specific item by checking the appropriate space. If the shareholder giving the proxy wishes to confer a discretionary authority with respect to any item of business then the space opposite the item is to be left blank. In accordance with section 85B(4) of the Company Act (Nova Scotia) (the "Act"), a shareholder who has given a proxy may revoke it at any time to the extent that it has not been exercised. A proxy may be revoked, as to any manner on which a vote shall not already have been cast pursuant to the authority conferred by such proxy, by instrument in writing executed by the shareholder or by his attorney authorized in writing or, if the shareholder is a body corporate, under its corporate seal or by an officer or attorney thereof duly authorized and deposited either with the Corporation or its transfer agent at any time up to and including the last business day preceding the day of the Meeting, or any adjournment thereof, at which the proxy is to be used or with the Chairman of the Meeting on the date of the Meeting, or any adjournment thereof, and upon either of such deposits the proxy is revoked. A proxy may also be revoked in any other manner permitted by law. Exercise Of Discretion Of Proxies The persons named in the enclosed form of proxy will vote the shares in respect of which they are appointed in accordance with the direction of the shareholders appointing them. In the absence of such direction, such shares will be voted in favour of the nominees proposed below for election as directors and in favour of the appointment of BDO Dunwoody LLP as the auditor of the Corporation. The enclosed form of proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the Notice of Meeting and with respect to other matters which may properly come before the Meeting. As at the date of this management information circular, management knows of no such amendments, variations or other matters to come before the Meeting other than the matters referred to in the Notice of Meeting. Voting Securities And Principal Holders Thereof On January 12, 2004, 6,033,282 multiple voting shares and 49,609,822 subordinate voting shares in the capital of the Corporation were issued and outstanding. Each multiple voting share entitles the registered holder thereof to ten votes at all meetings of shareholders. Each subordinate voting share entitles the registered holder thereof to one vote at all meetings of shareholders. Subject to the following paragraph, all voting shareholders of record as of the record date are entitled either to attend and vote thereat in person the shares held by them or, provided a completed and executed proxy shall have been delivered to Equity Transfer Services Inc. within the time specified herein, to vote thereat by proxy the shares held by them. The Corporation has fixed January 12, 2004, as the record date for the purpose of determining shareholders entitled to receive notice of, and to vote at, the Meeting. In accordance with the provisions of the Act, the Corporation will prepare a list of holders of shares at the close of business on the record date. Each holder of voting shares named in the list will be entitled to vote at the Meeting the shares shown opposite his name on the list except to the extent that: (a) the shareholder has transferred any of his shares after the date on which the list was prepared; and (b) the transferee of those shares produces properly endorsed share certificates or otherwise establishes that he owns such shares and demands not later than 10 days before the Meeting that his name be included in the list of shareholders eligible to vote at the Meeting, in which case the transferee is entitled to vote his shares at the Meeting. To the knowledge of the directors and senior officers of the Corporation, the only persons, firms or corporations which beneficially own or exercise control or direction over securities of the Corporation carrying more than ten percent of the voting rights attached to any class of outstanding voting securities of the Corporation is The Serruya Family Trust which, directly and indirectly, owns 4,233,332 multiple voting shares of the Corporation or approximately 38.5% of the votes attaching to all outstanding shares. The Serruya Family Trust was created and settled for the benefit of certain members of the Serruya family of Toronto, Ontario. Certain members of the Serruya family serve as directors and officers of the Corporation. In addition, Richard E. Smith, David M. Smith and David J. Stein hold 1,419,467, 288,106 and 45,138 multiple voting shares, representing 12.9%, 2.6% and 0.4% of the votes attaching to all outstanding shares of the Corporation, respectively. Michael Serruya and Aaron Serruya currently own 56,000 and 56,149 subordinate voting shares, respectively, representing 0.05% and 0.05% of the votes attaching to all outstanding shares of the Corporation. Richard E. Smith owns 8,300 subordinate voting shares, representing approximately 0.01%of the votes attaching to all outstanding shares of the Corporation, respectively. Pursuant to a Board Representation Agreement described below under "Election of Directors - Board Representation Agreement", The Serruya Family Trust, Michael Serruya, Aaron Serruya, Richard E. Smith, David M. Smith and David J. Stein have agreed with each other to vote all of their respective shares of the Corporation, representing in the aggregate 54.6% of the votes attaching to all outstanding shares of the Corporation, in favour of the nominees proposed below for election as directors. Voting Of Subordinate Voting Shares - Advice To Beneficial Shareholders The information set forth in this section is of significant importance to holders of subordinate voting shares who hold their subordinate voting shares in "book-entry" form, meaning that they are held through brokers and nominees and not in their own name. Holders of subordinate voting shares who do not hold their subordinate voting shares in their own name (referred to in this circular as beneficial shareholders) should note that only proxies deposited by holders of subordinate voting shares whose names appear on the records of the Corporation as the registered holders of subordinate voting shares can be recognized and acted upon at the Meeting. If subordinate voting shares are listed in an account statement provided to a holder of subordinate voting shares by a broker, then in almost all cases those subordinate voting shares will not be registered under the name of the holder on the records of the Corporation. Such subordinate voting shares will more likely be registered under the name of the beneficial shareholder's broker, or an agent or nominee of that broker. Subordinate voting shares held by brokers or their agents and nominees can only be voted for, or withheld from voting, or voted against, any resolution, upon the instructions of the beneficial shareholder. Without specific instructions, brokers and their agents and nominees are prohibited from voting the securities for their clients. Applicable Canadian regulatory policy requires intermediaries and brokers to seek voting instructions from beneficial shareholders in advance of a meeting of shareholders of the Corporation. Every intermediary and broker has its own mailing procedures and provides its own return instructions, which should be carefully followed by beneficial shareholders in order to ensure that their subordinate voting shares are voted at the Meeting. Often, the form of proxy supplied to a beneficial shareholder by its broker is identical to the form of the proxy provided to registered holders of subordinate voting shares; however, its purpose is limited to instructing the registered holder of subordinate voting shares how to vote on behalf of the beneficial shareholder. A beneficial shareholder receiving a proxy from an intermediary cannot use that proxy to vote subordinate voting shares directly at the Meeting, rather the proxy must be returned to the intermediary well in advance of the Meeting in order to have the subordinate voting shares voted. ELECTION OF DIRECTORS Six directors will be elected at the Meeting and unless authority to do so is withheld, the persons named in the enclosed form of proxy intend to vote for the election of the nominees whose names are set forth below. Management does not contemplate that any of the nominees will be unable to serve as a director but if that should occur for any reason prior to the Meeting, it is intended that discretionary authority shall be exercised by the persons named in the enclosed form of proxy to vote the proxy for the election of any other person or persons in place of any nominee or nominees unable to serve. Each director elected will hold 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 Memorandum and Articles of Association and the Act. The statement as to the shares of the Corporation beneficially owned or over which control or direction is exercised by the nominees for election as directors hereinafter named is in each instance based upon information furnished by the person concerned. The names of the nominees for election as directors, their municipality of residence, their positions with the Corporation, the year they become a director of the Corporation and the number of shares beneficially owned, directly or indirectly, or over which control or direction is exercised is as follows:
