-----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, RxcOhKriC3f1ULZ8yOFZa+rahuNG+EY6s3NAClwDgaqxR+m5vI7kDDiF5qgzZyYw L24VzmAGZSTODdHyOtwjbg== 0000950117-06-000282.txt : 20060124 0000950117-06-000282.hdr.sgml : 20060124 20060124171812 ACCESSION NUMBER: 0000950117-06-000282 CONFORMED SUBMISSION TYPE: 6-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060120 FILED AS OF DATE: 20060124 DATE AS OF CHANGE: 20060124 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27476 FILM NUMBER: 06547295 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/A 1 a41197.txt COOLBRANDS INTERNATIONAL INC. FORM 6-K/A 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, 2006 Commission File No. 000-27476 --------- CoolBrands International Inc. ----------------------------- (Translation of registrant's name into English) 8300 Woodbine Avenue, Markham, Ontario Canada L3R 9Y7 ----------------------------------------------------- (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ] Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1)________ Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7)________ Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934. Yes [ ] No [X] If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-_________ SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COOLBRANDS INTERNATIONAL INC. Date: January 24, 2006 By: /s/ Gary P. Stevens ---------------------------------- Name: Gary P. Stevens Title: Chief Financial Officer INDEX TO EXHIBITS 99.1 Registrant's Notice of Annual and Special Meeting and Special Confirmatory Meeting on February 27, 2006; 99.2 Registrant's Proxy Solicited by Management for use at Annual and Special Meeting and Special Confirmatory Meeting on February 27, 2006; 99.3 Registrant's Annual Report of the Company for the year ended August 31, 2005. 99.4 Registrant's Notice of Change of Auditors letters. This amendment to 6-K is being filed only to reflect the addition of the conformed signature and date to the signature page of the Registrant's 6-K filed January 24, 2006. EX-99 2 ex99-1.txt EXHIBIT 99.1 NOTICE OF ANNUAL AND SPECIAL MEETING AND SPECIAL CONFIRMATORY MEETING OF COOLBRANDS INTERNATIONAL INC. NOTICE IS HEREBY GIVEN that the annual and special meeting (the "Annual and Special Meeting") of holders (the "Shareholders") of subordinate voting shares and multiple voting shares of CoolBrands International Inc. (the "Corporation") will be held at The Sheraton Parkway (Thornhill Room), 600 Highway 7 East, Richmond Hill, Ontario, L4B 1B2, on February 27, 2006 at 10:00 a.m. (Toronto time), for the following purposes: 1. to receive the financial statements of the Corporation for the year ended August 31, 2005, together with the report of the auditor thereon; 2. to elect directors of the Corporation; 3. to appoint the auditor of the Corporation and to authorize the directors to fix the auditor's remuneration; 4. to consider and, if deemed advisable, to pass with or without variation, a special resolution (the "Continuance Resolution"), the form of which is set forth in Schedule B to the accompanying Management Information Circular (the "Circular"), approving the discontinuance of the Corporation pursuant to section 133(5) of the Companies Act (Nova Scotia) (the "NSCA") and the continuance (the "Continuance") of the Corporation pursuant to section 187 of the Canada Business Corporations Act (the "CBCA") and the adoption of a general by-law, all as more particularly described in the Circular; 5. to consider and, if deemed advisable, to pass with or without variation, a special resolution (the "Share Capital Restructuring Resolution"), the form of which is set forth in Schedule D to the Circular, approving the share capital restructuring of the Corporation as more particularly described in the Circular; and 6. to transact such other business as may properly come before the Annual and Special Meeting or any adjournments or postponements thereof. NOTICE IS HEREBY FURTHER GIVEN that a subsequent special confirmatory meeting of the Shareholders (the "Confirmatory Meeting") will be held at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario, L3R 9Y7 on March 20, 2006 at 10:00 a.m. (Toronto time), for the sole purpose of passing resolutions confirming the Continuance Resolution (the "Continuance Confirmatory Resolution") and the Share Capital Restructuring Resolution (the "Share Capital Confirmatory Resolution") to be passed at the Annual and Special Meeting. Pursuant to the NSCA, because the Continuance Resolution and the Share Capital Restructuring Resolution must be passed as special resolutions for the purposes of the NSCA, they must also be confirmed by greater than 50% of the votes cast by Shareholders present in person or represented by - ii - proxy at the Confirmatory Meeting by way of the Continuance Confirmatory Resolution and Share Capital Confirmatory Resolution, respectively, the forms of which are set forth in Schedules C and E, respectively, to the accompanying Circular. Shareholders are invited to attend the Annual and Special Meeting and the Confirmatory Meeting (which are collectively referred to as the "Meetings"). Shareholders who are unable to attend the Meetings in person are requested to sign and return the enclosed form of proxy in the envelope provided for that purpose. To be effective in respect of the Annual and Special Meeting, proxies must be received before 5:00 p.m. (Toronto time) on February 24, 2006 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 adjournment or postponement thereof, or be presented prior to the commencement of the Annual and Special Meeting or any adjournment or postponement thereof. To be effective in respect of the Confirmatory Meeting, proxies must be received before 5:00 p.m. (Toronto time) on March 16, 2006 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 adjournment or postponement thereof, or be presented prior to the commencement of the Confirmatory Meeting or any adjournment or postponement thereof. The Corporation's Annual Report for the year ended August 31, 2005, Circular and form of proxy are enclosed with this notice of meeting. Only Shareholders of record on January 9, 2006 will be entitled to vote at the Meetings except to the extent that a person has transferred any of his or her shares after that date and the transferee of such shares establishes proper ownership and requests, not later than ten days before the relevant Meeting, that his or her name be included in the list of Shareholders for such Meeting, in which case the transferee will be entitled to vote his or her shares at the Annual and Special Meeting or the Confirmatory Meeting, as the case may be. DATED at Markham, Ontario this 13th of January, 2006. BY ORDER OF THE BOARD OF DIRECTORS "Francis Orfanello" -------------------------------- Francis X. Orfanello Secretary - iii - If the Continuance Resolution and the Continuance Confirmatory Resolution are passed in accordance with the provisions of the relevant