- --------------------------------------------------------------------------------------------------- Number of Number of Multiple Voting Subordinate Year Shares Voting Shares Became Principal Beneficially Beneficially Name Director Occupation and Business Held Held - --------------------------------------------------------------------------------------------------- Michael Serruya (2)(3) 1994 Co-Chairman of the Board 4,233,332(1) 56,000 Thornhill, Ontario - --------------------------------------------------------------------------------------------------- Richard E. Smith (2)(3) 1998 Co-Chairman of the Board 1,419,467 8,300 Ronkonkoma, New York & Co-Chief Executive Officer - ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- David J. Stein (4) 1998 President, Co-Chief 45,138 -- Ronkonkoma, New York Executive Officer - --------------------------------------------------------------------------------------------------- Aaron Serruya 1994 Executive Vice President 4,233,332(1) 56,149 Thornhill, Ontario & Secretary - --------------------------------------------------------------------------------------------------- Romeo DeGasperis (2)(3)(4) 2000 Director, Vice President -- -- Toronto, Ontario Con-Drain Company Ltd. - --------------------------------------------------------------------------------------------------- David M. Smith (2)(3) 1998 Vice-Chairman and Chief 288,106 -- Ronkonkoma, New York Operating Officer - ---------------------------------------------------------------------------------------------------
(1) Includes 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. (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. 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. 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. 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. The Corporation does not have an executive committee of its Board of Directors. Board Representation Agreement In connection with the acquisition on March 18, 1998 of Integrated Brands Inc. by a wholly-owned subsidiary of the Corporation, Messrs. Richard E. Smith, David M. Smith and David J. Stein ("Integrated Brands Principal Shareholders") and Integrated Brands Inc., on the one hand, and the Corporation and The Serruya Family Trust, 1082272 Ontario Inc., Michael Serruya and Aaron Serruya ("CoolBrands Principal Shareholders"), on the other hand, entered into a Board Representation Agreement (the "Board Representation Agreement") pursuant to which the Corporation agreed to nominate for the election of directors qualified individuals, 50% of whom are recommended by the Integrated Brands Principal Shareholders and 50% of whom are recommended by the CoolBrands Principal Shareholders. Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders agreed to vote their multiple voting shares and subordinate voting shares in the capital of the Corporation in favour of each other's nominees to the Board of Directors of the Corporation. Pursuant to the terms of the Board Representation Agreement, Messrs. Michael Serruya, Aaron Serruya and Romeo DeGasperis were nominated by the CoolBrands Principal Shareholders and Messrs. Richard E. Smith, David M. Smith and David J. Stein were nominated by the Integrated Brands Principal Shareholders. Pursuant to the terms of the Board Representation Agreement, the Corporation agreed to solicit proxies from its shareholders for above-mentioned nominees to the Corporation's Board of Directors and to cause management proxies to be voted in favour of such nominees. The Corporation's obligations under the Board Representation Agreement to solicit proxies terminates: (i) with respect to the nominees of the Integrated Brands Principal Shareholders, if the Integrated Brands Principal Shareholders own, in the aggregate, less than 500,000 voting securities (including voting securities issuable upon exercise or conversion of convertible securities); or (ii) with respect to the nominees of the CoolBrands Principal Shareholders, if the CoolBrands Principal Shareholders own, in the aggregate, less than 1,000,000 voting securities (including voting securities issuable upon exercise or conversion of convertible securities). In the event any director of the Corporation nominated by either the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders ceases to be a director of the Corporation for any reason, each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders has agreed to use its best efforts, promptly upon the request of the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders, as the case may be, to cause to be elected or appointed a legally qualified individual nominated by either the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders, as the case may be, to replace such director. In the event that the laws of the jurisdiction of incorporation of the Corporation are changed in a manner which prevents the Integrated Brands Principal Shareholders from nominating and electing non-residents of Canada as their respective nominees to the Corporation's Board of Directors, the CoolBrands Principal Shareholders have agreed to co-operate with the Integrated Brands Principal Shareholders in causing the Corporation to take all necessary action to ensure that the Integrated Brands Principal Shareholders are entitled to nominate and elect non-residents of Canada as their director nominees (including, without limitation, continuing the Corporation from its current jurisdiction of incorporation to another jurisdiction within Canada which permits at least 50% of the directors to be non-Canadian). Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have agreed to use its best efforts, and to take all actions to ensure that (i) Michael Serruya and Richard E. Smith are elected as the Co-Chairman of CoolBrands and each subsidiary; (ii) that Richard E. Smith and David J. Stein are elected as Co-Chief Executive Officers of CoolBrands and each subsidiary; and (iii) that the Board of Directors of CoolBrands and the Board of Directors of each direct and indirect subsidiary of CoolBrands, and each Committee of the Board of Directors of CoolBrands and each Committee of the Board of Directors of each direct and indirect subsidiary of CoolBrands shall be comprised of members, 50% of whom are designated jointly by the Integrated Brands Principal Shareholders and 50% of whom shall be designated jointly by the CoolBrands Principal Shareholders. Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have also agreed to vote against: (i) the sale of all or substantially all of the Corporation's assets; (ii) a merger, consolidation or similar transaction involving the Corporation; or (iii) an amendment to the Memorandum of the Association and/or the Articles of Association of the Corporation which would adversely affect the rights of the Integrated Brands Principal Shareholders or the CoolBrands Principal Shareholders, unless the Integrated Brands Principal Shareholders and the CoolBrands Principal Shareholders agree in writing to vote for any such matters. Pursuant to the terms of the Board Representation Agreement, each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders agreed to certain restrictions relating to resales of voting securities of the Corporation. Subject to certain exemptions, until the first to occur of: (i) the termination of the Board Representation Agreement; or (ii) the 21st anniversary of the Board Representation Agreement; the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have each agreed not to sell any voting securities of the Corporation to an unrelated third party without the prior written consent of the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders, as the case may be, and to first offer such voting securities to the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders, as the case may be, at the market price for such voting securities as of the date of the offer. Pursuant to the Board Representation Agreement, prior to any sale to a third party, any multiple voting shares must be converted to subordinate voting shares. In addition, the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have agreed not to convert, or cause to be converted, any multiple voting shares into subordinate voting shares, without the prior written consent of the CoolBrands Principal Shareholders or the Integrated Brands Principal Shareholders, as the case may be. The CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have deposited with an escrow agent the multiple voting shares held by them. Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have agreed not to accept an offer to sell any voting securities at a price in excess of the market price of the voting securities on the date of such offer, except: (i) sales made on The Toronto Stock Exchange ("TSX") or any other regional or national exchange, outside or inside Canada, on which such securities are regularly traded; (ii) to another principal shareholder; or (iii) pursuant to an offer made proportionately and at the same price to all other shareholders of the Corporation. The Board Representation Agreement may be terminated: (i) by the CoolBrands Principal Shareholders in the event that the Integrated Brands Principal Shareholders are the beneficial owners, in the aggregate, of fewer than 750,000 voting securities (including voting securities issuable upon the conversion or exercise of convertible securities); and (ii) by the Integrated Brands Principal Shareholders, in the event the CoolBrands Principal Shareholders are the beneficial owners, in the aggregate, of fewer than 1,500,000 voting securities (including voting securities issuable upon the conversion or exercise of convertible securities). EXECUTIVE COMPENSATION Compensation of Officers The following sets forth all compensation earned for the years ended August 31, 2003, August 31, 2002 and August 31, 2001 by the Corporation's Co-Chief Executive Officers and the Corporation's other executive officers who received aggregate compensation during the fiscal year ended August 31, 2003, equal to or greater than $100,000 (collectively, the "Named Executive Officers") Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended Annual Compensation Long-Term Compensation ----------------------------------------------------------------- Other Annual Securities Under All Other Name and Salary Bonus Compensation (1) Options Granted (2) Compensation (3) Principal Position ($) ($) ($) (#) ($) - ------------------------------------------------------------------------------------------------------------------- Michael Serruya 2003 320,000 -- 25,864 191,666 -- Co-Chairman 2002 320,000 -- 25,864 -- -- 2001 320,000 -- 32,193 277,500 -- - ------------------------------------------------------------------------------------------------------------------- Richard E. Smith 2003 (4) -- -- 225,000 -- Co-Chairman & Co- 2002 (4) -- -- -- -- Chief Executive 2001 (4) -- -- 675,000 -- Officer - ------------------------------------------------------------------------------------------------------------------- David J. Stein 2003 US 326,442 US 60,000 US 7,571 225,000 US 1,820 President, Co-Chief 2002 US 261,923 US 60,000 US 7,571 -- US 1,630 Executive Officer 2001 US 249,519 -- US 7,854 375,000 US 1,575 - ------------------------------------------------------------------------------------------------------------------- Aaron Serruya 2003 320,000 -- 36,717 191,666 -- Executive Vice- 2002 320,000 -- 44,461 -- -- President 2001 320,000 -- 53,226 277,500 -- - ------------------------------------------------------------------------------------------------------------------- David M. Smith 2003 US 99,808(5) -- -- 191,666 -- Chief Operating 2002 (5) -- -- -- -- Officer 2001 (5) -- -- 420,000 -- - ------------------------------------------------------------------------------------------------------------------- William J. Weiskopf 2003 US 140,000 US 42,000 -- -- US 1,604 President, Value 2002 US 140,000 US 30,000 -- -- US 1,516 America Flavors And 2001 US 140,000 -- -- 25,000 US 485 Ingredients - -------------------------------------------------------------------------------------------------------------------
(1) These amounts represent the imputed value of interest-free loans made by the Corporation to Michael Serruya and Aaron Serruya, certain health benefits made available to Michael Serruya and Aaron Serruya and the value of a car benefit. (2) Options to purchase subordinate voting shares granted pursuant to the Corporation's stock option plan. (3) These amounts represent the Corporation's contribution to employee's 401K plans. (4) Richard E. Smith is paid by Calip Dairies, Inc. (an ice cream distributor owned by Mr. Richard E. Smith and members of his family). Pursuant to the terms of a Management Agreement between Calip Dairies, Inc. and Integrated Brands, Calip Dairies receives a fixed fee of US$1,300,000 per year effective July 1, 2003, prior to which the fee was US$1,000,000 per year, for providing a variety of management services. Pursuant to the Agreement, Calip Dairies, Inc. has agreed to make available its Chairman and/or Chief Executive Officer (currently Richard E. Smith) to Integrated Brands, to provide the assistance of other officers and personnel from Calip Dairies, Inc. and to make available a portion of Calip Dairies' office space and utilities and office furniture and equipment. The management fee paid by Integrated Brands to Calip Dairies, Inc. does not represent a material portion of Calip Dairies' revenues. (5) David M. Smith is paid by Calip Dairies, Inc. Effective January 1, 2003 when he became Chief Operating Officer of the Corporation, Mr. David Smith is paid a salary of US $150,000 per year by the Corporation. Options Granted During the fiscal year ended August 31, 2003, options were granted to the Named Executive Officers.
- --------------------------------------------------------------------------------------------- Market Value Securities % of Total of Securities Under Options Underlying Options Granted to Exercise or Options on Granted Employees In Base Price Date of Grant Expiration Name (#) Fiscal Year ($/Security) ($/Security) Date - --------------------------------------------------------------------------------------------- Michael Serruya 191,666 14.7 5.00 5.00 January 23, 2008 - --------------------------------------------------------------------------------------------- Aaron Serruya 191,666 14.7 5.00 5.00 January 23, 2008 - --------------------------------------------------------------------------------------------- David M. Smith 191,666 14.7 5.00 5.00 January 23, 2008 - --------------------------------------------------------------------------------------------- David J. Stein 225,000 17.3 5.00 5.00 January 23, 2008 - --------------------------------------------------------------------------------------------- Richard E. Smith 225,000 17.3 5.00 5.00 January 23, 2008 - ---------------------------------------------------------------------------------------------
Option Exercise and Year-End Values Table The following table summarizes the number and value of options held, or exercised during the fiscal year ending August 31, 2003 by the Named Executive Officers.