legislation and the Continuance becomes effective, a registered holder of shares who dissents (a "Dissenting Shareholder") from the Continuance Resolution or the Continuance Confirmatory Resolution, as the case may be, will be entitled to be paid the fair value of his or her shares if the Secretary of the Corporation shall have received from such Dissenting Shareholder at or before the Annual and Special Meeting or at or before the Confirmatory Meeting a notice of dissent or a written objection (each a "Notice of Dissent") to the Continuance Resolution or the Continuance Confirmatory Resolution, as the case may be, and the Dissenting Shareholder shall have otherwise complied with the dissent procedures (which are described in the Circular under the heading "Dissenting Shareholder Rights" and in Schedule F to the Circular). Failure to comply strictly with such dissent procedures may result in the loss or unavailability of any right of dissent. A Dissenting Shareholder need not have dissented at the Annual and Special Meeting in order to be able to dissent at the Continuance Confirmatory Meeting. COOLBRANDS INTERNATIONAL INC. MANAGEMENT INFORMATION CIRCULAR 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 (the "Annual and Special Meeting") and confirmatory meeting (the "Confirmatory Meeting") of shareholders of the Corporation to be held at the times and places and for the purposes set forth in the attached notice of annual and special meeting and special confirmatory meeting of shareholders (the "Notice of Meeting"). While it is expected that the solicitation will be primarily by mail, proxies may be solicited personally or by telephone by the regular employees of the Corporation at nominal cost. The costs of solicitation will be borne by the Corporation. The Annual and Special Meeting and the Confirmatory Meeting are collectively referred to herein as the "Meetings". All references in this management information circular to the Meetings include references to any adjournments or postponements thereof. The Corporation may pay the reasonable costs incurred by persons who are the registered but not beneficial owners of voting shares of the Corporation (such as brokers, dealers, other registrants under applicable securities laws, nominees and/or custodians) in sending or delivering copies of the Notice of Meeting, this Information Circular and the form of proxy (collectively, the "Meeting Materials") to the beneficial owners of such shares. The Corporation will provide, without cost to such persons, upon request to the Secretary of the Corporation, additional copies of the foregoing documents required for this purpose. 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 Meetings 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 to be exercised at the Meetings must be deposited at the offices of Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1, or by facsimile at 416-361-0470, (i) in the case of the Annual and Special Meeting, prior to 5:00 p.m. (Toronto time) on February 24, 2006 or, with the Secretary of the Corporation at any time prior to the Annual and Special Meeting, or (ii) in the case of the Confirmatory Meeting, prior to 5:00 p.m. (Toronto time) on March 16, 2006 or, with the Secretary of the Corporation at any time prior to the Confirmatory Meeting, or (iii) in any other manner permitted by law. 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 - 2 - 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 the Company Act (Nova Scotia) (the "Act") and applicable securities laws, 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 relevant Meeting or any adjournment of such Meeting at which the proxy is to be used, or with the Chairman of the Meeting prior to the commencement of the Meeting on the day of the Meeting or any adjournment of the Meeting. 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. Where no choice is specified, such shares will be voted in favour of the nominees proposed below for election as directors, in favour of the appointment of BDO Seidman, LLP as the auditor of the Corporation, in favour of the Continuance Resolution (as defined below), in favour of the Share Capital Restructuring Resolution (as defined below), in favour of the Continuance Confirmatory Resolution (as defined below), and in favour of the Share Capital Confirmatory Resolution (as defined below). The enclosed form of proxy confers discretionary authority upon the persons named therein to vote 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 Meetings in such manner as such nominee in his judgment may determine. As at the date of this management information circular, management knows of no such amendments, variations or other matters to come before the Meetings other than the matters referred to in the Notice of Meeting. Date of Information Unless otherwise specified, information in this Information Circular is given as of January 9, 2006. Voting Securities and Principal Holders Thereof As of January 9, 2006, the Corporation had outstanding 6,027,864 multiple voting shares and 50,005,069 subordinate voting shares. Only shareholders of record at the close of business on January 9, 2006 (the "Record Date"), who either personally attend the Meetings or who have completed and delivered a form of proxy in the manner and subject to the provisions described above shall be entitled to vote or to have their shares voted at the Meetings, except to the - 3 - extent that such shareholder has transferred the ownership of any shares after the Record Date and the transferee of such shares establishes proper ownership thereof and demands, not later than ten days before the relevant Meeting, to be included in the list of shareholders entitled to vote at such Meeting, in which case such transferee is entitled to vote. 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. Holders of subordinate voting shares exercise in the aggregate 45.3% of the voting rights attached to all voting securities of the Corporation. In the event that an offer to purchase multiple voting shares is made to holders of such shares, and the offer is required by securities legislation or stock exchange rule to be made to all, or substantially all, of the holders of multiple voting shares in Canada, holders of subordinate voting shares have an option to convert their subordinate voting shares into multiple voting shares. This option commences on the eighth day after the date the offer is made to holders of multiple voting shares and ends on the date of expiry of the offer. This conversion right will not apply if, within seven days of the date of the offer, registered shareholders owning more than 50% of the then outstanding multiple voting shares confirm to the transfer agent and secretary of the Corporation, among other items, that they will not tender any multiple voting shares in acceptance of the offer without having given the transfer agent and secretary written notice of their acceptance or intended acceptance of the offer at least seven days prior to the expiry date of the offer. If the right of conversion to multiple voting shares is available to holders of subordinate voting shares and is duly exercised, all multiple voting shares so converted will be deemed to be deposited to the offer. If any converted multiple voting shares are withdrawn, or are not ultimately taken up by the offeror, such converted multiple voting shares shall be automatically reconverted to subordinate voting shares. To the knowledge of the directors and executive officers of the Corporation, there are no persons or companies who beneficially own, directly or indirectly, or exercise control or direction over securities of the Corporation carrying more than 10% percent of the voting rights attached to any class of outstanding voting securities of the Corporation, except as follows: - 4 -