- ------------------------------------------------------------------------------------------- Value of Unexercised in- Shares Unexercised the-Money Acquired on Options Options Exercise Aggregate Value Exercisable/Un- Exercisable/Un- Name (#) Realized ($) Exercisable (#) exercisable ($) (1) - ------------------------------------------------------------------------------------------- Michael Serruya NIL NIL 395,156/NIL 5,341,045/NIL - ------------------------------------------------------------------------------------------- Richard E. Smith NIL NIL 672,240/NIL 9,493,486/NIL - ------------------------------------------------------------------------------------------- Aaron Serruya NIL NIL 395,156/NIL 5,341,045/NIL - ------------------------------------------------------------------------------------------- David M. Smith NIL NIL 1,390,972/NIL 17,738,740/NIL - ------------------------------------------------------------------------------------------- David J. Stein NIL NIL 846,106/NIL 12,032,778/NIL - ------------------------------------------------------------------------------------------- William J. Weiskopf 17,500 82,250 NIL/7,500 NIL/122,250 - -------------------------------------------------------------------------------------------
(1) Market value of underlying subordinate and multiple voting shares as at August 29, 2003, being $17.55 minus the exercise price of the options. Compensation of Directors Non-independent Directors of the Corporation did not receive any fees and/or any other type of compensation in fiscal 2003 for acting as such. Romeo DeGasperis, an independent Director, received 15,000 options in fiscal 2003. Directors' And Officers' Liability Insurance The Corporation carries directors' and officers' liability insurance coverage with an annual policy limit of $10,000,000, subject to a deductible of $150,000 per claim. The premium paid for renewal of the coverage during the fiscal year ended August 31, 2003 was $65,880, all of which was paid by the Corporation. Management Agreement Integrated Brands Inc., a wholly-owned subsidiary of the Corporation, has entered into a management agreement with Calip Dairies, Inc., a New Jersey corporation controlled by Mr. Richard E. Smith, which was amended in fiscal 2003. The amended agreement provides for an annual management fee of US$1,300,000, effective July 1, 2003, prior to which the fee was US $1,000,000 per year. Pursuant to the agreement, Calip Dairies, Inc. has agreed to make its Chairman and/or Chief Executive Officer, (currently Mr. Richard E. Smith) available to Integrated Brands Inc., to provide the assistance of other officers and personnel from Calip Dairies and to make available a portion of Calip Dairies' office space and utilities and office furniture and equipment. The amended agreement continues until December 31, 2013 and thereafter renews automatically on December 31 of each year for an additional one year term, provided that as of such date at least 50% of the issued and outstanding shares of Calip Dairies, Inc. are beneficially owned by Richard Smith, Susan Smith, David Smith and/or David Stein, unless Calip Dairies, Inc. gives Integrated Brands Inc. written notice on or before September 30th of that same year that Calip Dairies, Inc. will not renew the agreement, in which event the agreement terminates effective on December 31 following such notice. The obligations of Integrated Brands Inc. under the agreement are guaranteed by the Corporation. Employment Agreements Integrated Brands Inc., a wholly owned subsidiary of the Corporation, has entered into an employment agreement with David J. Stein, which was amended in fiscal 2003. The amended agreement provides for an annual salary of US$265,000 in calendar 2002, US$280,000 from January 1, 2003 until May 31, 2003, US$490,000 from June 1, 2003 until December 31, 2003, US$500,000 in calendar 2004, US$520,000 in calendar 2005, US$540,000 in calendar 2006, US$560,000 in calendar 2007, US$580,000 in calendar 2008, US$600,000 in calendar 2009, US$620,000 in calendar 2010, US$640,000 in calendar 2011, US$660,000 in calendar 2012, US$680,000 in calendar 2013 and US$700,000 in any subsequent calendar year. The agreement may be terminated after December 31, 2013, with or without cause, on 90 days notice. In the event that the agreement is terminated by Integrated Brands Inc. without cause, Integrated Brands Inc. must pay Mr. Stein a severance amount equal to 36 months salary at the annual rate in effect as of the date of termination. The obligations of Integrated Brands Inc. under the agreement are guaranteed by the Corporation. The Corporation has entered into five-year employment agreements with Michael Serruya and Aaron Serruya, each dated April 9, 1999, which were amended in fiscal 2004. The amended agreements provide for base salaries of $320,000 & $320,000 until October 4, 2003 and thereafter $420,000 & $420,000, respectively, per annum, increasing by the rate of inflation annually on the anniversary of the employment agreement, and a bonus of up to $100,000 per year, respectively, paid on the anniversary of the employment agreement, determined as follows: (A) 50% of such bonus based on earnings of the Corporation; and (B) 50% of such bonus based on reasonable standards of personal performance and earnings performance of CoolBrands. Each employment agreement provides for a severance payment in the amount of $500,000 to be made to the officer on the termination for any reason of the employment agreement or on the failure of the Corporation to renew the employment agreement upon the expiration of its term. In fiscal 2003, base salaries for Michael Serruya and Aaron Serruya were $320,000 and $320,000, respectively. No bonuses were paid for fiscal 2003 under the employment agreements. INDEBTEDNESS OF DIRECTORS AND OFFICERS No individual who was a director, executive officer or senior officer of the Corporation at any time during the fiscal year ended August 31, 2003, or any associate or affiliate thereof is indebted to the Corporation. As of the date of this Notice, no officers, directors or employees of the Corporation or their associates were indebted to the Corporation. REPORT ON EXECUTIVE COMPENSATION At August 31, 2003, the Compensation Committee was comprised of the following four directors: Michael Serruya, Romeo DeGasperis, Richard E. Smith and David M. Smith. The mandate of the Compensation Committee includes the responsibility of reviewing and recommending to the Board of Directors for its approval the compensation programs for the Corporation's executive officers. The executive compensation policies of the Corporation are designed to recognize and reward individual performance as well as provide a competitive level of compensation. The Corporation's philosophy is to reward both adequately and competitively its executives for their short-term compensation. Base salaries and salary ranges for each position are determined by evaluating the responsibilities of each executive's position as well as the experience and knowledge of the individual. The above are periodically reviewed and adjusted accordingly. Individual salary increases to executives within the set ranges take into account their current performance against expected targets, overall contribution to the Corporation and market conditions. Base salary levels for all executive officers (excluding the Chief Executive Officers) are determined based upon performance, and are intended to achieve the following objectives: (a) to attract and retain executives and senior management required for the success of the Corporation; (b) to motivate performance; (c) to provide fair and competitive compensation commensurate with an individual's experience and expertise; and (d) to reward individual performance and contribution to the achievement of the Corporation's objectives. Executive Compensation for the Co-Chief Executive Officers The cash compensation paid by the Corporation to Mr. David J. Stein, one of the Co-Chief Executive Officers, is set through an employment agreement, which is described above. The Compensation Committee assesses the performance of Mr. David J. Stein on an annual basis when awarding bonuses pursuant to his employment agreement. The other Co-Chief Executive Officer, Mr. Richard E. Smith, is paid by Calip Dairies, Inc. (an ice cream distributor owned by Mr. Richard E. Smith and members of his family) pursuant to the terms of a Management Agreement under which Calip Dairies, Inc. receives a fixed fee of US$1,300,000 per year effective July 1, 2003, prior to which the fee was US$1,000,000 for providing a variety of management services. One of these services provided by Calip Dairies, Inc. is to make its Chairman and/or Chief Executive Officer (currently Mr. Richard E. Smith) available to Integrated Brands. There is no pension plan of the Corporation in which executive officers or other employees may participate. Submitted on behalf of the Compensation Committee: Michael Serruya (Co-Chairman of the Board) Richard E. Smith (Co-Chairman of the Board) David M. Smith Romeo DeGasperis RELATIVE PERFORMANCE GRAPH On August 29, 2003, the closing price of a subordinate voting share of the Corporation on The Toronto Stock Exchange was $17.55 per subordinate voting share. The following graph compares the Corporation's cumulative total shareholder return from September 1, 1998 to August 31, 2003 with cumulative returns of the S&P/TSX Composite and the TSX Consumer Products Index for the same period. Relative Performance Graph [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.] 