Name Designation of Class Number Percentage of Class - ----------------------------------------------------------------------------------------------- The Serruya Family Trust Multiple voting shares 4,233,332(1) 70.2 The Estate of Richard E. Smith Multiple voting shares 1,419,467(2) 23.5 Krevlin Advisors, L.L.C.(3) Subordinate Voting Shares 5,074,000 10.15
Notes: 1. The 4,233,332 multiple voting shares represents approximately 38.4% of the votes attaching to all outstanding shares of the Corporation. 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. 2. The 1,419,467 multiple voting shares represents approximately 12.9% of the votes attaching to all outstanding shares of the Corporation. Mr. Richard E. Smith, the Corporation's former Co-Chairman and Co-Chief Executive Officer, passed away on January 29, 2005. The sole executrix of the Estate of Richard E. Smith is Susan Smith. 3. Krevlin Advisors, L.L.C. acts as investment advisor to Glenhill Capital, LP, Glenhill Capital Overseas Master Fund, LP and Glenhill Concentrated Long Absolute Fund, LP. This information is based on a report dated December 9, 2005 filed by Krevlin Advisors, L.L.C. with Canadian securities regulators under National Instrument 62-103. Notwithstanding the existence of a board representation agreement dating to March 1998 (the "Board Representation Agreement") pursuant to which The Serruya Family Trust, Michael Serruya, Aaron Serruya, Richard E. Smith, David M. Smith and David J. Stein agreed with each other to vote all of their respective shares of the Corporation, representing in the aggregate approximately 54.4% of the votes attaching to all outstanding shares of the Corporation, in favour of nominees proposed for election as directors, such parties have agreed pursuant to a voting agreement as of December 13, 2005 (the "Voting Agreement") that all nominations for membership on the board of directors of the Corporation (the "Board") made in the Corporation's management information circulars or otherwise will be made by the Corporate Governance Committee of the Board. For details relating to the Board Representation Agreement and the Voting Agreement, see "Election of Directors - Board Representation Agreement and Voting Agreement". Advice To Beneficial Shareholders The information set forth in this section is of significant importance to holders of subordinate voting shares and multiple voting shares who hold their shares in "book-entry" form, meaning that they are held through brokers and nominees and not in their own name. Holders of shares who do not hold their shares in their own name (referred to in this circular as beneficial shareholders) should note that only proxies deposited by holders of shares whose names appear on the records of the Corporation as the registered holders of subordinate voting shares or multiple voting shares can be recognized and acted upon at the Meetings. If shares are listed in an account statement provided to a holder of shares by a broker, then in almost all cases those shares will not be registered under the name of the holder on the records of the Corporation. Such shares will more likely be registered under the name of the beneficial shareholder's broker, or an agent or nominee of that broker. 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. - 5 - 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 shares are voted at the Meetings. 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 shares; however, its purpose is limited to instructing the registered holder of 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 shares directly at the Meetings, rather the proxy must be returned to the intermediary well in advance of the Meetings in order to have the shares voted. BUSINESS TO BE CONDUCTED AT THE MEETING Audited Financial Statements The Corporation's consolidated financial statements for the financial year ended August 31, 2005 and the report of the auditors thereon will be submitted to the Annual and Special Meeting. Receipt at the Annual and Special Meeting of the consolidated financial statements for the financial year ended August 31, 2005 and the auditor's report thereon will not constitute approval or disapproval of any matters referred to therein. Election of Directors The table below describes the people who have been nominated as directors and the voting securities that they own directly or indirectly. The articles of the Corporation provide that the Board shall consist of a minimum of 5 and a maximum of 15, with the actual number to be determined from time to time by the Board. The Board has determined that, at the present time, there will be nine directors. 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 Annual and Special 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 or her election unless his or her office is earlier vacated in accordance with the Corporation's constating documents and the Corporation's governing statute. Shares listed below include shares over which a director has or shares, directly or indirectly, voting or investment power. - 6 -
- -------------------------------------------------------------------------------------------------------------------------------- Number of Number of Multiple Subordinate Voting Voting Name, Position with the Principal Occupation and, if not at Present an Shares Shares Corporation and Municipality Director Elected Director, Occupation during the Past Five Beneficially Beneficially of Residence(1) Since Years(1) Held(2) Held(2) - -------------------------------------------------------------------------------------------------------------------------------- Robert E. Baker(4)(5) 2005 President of Puroast Coffee, Inc., a private company - - Lead Director manufacturing low acid coffee. Smyrna, Georgia, U.S.A. - -------------------------------------------------------------------------------------------------------------------------------- Beth L. Bronner(3)(5) 2005 Senior Vice President & Chief Marketing Officer of Jim - - Director Beam Brands Co., a division of Fortune Brands, Inc., a Deerfield, Illinois, U.S.A. publicly traded leading consumer