300 Consumer YF Sep-94 75 65 8 Oct-94 74 65 8 Nov-94 70 63 8 Dec-94 73 65 8 Jan-95 69 65 8 Feb-95 71 67 8 Mar-95 74 70 22 Apr-95 74 65 20 May-95 77 71 29 Jun-95 78 78 25 Jul-95 79 81 30 Aug-95 78 82 38 Sep-95 78 81 34 Oct-95 77 82 33 Nov-95 80 83 37 Dec-95 81 82 37 Jan-96 86 87 53 Feb-96 85 84 49 Mar-96 86 80 63 Apr-96 89 85 56 May-96 90 88 53 Jun-96 87 84 53 Jul-96 85 79 46 Aug-96 89 81 49 Sep-96 91 89 49 Oct-96 96 90 47 Nov-96 104 96 48 Dec-96 102 97 48 Jan-97 105 101 55 Feb-97 106 101 63 Mar-97 101 95 67 Apr-97 103 96 75 May-97 110 102 82 Jun-97 111 103 92 Jul-97 118 105 103 Aug-97 114 100 102 Sep-97 121 106 125 Oct-97 118 104 122 Nov-97 112 104 104 Dec-97 115 103 108 Jan-98 115 108 106 Feb-98 122 112 141 Mar-98 130 114 154 Apr-98 132 119 205 May-98 131 122 195 Jun-98 127 119 200 Jul-98 119 115 177 Aug-98 95 97 137 S&P/TSX Composite Consumer Products COB.A Sep-98 100 100 100 Oct-98 99 99 98 Nov-98 110 110 72 Dec-98 110 117 80 Jan-99 115 129 57 Feb-99 112 132 47 Mar-99 112 131 36 Apr-99 120 130 53 May-99 119 130 56 Jun-99 119 140 46 Jul-99 123 148 45 Aug-99 121 147 40 Sep-99 120 143 36 Oct-99 125 142 29 Nov-99 130 147 24 Dec-99 145 156 28 Jan-00 146 168 21 Feb-00 157 186 25 Mar-00 163 147 26 Apr-00 161 150 23 May-00 159 151 23 Jun-00 176 174 21 Jul-00 179 164 21 Aug-00 194 180 22 Sep-00 177 180 20 Oct-00 179 173 18 Nov-00 173 172 14 Dec-00 168 160 14 Jan-01 161 159 23 Feb-01 154 172 24 Mar-01 147 158 20 Apr-01 144 154 21 May-01 141 164 28 Jun-01 136 163 32 Jul-01 134 165 34 Aug-01 133 169 34 Sep-01 118 161 28 Oct-01 119 167 26 Nov-01 128 182 48 Dec-01 132 191 53 Jan-02 132 177 62 Feb-02 132 178 70 Mar-02 135 185 85 Apr-02 132 167 86 May-02 132 160 96 Jun-02 123 151 109 Jul-02 114 138 103 Aug-02 114 140 113 Sep-02 106 130 109 Oct-02 108 139 90 Nov-02 113 144 82 Dec-02 114 137 82 Jan-03 113 136 79 Feb-03 113 141 76 Mar-03 109 143 110 Apr-03 113 144 120 May-03 118 161 144 Jun-03 120 163 205 Jul-03 125 165 252 Aug-03 129 167 268
STATEMENT OF CORPORATE GOVERNANCE PRACTICES The Toronto Stock Exchange Company Manual sets out a series of guidelines for effective corporate governance. These guidelines deal with matters such as the constitution and independence of corporate boards, their functions, the effectiveness and education of board members and other items dealing with sound corporate governance. The TSX requires that each listed company disclose on an annual basis its approach to corporate governance. The Corporation's disclosure with respect to the guidelines is set out in Schedule "A" to this management information circular. The disclosure statement has been prepared by the Corporate Governance Committee of the Board of Directors and has been approved by the Board of Directors. INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS The only material transactions within the last three years in which any director, senior officer, principal shareholder or any associate or affiliate of the foregoing has or had an interest in are as follows: (a) Yogen Fruz International, Ltd., a corporation whose sole shareholder is The Serruya Family Trust, a significant shareholder of the Corporation, routinely enters into leases with commercial landlords for the premises used by the Corporation's Canadian franchisees and sublets such premises to such franchisees. Yogen Fruz International, Ltd. does not earn any fees or premium on such leases. The Corporation holds a 50 year option to acquire all of the issued and outstanding shares of Yogen Fruz International Ltd. ; and (b) Integrated Brands Inc., a wholly owned subsidiary of the Corporation, has entered into a distribution agreement with Calip Dairies, Inc. ("Calip"), a company controlled by Richard E. Smith, dated October 13, 1997. Pursuant to the agreement, Integrated Brands Inc. has appointed Calip as its exclusive distributor for any ice cream or other frozen dessert product manufactured by, on behalf of, or under authority of Integrated Brands Inc., its subsidiaries, affiliates or successors in the State of New Jersey and certain areas in the State of New York and the State of Connecticut. The agreement continues until December 31, 2007 and thereafter renews automatically on December 31 of each year for an additional one year term, provided that as of such date at least 50% of the issued and outstanding shares of Calip are beneficially owned by Richard Smith, Susan Smith, David Smith and/or David Stein, unless Calip gives Integrated Brands Inc. written notice on or before September 30th of that same year that Calip will not renew the agreement, in which event the agreement terminates effective on December 31 following such notice. The Corporation has agreed to guarantee the performance of the distribution agreement. Integrated Brands Inc. has also entered into a Management Agreement with Calip as described above under "Executive Compensation - Management Agreement". APPOINTMENT OF AUDITOR Unless authority to do so is withheld, the persons named in the enclosed proxy intend to vote for the re-appointment of BDO Dunwoody LLP, Chartered Accountants, Toronto, Ontario, as auditor of the Corporation, to hold office until the next annual meeting of shareholders, at a remuneration to be fixed by the directors. BDO Dunwoody LLP has been the corporation's auditor since February 28, 2001. THE 2002 STOCK OPTION PLAN AMENDMENT In 2002, the Corporation established a stock option plan (the "2002 Plan") as a means of attracting, retaining and motivating directors, officers, consultants and key employees. The Corporation has grown significantly since the 2002 Plan was initially put into effect on November 1, 2002. For example, the number of employees has grown more than five-fold from approximately 253 employees in November, 2002 to approximately 1,305. The Board of Directors of the Corporation believes that the 2002 Plan has been instrumental to that growth, but that in a certain respect the terms of the 2002 Plan do not continue to meet the needs of the Corporation for its continued growth by not allowing the Board of Directors sufficient discretion with respect to the number of options available to grant in any one fiscal year. In order to continue to be able to attract additional qualified directors, officers, consultants and key employees, and to provide appropriate incentives to the Corporation's existing directors, officers, consultants and key employees, the Board of Directors believes that it is in the best interest of the Corporation to amend the 2002 Plan to remove the restriction in the 2002 Plan which limits the Board of Directors from granting options in any one fiscal year that represent more than 2.5% of the total number of outstanding equity shares of the Corporation at the start of that fiscal year. The Board of Directors is proposing this change because it believes that increasing the number of stock options the Board of Directors may grant in any one fiscal year will better enable the Corporation to realize the maximum incentive value of the total number of stock options reserved under the 2002 Plan. As of January 20, 2004, there were 1,592,579 outstanding and unexercised stock options under the 2002 Plan. An additional 2,552,423 options are still available for granting under the 2002 Plan out of a maximum number of issuable options of 5,170,000. There are also 343,250 outstanding and unexercised stock options and 186,079 options available for granting under the Corporation's 1998 Stock Option Plan. The key features of the 2002 Plan, after this amendment is in effect, will be as follows: 1. The maximum number of subordinate voting shares (the "Shares") reserved for issuance under the 2002 Plan will continue to be 5,170,000 of which 2,552,423 Shares remain reserved for issuance after taking into account the stock options previously granted under the 2002 Plan. 2. Options to purchase Shares ("Options") may be granted from time to time to eligible service providers by the Board of Directors. An eligible service provider is a director, officer, employee or consultant of the Corporation or any of its subsidiaries. 3. An exercise price for the Options shall be fixed by the Board of Directors at the time of the grant in compliance with the 2002 Plan, applicable law and the rules of the Toronto Stock Exchange ("TSX"), which price will be no less than the closing price of the Shares on the TSX on the day immediately prior to the grant of Options. 4. Options cannot be granted for a term exceeding ten (10) years. 5. Subject to the Board of Director's discretion to determine otherwise, Options will generally vest as to 1/3 of the grant on each of the first, second and third anniversaries of the date of grant. 6. The maximum number of Shares available for issuance to any one person is 5% of the aggregate number of Shares issued and outstanding on a non-diluted basis at the time of the grant. 7. The maximum number of Shares, which may be reserved for issuance to insiders, cannot exceed 10% of the total number of issued and outstanding Shares on a non-diluted basis. The maximum number of Shares which may be issued to any one insider within a one-year period cannot exceed 5% of the number of Shares issued and outstanding on a non-diluted basis. The maximum number of Shares which may be issued to all insiders within any one-year period cannot exceed 10% of number of Shares issued and outstanding on a non-diluted basis. 8. Options granted pursuant to the 2002 Plan are non-transferable and non-assignable, other than to an eligible service provider's registered retirement savings plan or registered retirement income fund in certain circumstances. 9. Options are subject to early termination in the event that an optionee ceases to be an officer, director, consultant or employee of the Corporation. 10. In the event of the death of an eligible service provider, Options may continue to be exercised up to one year following the death, but not beyond the normal expiry of the term of the Option. To approve the amendments to the 2002 Plan (which are also subject to the approval of the TSX), shareholders will be asked at the Meeting to approve the resolution attached as Schedule "B" hereto (the "2002 Stock Option Plan Amendment Resolution"), which must be passed with or without amendment by the affirmative vote of a majority of the votes cast by shareholders of the Corporation attending or represented by proxy at the Meeting. In the absence of a contrary instruction, the persons named in the enclosed form of proxy intend to vote in favour of the passing of the 2002 Stock Option Plan Amendment Resolution. GENERAL At the date hereof, management knows of no matters to come before the Meeting other than the matters referred to in the Notice of the Meeting. However, if any other matters which are not now known to management should properly come before the Meeting, the proxy solicited hereby will be voted on such matters in accordance with the best judgment of the persons voting the proxy. DIRECTORS' APPROVAL The contents and the sending of this management information circular to shareholders of the Corporation have been approved by the Board of Directors. DATE: January 27th, 2004 /s/ Michael Serruya ----------------------------- Michael Serruya Co-Chairman of the Board SCHEDULE "A" STATEMENT OF CORPORATE GOVERNANCE PRACTICES The Company Manual of The Toronto Stock Exchange (the "TSX") (on which the Corporation's subordinate voting shares are listed) requires disclosure on an annual basis of the approach to corporate governance by listed companies as compared to guidelines established by the exchange. These guidelines focus on the importance of each corporation addressing the governance matters in its own context and the receipt by the investment community of an explanation for the corporation's approach to governance. The Board of Directors of the Corporation has constituted a Corporate Governance Committee in order to review and, if deemed necessary, to recommend changes to the corporate governance practices of the Corporation. The Board itself, however, has considered the TSX guidelines and believes that its approach to corporate governance is working effectively for the Corporation and its shareholders. In particular, the Board considers that many of the guidelines are better suited to corporations larger than the Corporation (such as financial institutions and large industrial corporations) and corporations the shares of which are more widely held than those of the Corporation. The Board of Directors The Corporation's Board of Directors is responsible for the supervision of the management of the Corporation's business and affairs. Under its governing statute (the Company Act (Nova Scotia) (the "Act")), the Board is required to carry out its duties with a view to the best interests of the Corporation. To assist it in fulfilling this responsibility, the Board has specifically recognized its responsibility for the following areas: (a) adoption of a strategic planning process; (b) identification of the principal risks of the Corporation's business and monitoring the implementation of appropriate systems to manage these risks; (c) succession planning, including appointing, training and monitoring senior management; (d) implementation of a communication policy to facilitate communications with shareholders and others involved with the Corporation; and (e) integrity of the Corporation's internal control and management information systems. Mandate of the Board of Directors The Board discharges its responsibilities directly and through its committees. As well, from time to time ad hoc committees of the Board may be appointed. On a quarterly basis, members of the Board receive and discuss reports on the subsidiary companies as well as on the Corporation's overall financial position and its investments. In addition, Board members are consulted informally by senior management of the Corporation to remain informed of corporate developments, which may not require formal meetings and to provide advice as needed. Strategic, financial and succession plans are approved. In addition, developments and issues of current relevance are reviewed. It is the responsibility of the Board to supervise the management of the affairs and business of the Corporation, acting with a view to the best interests of the Corporation, pursuant to the powers granted by, and the obligations imposed under, the Act, the Corporation's memorandum of association and articles of association and common law. The Board, either directly or through its committees, includes in its responsibilities: o approval of all matters which by law must be approved by the Board, including but not limited to, declaration of dividends, offerings of securities and transactions out of the ordinary course of business; o approval of entering into any ventures which are outside of the Corporation's existing business; o approval of any changes in senior management including changes in senior management of the Corporation's subsidiaries; o annual review and consent to substantial strategic planning matters; o considering and deliberating the principal risks of the Corporation's business and receiving and reviewing reports of the Corporation's assessment and management of those risks; o considering succession issues and appointing and monitoring senior management; o discussing and considering how the Corporation communicates with its various shareholders; o assessing the integrity of the Corporation's internal control and management information systems, both directly and through its Audit Committee; and o since the Board has plenary power, any responsibility which is not delegated to senior management or a Board committee remains with the full Board. It is the responsibility of the Co-Chairmen of the Board to ensure the effective operation of the Board. The Co-Chairmen of the Board periodically informally meet, on an individual basis, with every member of the Board to discuss each director's contribution to the Board and committee meetings and any other matters, which the individual directors wish to raise with the Co-Chairmen of the Board. The frequency of the meetings of the Board of Directors as well as the nature of agenda items change depending upon the state of the Corporation's affairs and in light of opportunities or risks which the Corporation faces. At least 12 meetings of the Board are scheduled for the fiscal year ending August 31, 2004. The Board met on at least 10 occasions during the fiscal year ended August 31, 2003. Board Composition Much of the TSX Guidelines focus on the composition of the Board of Directors of the Corporation and, in particular, on the number of "unrelated directors" who make up such Board. In the TSX Guidelines, an "unrelated director" is a director who is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interest of the Corporation, other than an interest arising from shareholding. The TSX Guidelines also focus on the importance of having an appropriate portion of Board members who are free from any interest or relationships with a significant shareholder of the Corporation, i.e. a shareholder controlling more than 50% of the voting securities. The Corporation's significant shareholders are The Serruya Family Trust and the Smith Group (Richard