products company. - -------------------------------------------------------------------------------------------------------------------------------- Romeo DeGasperis(3) 2000 Vice President Con-Drain Company Limited, a watermain - - Director and sewer contracting business. Concord, Ontario, Canada - -------------------------------------------------------------------------------------------------------------------------------- William R. McManaman(3) N/A Business consultant. From March 2004 to January 2005, - - Nominee for Director Senior Vice President and Chief Financial Officer of La Grange, Illinois, U.S.A. First Health Group Corp., a national health-benefits services company. Prior thereto, Executive Vice President and Chief Financial Officer of Aurora Foods, Inc., a manufacturer, marketer and distributor of dry and frozen branded food products from 2002. Vice President, Finance and Chief Financial Officer of Dean Foods Company, a dairy products company, from 1995 to 2000. - -------------------------------------------------------------------------------------------------------------------------------- Aaron Serruya 1994 President and Chief Executive Officer of International 4,233,332(6) 56,149 Director Franchise Corp. Thornhill, Ontario, Canada - -------------------------------------------------------------------------------------------------------------------------------- Michael Serruya 1994 Co-Chairman of the Corporation 4,233,332(6) 56,000 Co-Chairman and Director Thornhill, Ontario, Canada - -------------------------------------------------------------------------------------------------------------------------------- David M. Smith 1998 Vice-Chairman and Chief Operating Officer of the 288,106 - Vice-Chairman, Chief Operating Corporation Officer and Director Manhasset, New York, U.S.A. - -------------------------------------------------------------------------------------------------------------------------------- L. Joshua Sosland(4)(5) 2005 Vice Chairman of Sosland Publishing Co., a publisher - 4,030 Director of business-to-business periodicals for the Kansas City, Missouri, U.S.A. grain-based and food processing industries. - -------------------------------------------------------------------------------------------------------------------------------- David J. Stein 1998 Co-Chairman, President and Chief Executive Officer of 45,138 - Co-Chairman, President, Chief the Corporation Executive Officer and Director Southampton, New York, U.S.A. - --------------------------------------------------------------------------------------------------------------------------------
Notes: 1) Individual directors have provided information as to municipality of residence and principal occupation. 2) The individual directors have provided this information, not being within the knowledge of the Corporation. 3) Member of the Audit Committee. It is expected that Mr. McManaman will join the Audit Committee following his election at the Annual and Special Meeting. 4) Member of the Compensation Committee. 5) Member of the Corporate Governance Committee. 6) 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 The Serruya Family Trust. - 7 - Corporate Cease Trade Orders or Bankruptcies Michael Serruya, the Corporation's Co-Chairman, by virtue of his role as a director of Moneysworth & Best Shoe Care Inc., was subject to a cease trade order issued by the Ontario Securities Commission in June 2000 concerning Moneysworth & Best Shoe Care Inc. securities when Moneysworth failed to comply with certain continuous disclosure requirements. Moneysworth & Best Shoe Care Inc. filed for voluntary assignment into bankruptcy on July 11, 2000. The cease trade order is no longer in effect. William R. McManaman, a nominee for election as director at the Annual and Special Meeting, was the Executive Vice-President and Chief Financial Officer of Aurora Foods, Inc. ("Aurora") from April 2002 until March 2004. Aurora filed for voluntary assignment into bankruptcy under Chapter 11 on December 8, 2003. Aurora emerged from bankruptcy March 19, 2004 and merged the same day with Pinnacle Foods Corporation. Penalties or Sanctions No proposed director has, during the ten years prior to the date hereof: (a) been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities regulatory authority; or (b) been subject to any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to a reasonable investor making an investment decision. Personal Bankruptcies No proposed director, has, during the ten years prior to the date thereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or has been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his or her assets. Board Representation Agreement and Voting Agreement Board Representation Agreement In connection with the acquisition on March 18, 1998 of Integrated Brands 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 the Board Representation Agreement. - 8 - Each of the CoolBrands Principal Shareholders and the Integrated Brands Principal Shareholders have 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 - 9 - than 1,500,000 voting securities (including voting securities issuable upon the conversion or exercise of convertible securities). Voting Agreement Notwithstanding the Board Representation Agreement, Aaron Serruya, Michael Serruya, David Smith and David Stein, and entities affiliated with them (collectively, the "Management MVS Holders"), have each entered into the Voting Agreement with the Corporation pursuant to which they each agreed to vote all of the shares that they beneficially own or control in favour of the Continuance Resolution (as defined below) and in favour of the Share Capital Restructuring Resolution (as defined below). Further notwithstanding the Board Representation Agreement, the parties to the Voting Agreement agreed pursuant to the terms of the Voting Agreement, the Management MVS Holders have agreed that (i) the Board Representation Agreement shall be terminated on the date on which articles of amendment in respect of the Share Capital Restructuring have become effective; and (ii) from the date of the Voting Agreement until the termination of the Board Representation Agreement, all nominations for membership on the Board made in the Corporation's management information circulars or otherwise will be made by the Corporate Governance Committee of the Board. SPECIAL BUSINESS TO BE CONDUCTED AT THE MEETING 1. Continuance under the Canada Business Corporations Act / Adoption of New By-Law Shareholders will be asked at the Meeting to consider, and, if deemed advisable, to pass a resolution (the "Continuance Resolution"), the text of which is set out in Schedule B to this circular, authorizing the continuance of the Corporation (the "Continuance") from the Companies Act (Nova Scotia) (the "NSCA") to the Canada Business Corporations Act (the "CBCA"), subject to receipt of all necessary regulatory approvals. If the Continuance Resolution is passed and the requisite filings made in order to effect the Continuance, the Corporation will continue its corporate existence governed by the laws of the CBCA rather than the NSCA. Reason for the Continuance The primary impetus for the Continuance is to permit the Corporation to be governed by the CBCA, a more modern statute than the NSCA. A brief overview of some of the key differences in terms of shareholder rights between the two statutes follows. Summary Comparison of Shareholder Rights In the event that shareholders approve the Continuance and the Continuance is effected under the CBCA, the Corporation will be treated as if it had been incorporated under the federal laws of Canada, rather than under the NSCA which now governs the - 10 - Corporation's affairs. The relevant provisions of the CBCA are similar to those of the NSCA and, accordingly, the fundamental rights of the Corporation's shareholders, the rights, powers and obligations of the directors and the power and authority of the Corporation will not significantly change as a result of the Continuance. However, there are some material differences between the NSCA and the CBCA. The following is a summary of some of the material differences between the NSCA and the CBCA. This summary is not intended to be exhaustive and shareholders should consult their own legal advisors regarding implications of the Continuance which may be of particular importance to them. Special Resolutions A resolution is deemed to be a "special resolution" under the NSCA when it has been passed by a majority of not less than three-fourths of such shareholders entitled to vote as are present in person or by proxy at any general meeting and such resolution has been confirmed by a majority of such shareholders entitled to vote as are present in person or by proxy at a subsequent confirmatory meeting held at an interval of not less than 14 days, and not more than one month, from the date of the first meeting. Alternatively, a resolution which has been unanimously passed by all of the shareholders of a company shall be deemed to be a special resolution. Under the CBCA, subject to such greater number as may be provided in the articles, a special resolution means a resolution passed by a majority of not less than two-thirds of the votes cast by shareholders who voted in respect of the that resolution. Alternatively, a resolution which has been unanimously passed by all of the shareholders of a corporation shall be deemed to be a special resolution. Fundamental Changes A special resolution is required under the NSCA for a company to effect fundamental changes, including altering its memorandum of association or articles of association, increasing its authorized capital in certain ways or sub-dividing, consolidating or changing its shares, purchasing its own shares other than redeemable shares, being wound-up voluntarily, changing its name or, with court approval, reducing its paid-up capital or being amalgamated. A special resolution is required under the CBCA in order that a corporation amend its articles, approve a voluntary liquidation, dissolution, amalgamation, arrangement, extraordinary sale or continuance. Under both the NSCA and the CBCA, class votes may be required in connection with certain fundamental changes. Under both statutes, the vote must be by a majority of not less than two-thirds of the votes cast by shareholders of the class who vote in respect of that resolution. Both statutes provide for class voting in similar circumstances - 11 - although under the NSCA, class vote rights arise even where the holders of the class are not treated differently than others in respect of the matter at issue. Authorized Capital Under the NSCA, the memorandum of association must state the number of shares a company is authorized to issue. Under the CBCA, the articles may provide for the issuance of an unlimited number of shares. Share Purchase Under the NSCA, a company is permitted to purchase, or otherwise acquire its shares, subject to certain solvency tests and certain exceptions, only upon authorization of the shareholders of the company by special resolution. Under the CBCA, a corporation is permitted to purchase, or otherwise acquire its shares subject to its articles and certain solvency tests, without shareholder approval. Board of Directors The NSCA imposes no restrictions on the composition of a company's board of directors or on the means by which persons are elected or appointed to the board and the NSCA does not require companies to have audit committees. In the case of the Corporation, directors are to be elected by motion carried by at least two-thirds of the votes entitled to be cast on such motion and any motion to elect a director which is not carried by such majority shall be considered not to have been carried. Under the CBCA, at least 25% of a corporation's directors must be Canadians. In addition, an "offering corporation" must have an audit committee composed of not fewer than three directors, a majority of whom are not officers or employees of the corporation or any of its affiliates. The directors of a CBCA corporation are elected by a majority vote of shareholders. Both the NSCA and CBCA provide for the removal of a director. Under the NSCA, a director may be removed by special resolution. This differs from the requirement under the CBCA where a director may be removed by ordinary resolution at a special meeting of shareholders. - 12 - Amending Capital Under the NSCA, capital is amended by passing a special resolution or, in the case of a decrease in authorized capital and certain other changes, by ordinary resolution of the shareholders which is effective immediately; only notice must be provided to the Office of the Registrar of Joint Stock Companies, through filing a copy of the resolution in most cases or, where no special resolution is required, by other written notice. Under the CBCA, capital is amended by filing articles of amendment subsequent to the passing of a special resolution. Ability to Pay Dividends The common law tests applicable in Nova Scotia allow payment of dividends in certain circumstances where dividends could not be paid because of the solvency test in the CBCA. Guarantees or Other Financial Assistance No restrictions exist under the NSCA upon a company giving guarantees or providing other financial assistance except where the shares of the company itself are being purchased, in which case financial assistance is restricted. The CBCA provides that subject to the articles and by-laws, the directors of a corporation may give a guarantee on behalf of the corporation to secure performance of an obligation to any person. Directors' Liability Directors' liability provisions in the NSCA are limited and generally only apply where directors knowingly involve themselves in unlawful activities of the company. A number of provisions in the CBCA impose liability on directors, including liability for certain wages due by a corporation. Ability of Shareholders