E. Smith, David M. Smith and David J. Stein). The Board has concluded that five of the Board's six members are "related" within the meaning of the TSX Guidelines. The Corporation presently has one "unrelated" director, Mr. Romeo DeGasperis. The Board believes that the current composition of the Board is appropriate in the Corporation's circumstances. The Corporation's business was founded in 1986 by members of the Serruya family. The Serruya Family Trust, which was created and settled for the benefit of certain members of the Serruya family, continues to own approximately 70.2% of the issued and outstanding multiple voting shares of the Corporation. The early role of Messrs. Michael and Aaron Serruya in the Corporation and their guidance of its successful development since that time, make them uniquely suited to fulfil their respective roles as Co-Chairman and Executive Vice-President of the Corporation and to serve as members of the Board. These members of the Board of Directors reflect the origins of the Corporation, and the dedication of the Serruya family to the Corporation's business. The Smith Group owns approximately 29.1% of the issued and outstanding multiple voting shares of the Corporation. Richard E. Smith was the founder of Integrated Brands and has been its Chief Executive Officer and Chairman of the Board since its inception. In addition, Mr. Richard E. Smith has been involved in the frozen dessert industry for more than thirty years. The Board believes that its relationship with management in supervising the management of the business and affairs of the Corporation is appropriate, and that the TSX Guidelines' focus on the independence of the Board from management is neither necessary nor desirable in the Corporation's circumstances. The current management's significant contributions to the formation and continued growth of the Corporation and the confidence which the Board understands shareholders have in that management, are factors supporting the Board's opinion that additional independence is not in the Corporation's best interests. However, in order to assist the Board in ensuring that the Corporation's system of corporate governance continues to suit its needs, as indicated above, the Board has constituted a Corporate Governance Committee which will monitor the performance of the Board in light of the corporate governance guidelines suggested by the TSX Guidelines and recommend modifications where appropriate. Committees The Board and its committees (consisting of an Audit Committee, a Compensation Committee and Corporate Governance Committee) are available to consider the views of management and investors concerning their needs and decisions affecting the Corporation. (a) Audit Committee The Audit Committee follows recommendations of the Corporation's outside auditors to enhance the effectiveness of those published guidelines. In addition to carrying out its statutory legal responsibilities, the Committee's roles and responsibilities include, but are not necessarily limited to, the following: o review quarterly and annual financial statements, before they are approved by the Board; o monitor audit functions and the preparation of financial statements; o approve press releases on financial results; o review all prospectuses, material change reports and the annual information form; o examine the presentation and impact of significant risks and key management estimates and judgments that may be material to the Corporation's financial reporting; o review the adequacy of internal accounting control procedures and systems, financial plans for the ensuing year, budget, organization, activities and performance; o meet with the Corporation's external auditors and with members of management at least once a year (and more frequently as necessary) to assist it in the effective discharge of its duties; o meet with the outside auditors; and o review and approve foreign currency risk strategies. The Audit Committee is not composed solely of "outside directors" as recommended by the TSX Guidelines. The only "outside director" on the Audit Committee is Romeo DeGasperis. (b) Compensation Committee The Compensation Committee reviews the Corporation's overall compensation philosophy and corporate succession and development plans at the executive officer level. The Committee's roles and responsibilities include, but are not necessarily limited to, the following: o review and approve the grant of options to directors, officers and those employees judged to be key employees and consultants of the Corporation.; o establish the Corporation's compensation policy and its implementation through an effective compensation program, including compensation of senior executives; o set personnel policies; o approve executive salaries; and o review training programs and succession plans. (c) Corporate Governance Committee The Corporation's Corporate Governance Committee has the general responsibility for developing the Corporation's approach to governance issues. At present, Board approval is required for any transaction which is out of the ordinary course of business or could be considered to be "material" to the business of the Corporation. As a matter of practice, all significant decisions affecting the Corporation and its subsidiaries are approved by the Board of Directors prior to their implementation. The Committee's roles and responsibilities include, but are not necessarily limited to, the following: o facilitate the independent functioning and maintain an effective relationship between the Board of Directors and management of the Corporation; o analyze Board composition and dynamics and make recommendations with respect to new nominees to the Board; o establish procedures and approve an appropriate orientation and education program for new recruits to the Board; o consider the adequacy and form of compensation paid to the directors; o provide recommendations for other procedures which contribute to the Board's ability to exercise informed judgment; o develop programs and procedures which will enable the Board to act effectively and on an informed basis; o annually review the mandates of the Board of Directors and its committees and recommend to the Board such amendments to those mandates as the Committee believes are necessary or desirable; o consider and, if thought fit, approve requests from directors or committees of directors for an engagement of special advisors from time to time; o prepare and recommend to the Board annually, a "Statement of Corporate Governance Guidelines" to be included in the Corporation's annual report or information circular; o recommend to the Board's internal guidelines on corporate governance issues in the context of the Corporation's particular circumstances and recommend the making of appropriate adjustments as necessary to accommodate the changing needs of investors and the Corporation; o review, on a periodic basis, the composition of the Board and the appropriate number of independent directors to sit on the Board of Directors; and o assess, at least annually, the effectiveness of the Board as a whole, the committees of the Board and the contribution of individual directors, including considering the appropriate size of the Board. Process of Appointing New Directors The Corporate Governance Committee has the mandate to recommend candidates for filling vacancies on the Board and ensure that qualifications are maintained. In connection with the acquisition of Integrated Brands Inc., Messrs. Richard E. Smith, David M. Smith, David J. Stein ("the Integrated Brands Principal Shareholders") and Integrated Brands Inc., on the one hand, and the Corporation and The Serruya Family Trust, 1082272 Ontario Inc., Michael Serruya and Aaron Serruya ("the CoolBrands Principal Shareholders"), on the other hand, entered into a Board Representation Agreement pursuant to which the Corporation agreed to nominate for the election of directors qualified individuals, 50% of whom are recommended by the Integrated Brands Principal Shareholders and 50% of whom are recommended by the CoolBrands Principal Shareholders. Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders agreed to vote their multiple voting shares and subordinate voting shares in the capital of the Corporation, representing in the aggregate 54.6% of the votes attaching to all outstanding shares of the Corporation, in favour of each other's nominees to the Board of Directors of the Corporation. Board Expectations of Management The Board works closely with members of management. The Board's access to information relating to the operations of the Corporation, through the membership on the Board of Directors of several key members of management and, as necessary, the attendance of other members of management at the request of the Board, are key elements to the effective and informed functioning of the Board of the Corporation. The Board looks to management to formulate and carry out strategic planning with a view to achieving continuing profitable growth and obtaining maximum return on the shareholders' equity and the Corporation's assets. Management is also expected to provide all necessary information in a timely manner to the Board and its committees, and to ensure that they properly discharge their responsibilities. Finally, the Board expects management to carry out its responsibilities to the Corporation and its shareholders in a prudent manner, adhering to the fundamental principles of risk management and maximum exploitation of its resources and the products that form the foundation of the Corporation. The Board is confident that the Corporation's management responds ably to this experience. Corporate Objectives which the Co-CEOs are Responsible for Meeting The Co-CEOs are responsible for leading the Corporation into the future and must ensure that there are long-term goals and a strategic planning process in place. The Co-CEOs' written objectives constitute a mandate on a year to year basis. The Co-CEOs' responsibilities include, but are not necessarily limited to the following: o maximize shareholder value. o ensure that disclosure requirements to shareholders are met in a timely fashion. o improve quality of interaction between management and the Board. o ensure that Corporation's achievement of financial and non-financial targets are met. o ensure that decisions with respect to human resource management are met. o ensure that decisions with respect to implementing corporate strategy and other Board decisions are met. o implement training, development and succession plans for other senior management members. Succession Planning (including appointing, training and monitoring senior management) The Board functions through delegation to management and therefore must ensure that management is of the highest calibre in appointing, training, assessing and providing for succession. The Board must ensure that the relationship between management performance and compensation is reasonable. Senior management is reviewed on an annual basis. Items under review include such things as future career paths and future objectives, qualifications, etc. Communication Policy for the Corporation Management is available to shareholders to respond to questions and concerns on a prompt basis, with regard to limitations imposed by law and by the sensitivity of the information in relation to the Corporation's competitors. The Board believes that its communications with shareholders and the avenues available for shareholders and others interested in the Corporation to have their inquiries about the Corporation answered are responsive and effective. At the Corporation's annual meeting, full opportunity is afforded for shareholder questioning of senior management about the Corporation's activities. SCHEDULE "B" RESOLUTION OF THE SHAREHOLDERS REGARDING AN AMENDMENT TO THE 2002 STOCK OPTION PLAN OF THE CORPORATION BE IT RESOLVED THAT: 1. The 2002 Stock Option Plan of the Corporation be amended to remove the restriction in the 2002 Stock Option Plan which limits the board of directors from granting options in any one fiscal year which represent more than 2.5% of the total number of outstanding equity shares in the Corporation at the start of that fiscal year, and such amendment to the 2002 Stock Option Plan is hereby authorized and approved, subject to the approval of the Toronto Stock Exchange, and the making of any necessary filings with all relevant regulatory authorities. 2. Any one officer or director of the Corporation is hereby authorized and directed, for and on behalf of the Corporation, to execute or cause to be executed, under the seal of the Corporation or otherwise, and to deliver or cause to be delivered, all such other documents and instruments, and to perform or cause to be performed all such other acts and things, as in such person's opinion may be necessary or desirable to give full effect to the foregoing resolution and the matters authorized thereby, such determination to be conclusively evidenced by the execution and delivery of such document, agreement or instrument or the doing of any such act or thing. COOLBRANDS INTERNATIONAL INC. To Registered and Non-Registered Shareholders In accordance with National Instrument 54-102 of the Canadian Securities Administrators, registered and beneficial shareholders may elect annually to have their names added to an issuer's supplemental mailing list in order to receive interim financial statements. If you are interested in receiving such statements, please complete and return this form. NAME: __________________________________________________________________________ ADDRESS: _______________________________________________________________________ _______________________________________ POSTAL CODE: ___________________________ (I certify that I am a beneficial shareholder) SIGNATURE: ----------------------------------- DATE: ___________________________________ COOLBRANDS INTERNATIONAL INC. PROXY SOLICITED BY MANAGEMENT FOR USE AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 27, 2004 The undersigned shareholder of COOLBRANDS INTERNATIONAL INC. (the "Corporation") hereby appoints Michael Serruya, Co-Chairman of the Corporation, or failing him, Aaron Serruya, a director of the Corporation, or in lieu of the foregoing ______ __________________ as nominee of the undersigned to attend, act and vote for the undersigned at the annual and special meeting of shareholders (the "Meeting") of the Corporation to be held on February 27, 2004 and at any adjournments or postponements thereof. The undersigned specifies that all of the voting shares owned by him and represented by this form of proxy shall be: (a) VOTED FOR [_] WITHHELD FROM VOTING [_] in respect of the election as directors of those persons listed below; Romeo DeGasperis, Aaron Serruya, Michael Serruya, David M. Smith, Richard E. Smith, David J. Stein (b) VOTED FOR [_] VOTED AGAINST [_] in respect of the resolution set forth in Schedule "B" to the management information circular dated January 27, 2004 proposing an amendment to the 2002 Stock Option Plan of the Corporation; (c) VOTED FOR [_] WITHHELD FROM VOTING [_] in respect of the appointment of BDO Dunwoody LLP as auditor and authorizing the directors to fix the auditor's remuneration; (d) VOTED at the discretion of the proxy nominee on any other matters as may be properly come before the Meeting or any adjournments or postponements thereof; If an amendment or variation to matters identified in the Notice of Meeting are proposed at the Meeting or any adjournments or postponements thereof or if any other matters properly come before the Meeting or any adjournment or postponements thereof, this proxy confers discretionary authority to vote on such amendments or variations or on such other matters according to the best judgment of the person voting the proxy at the Meeting or any adjournments or postponements thereof. This proxy is solicited on behalf of the management of the Corporation. A shareholder has the right to appoint a person to represent him and to attend and act for him on his behalf at the meeting other than the nominees designated above and may exercise such right by inserting the name of his nominee in the space provided above for that purpose. The undersigned hereby revokes any proxy previously given: DATED the _____________ day of ___________, 2004. ____________________________________ Name of Shareholder (Please Print) ------------------------------------ Signature of Shareholder NOTES: 1. The shares represented by this proxy will be voted or withheld from voting on any ballot that may be called in accordance with the foregoing directions and, if the shareholder specifies a choice with respect to any matter to be acted upon, the shares will be voted accordingly. In the event that no specification has been made with respect to voting or withholding from voting in respect of the election of directors, or the appointment of the auditor and the authorization of the directors to fix the remuneration of the auditor, the proxy nominees are instructed to vote the shares represented by this proxy in favour of such matters. 2. This proxy form must be signed and dated by the shareholder or his attorney authorized in writing, or, if the shareholder is a corporation, by any officer or attorney thereof duly authorized. If the proxy form is not dated in the space provided it is deemed to bear the date on which it is mailed to the Corporation. 3. Properly executed forms of proxy must be received before 5:00p.m. (Toronto time) on February 24, 2004 by Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1 or by facsimile at 416-361-0470, or by the close of business on the second business day preceding the day of the meeting or any adjourned or postponed meeting thereof (excluding Saturdays, Sundays and holidays). -----END PRIVACY-ENHANCED MESSAGE-----