to Require Investigation of the Company Under the CBCA, any shareholder may apply to the court for an order directing an investigation to be made of the corporation, whereas under the NSCA not less than 10% of the shareholders may apply to the Governor-in-Council to appoint inspectors to investigate the affairs of the company. Articles of Continuance If the Continuance is approved by shareholders, the Corporation intends to file with the Director under the CBCA articles of continuance. - 13 - Adoption of New By-Law The Board of Directors of the Corporation has passed a resolution adopting, upon the effective date of the Continuance, By-Law No. 1 of the Corporation in the form attached as Schedule G to this circular (the "CBCA By-Law"). As a Nova Scotia company, the Corporation's constating documents currently consist of a memorandum of association and articles of association. Therefore, while the Corporation does not currently have a by-law which the CBCA By-Law will repeal and replace, the CBCA By-Law contains provisions similar to some of those in the Corporation's current articles of association, including provisions relating to, among other things, directors, officers, and shareholder meetings. If the Continuance is approved, the CBCA By-Law will be adopted as a by-law of the Corporation. Votes Required to Pass the Continuance Resolution In order to approve the Continuance, the Continuance Resolution in the form attached as Schedule B must be approved at the Meeting by (i) not less than 75% of the votes cast by shareholders who attend the Meeting, in person or by proxy, and (ii) by not less than 66 2/3% of the votes cast by each class of shareholders who attend the meeting, in person or by proxy. The Continuance must also be confirmed by a majority of the votes cast by shareholders who attend the Confirmatory Meeting, present in person or by proxy. The Board of Directors unanimously recommends that shareholders vote in favour of the Continuance Resolution. PROXIES RECEIVED IN FAVOUR OF MANAGEMENT WILL BE VOTED IN FAVOUR OF THE CONTINUANCE RESOLUTION, UNLESS THE SHAREHOLDER HAS SPECIFIED IN THE PROXY THAT HIS OR HER SHARES ARE TO BE VOTED AGAINST THIS RESOLUTION. As noted above, the Management MVS Holders have agreed to vote all of the shares that they beneficially own or control in favour of the Continuance Resolution. As at the date hereof, the Management MVS Holders beneficially own or control, directly or indirectly, an aggregate of 5,986,043 multiple voting shares and 120,449 subordinate voting shares. The Continuance Resolution provides that the Board of Directors is authorized, in its sole discretion, to abandon the application for a certificate of continuance, or determine not to proceed with the Continuance, without further approval of the Corporation's shareholders. In particular, the Board of Directors may determine not to present the Continuance Resolution to the Meeting or, if the Continuance Resolution is presented to the Meetings and approved, may determine not to proceed with completion of the Continuance and filing the articles of continuance under the CBCA. If the Continuance is approved, the CBCA By-Law will be adopted as a by-law of the Corporation. See Schedule G for the full text of the CBCA By-Law. - 14 - Right to Dissent In this section, a reference to a shareholder means a registered holder of shares. Persons who are beneficial owners of shares registered in the name of a broker, custodian, nominee or other intermediary who wish to dissent should be aware that only the registered owner of the shares is entitled to dissent. The NSCA provides shareholders with a statutory right to dissent from certain resolutions of a company which effect fundamental corporate changes. Specifically, shareholders may dissent from the Continuance Resolution or the Confirmatory Resolution by exercising their right of dissent pursuant to section 2 of the third schedule of the NSCA (the "Third Schedule"). In general, any shareholder who dissents from the Continuance Resolution or the Confirmatory Resolution in compliance with the Third Schedule will be entitled, in the event the Continuance Resolution is confirmed and the Continuance becomes effective, to be paid by the Corporation the fair value of the shares held by such dissenting shareholder determined as of the close of business on the day before the resolution approving the Continuance is deemed adopted. A shareholder need not have dissented at the Meeting in order to be able to dissent at the Confirmatory Meeting. The dissent provisions under the NSCA provide that a shareholder may only make a claim thereunder with respect to all the shares of a class held by the shareholder on behalf of any one beneficial owner and registered in the shareholder's name. One consequence of this provision is that a shareholder may only exercise the right to dissent under the dissent procedures in respect of shares that are registered in that holder's name. A shareholder who wishes to dissent from the Continuance Resolution or the Confirmatory Resolution must provide written notice of his or her dissent or a written objection to such resolution (each a "Notice of Dissent") to the Corporation by depositing such Notice of Dissent with the Secretary of the Corporation at 8300 Woodbine Avenue, 5th Floor, Markham, Ontario, Canada, L3R 9Y7, to arrive at or before the Meeting in the case of the Continuance Resolution or at or before the Confirmatory Meeting in the case of the Confirmatory Resolution. The filing of a Notice of Dissent does not deprive a shareholder of the right to vote at the Meeting or the Confirmatory Meeting; however, a shareholder who has submitted a Notice of Dissent in respect of the Continuance Resolution or the Confirmatory Resolution who then votes in favour of such resolution will no longer be considered a dissenting shareholder with respect to that class of shares voted in favour of such resolution. The Corporation will not assume that a vote against the Continuance Resolution or the Confirmatory Resolution or an abstention constitutes a Notice of Dissent. However, a shareholder need not vote his or her shares against either such resolution in order to dissent. Similarly, the revocation of a proxy conferring authority on the proxy holder to vote in favour of either such resolution does not constitute a Notice of Dissent; however, any proxy granted by a shareholder who - 15 - intends to dissent, other than a proxy that instructs the proxy holder to vote against the Continuance Resolution or the Confirmatory Resolution, as the case may be, should be validly revoked (see "Appointment and Revocation of Proxies") in order to prevent the proxy holder from voting such securities in favour of such resolution and thereby causing the shareholder to forfeit his or her right to dissent. The Corporation is required, within 10 days after the Continuance Resolution is unanimously passed or confirmed at the Confirmatory Meeting, as the case may be, to notify each of the dissenting shareholders that the Continuance Resolution and the Confirmatory Resolution have been unanimously passed or confirmed at the Confirmatory Meeting, as the case may be. Such notice is not required to be sent to any shareholder who voted in favour of the resolution from which he or she submitted a Notice of Dissent nor to any shareholder who has withdrawn his or her Notice of Dissent. A dissenting shareholder who has not withdrawn his or her Notice of Dissent must then, within 20 days after receipt of notice that the Continuance Resolution or the Confirmatory Resolution, as the case may be, from which he or she dissented, as the case may be, has been adopted or, if the dissenting shareholder does not receive such notice, within 20 days after he or she learns that such resolution has been adopted, send to the Corporation a written notice (a "Demand for Payment"), containing his or her name and address, the number of shares in respect of which he or she dissents, and a demand for payment of the fair value of such shares. Within 30 days after sending a Demand for Payment, the dissenting shareholder must send to the Corporation or its transfer agent the certificates representing the shares in respect of which he or she dissents. A dissenting shareholder who fails to send certificates representing the shares in respect of which he or she dissents forfeits his or her right to dissent. The Corporation or its transfer agent will endorse on any share certificate received from a dissenting shareholder a notice that the holder is a dissenting shareholder and will forthwith return the share certificates to the dissenting shareholder. After sending a Demand for Payment, a dissenting shareholder ceases to have any rights as a holder of the shares in respect of which the shareholder has dissented other than the right to be paid the fair value of such shares as determined under the dissent procedures, unless (i) the dissenting shareholder withdraws the Demand for Payment before the Corporation makes an offer to pay (the "Offer to Pay"); (ii) the Corporation fails to make a timely Offer to Pay to the dissenting shareholder and the dissenting shareholder withdraws his or her Demand for Payment; or (iii) the Continuance does not proceed in which case the dissenting shareholder's rights as a shareholder are reinstated as of the date he or she sent the Demand for Payment and the shareholder will be entitled to receive his or her shares back. The Corporation is required, not later than 7 days after the later of the Effective Date or the date on which the Corporation receives a Demand for Payment from a dissenting shareholder, to send such dissenting shareholder an Offer to Pay for his or - 16 - her shares in an amount considered by the Board to be the fair value thereof, accompanied by a statement showing the manner in which such fair value was determined. Every Offer to Pay must be on the same terms. The Corporation must pay for the shares of a dissenting shareholder within 10 days after an Offer to Pay has been accepted by such dissenting shareholder, but any such offer lapses if the Corporation does not receive an acceptance thereof within 30 days after the Offer to Pay has been made. If the Corporation fails to make an Offer to Pay for a dissenting shareholder's shares or if a dissenting shareholder fails to accept an Offer to Pay which has been made, the Corporation may, within 50 days after the Effective Date or within such further period as a court may allow, apply to the court to fix a fair value for the shares of dissenting shareholders. If the Corporation fails to apply to the court, a dissenting shareholder may apply to the court for the same purpose within a further period of 20 days or within such further period as the court may allow. A dissenting shareholder is not required to give security for costs in such an application. Upon an application to the court, all dissenting shareholders whose shares have not been purchased by the Corporation will be joined as parties and bound by the decision of the court, and the Corporation will be required to notify each affected dissenting shareholder of the date, place and consequences of the application and of his or her right to appear and be heard in person or by counsel. Upon any such application to the court, the court may determine whether any other person is a dissenting shareholder who should be joined as a party, and the court will then fix a fair value for the shares of all dissenting shareholders. The court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for the shares of all dissenting shareholders. The final order of the court will be rendered against the Corporation in favour of each dissenting shareholder and for the amount of the fair value of his or her shares as fixed by the court. The court may, in its discretion, allow a reasonable rate of interest on the amount payable to each dissenting shareholder from the Effective Date until the date of payment. Please note that the foregoing is only a summary of the dissent procedures under the NSCA, which are technical and complex. A complete copy of Section 2 of the Third Schedule, which provides the full text of the dissent rights under the NSCA, is attached to this circular as Schedule F. It is recommended that any shareholder wishing to avail himself or herself of his or her dissent rights under the dissent procedures of the NSCA seek legal advice as failure to comply strictly with the provisions of the NSCA may prejudice the right of dissent. 2. Special Resolution Authorizing Restructuring of Share Capital The Corporation's authorized capital consists of 200,000,000 subordinate voting shares and 200,000,000 multiple voting shares of which, as at the date hereof, there are 6,027,864 multiple voting shares and 50,005,069 subordinate voting shares issued and outstanding. - 17 - The Board has determined that it would be in the best interests of the shareholders to simplify its share capital structure by (1) creating a new class of shares unlimited in number and designated as common shares ("Common Shares"), (2) changing each issued and outstanding subordinate voting share and each multiple voting share into one Common Share, (3) cancelling all authorized and unissued subordinate voting shares and multiple voting shares in the capital of the Corporation, and (4) removing all of the rights, privileges, restrictions and conditions attaching to the subordinate voting shares and multiple voting shares such that the authorized capital consists of an unlimited number of Common Shares. In light of the extraordinary events facing the Corporation during fiscal 2005, including the loss of the Weight Watchers product line and the untimely passing of former Co-Chairman and Co-Chief Executive Officer Richard E. Smith, the Corporation has determined that the immediate continuation of its dual class structure is desirable, in order to provide the Corporation with some stability during the time when it refocuses its business plan and strategy. Accordingly, the Corporation and the principal holders of the multiple voting shares have determined that the appropriate date at which to effect the Share Capital Restructuring is May 31, 2007, subject to the discretion granted to the independent directors of the Corporation to effect the change earlier than May 31, 2007. Unless circumstances change, the independent directors currently do not intend to exercise this discretion. However, the Board has determined to seek the requisite shareholder approval at this time, so that the Share Capital Restructuring can be effected automatically on May 31, 2007 (or earlier at the decision of the independent directors) without further corporate approvals required. If the Share Capital Restructuring Resolution is passed and upon the effective date of the articles of amendment, each holder of subordinate voting shares and/or multiple voting shares, as the case may be, will then hold one (1) Common Share for each subordinate voting share and/or each multiple voting share previously held. The Corporation will adopt a new form of certificate representing the Common Shares. Although the current certificates representing the subordinate voting shares and the multiple voting shares will continue to represent the Common Shares, shareholders will be entitled to replace their subordinate voting share certificates and multiple voting share certificates for Common Share certificates upon surrendering their certificates and providing such other documentation as may be required by the Corporation to Equity Transfer Services Inc., the transfer agent of the Corporation. Forthwith following the effective date of the articles of amendment in respect of the Share Capital Restructuring, the Corporation will send to each shareholder a form providing details on how to exchange certificates representing subordinate voting shares and/or multiple voting shares for certificates representing Common Shares. Votes Required to Pass the Share Capital Restructuring Resolution In order to approve the Share Capital Restructuring Resolution which is attached as Schedule D, it must be approved at the Meeting by (i) not less than 75% of the votes - 18 - cast by shareholders who attend the Meeting, in person or by proxy, and (ii) by not less than 66 2/3% of the votes cast by each class of shareholders who attend the meeting, in person or by proxy. The Share Capital Restructuring Resolution must also be confirmed by a majority of the votes cast by shareholders who attend the Confirmatory Meeting, present in person or by proxy. PROXIES RECEIVED IN FAVOUR OF MANAGEMENT WILL BE VOTED IN FAVOUR OF THE SHARE CAPITAL RESTRUCTURING RESOLUTION, UNLESS THE SHAREHOLDER HAS SPECIFIED IN THE PROXY THAT HIS OR HER SHARES ARE TO BE VOTED AGAINST THIS RESOLUTION. As noted above, each of the Management MVS Holders have agreed to vote all of the shares that they beneficially own or control in favour of the Share Capital Restructuring Resolution. As at the date hereof, the Management MVS Holders beneficially own or control, directly or indirectly, an aggregate of 5,986,043 multiple voting shares and 120,449 subordinate voting shares. Termination of Trust Agreement On March 18, 1998, Richard E. Smith, David M. Smith, David J. Stein, Michael Serruya, Aaron Serruya, 1082272, the Serruya Trust, Yogen Fruz Worldwide Incorporated and the Chase Manhattan Bank entered into a trust agreement (the "Trust Agreement"). The Trust Agreement governs the voting, transfer and conversion of the Multiple Voting Shares. The parties to the Voting Agreement have agreed that the Trust Agreement be terminated on the date that the Share Capital Restructuring is effective. A copy of the Trust Agreement is available on the Internet at www.sedar.com. Termination of Board Representation Agreement The parties to the Voting Agreement have also agreed that the Board Representation Agreement be terminated on the date that the Share Capital Restructuring is effective. STATEMENT OF EXECUTIVE COMPENSATION Compensation of Named Executive Officers The following table sets forth all compensation earned for the years ended August 31, 2005, August 31, 2004 and August 31, 2003 by the Corporation's Co-Chief Executive Officers, its Chief Financial Officer and the Corporation's next three highest paid executive officers whose salary and bonus during the fiscal year ended August 31, 2005 was equal to or greater than $150,000 (collectively, the "Named Executive Officers"). Amounts are in U.S. dollars, except for amounts related to Michael Serruya and Aaron Serruya which are stated in Canadian dollars. - 19 - Summary Compensation Table
Long-Term Annual Compensation Compensation ------------------- ------------ Year Other Annual Securities Under All Other Name and Ended Salary Bonus Compensation(1) Options Granted(2) Compensation(3) Principal Position August 31 ($) ($) ($) (#) ($) - ------------------------------------------------------------------------------------------------------------------------ Richard E. Smith 2005 (4) - - - - Co-Chairman & 2004 (4) - 8,350,678 709,983 - Co-Chief Executive 2003 (4) - - 225,000 - Officer(4) - ------------------------------------------------------------------------------------------------------------------------ David J. Stein 2005 520,000 - 7,571 2,100 President, Chief 2004 490,000 60,000 10,604,365 709,983 1,950 Executive Officer 2003 326,442 60,000 7,571 225,000 1,820 - ------------------------------------------------------------------------------------------------------------------------ Gary P. Stevens 2005 185,000 50,000 134,363 1,958 Chief Financial 2004 145,800 20,000 10,363 - 1,312 Officer 2003 145,800 20,000 10,363 20,000 1,604 - ------------------------------------------------------------------------------------------------------------------------ Michael Serruya 2005 CAD$420,000 - CAD$59,588 Co-Chairman 2004 CAD$408,461 - CAD$4,695,312 CAD$599,275 - 2003 CAD$320,000 - CAD$26,031 CAD$191,666 - - ------------------------------------------------------------------------------------------------------------------------ Aaron Serruya 2005 CAD$420,000 - CAD$30,222 - Secretary(5) 2004 CAD$408,461 - CAD$4,700,550 CAD$599,275 - 2003 CAD$320,000 - CAD$31,269 CAD$191,666 - - ------------------------------------------------------------------------------------------------------------------------ J. Leo Glynn 2005 245,577 92,000 16,000 100,000 - President, Eskimo 2004 230,000 39,100 16,000 - - Pie Frozen 2003 17,692 - - 50,000 - Distribution Inc. - ------------------------------------------------------------------------------------------------------------------------
Notes: 1) These amounts also include the difference in value between the exercise price of options and the fair market value of the shares at the time of purchase, for options exercised in the fiscal years ended August 31, 2004 and 2005. Certain amounts are paid in U.S. dollars, and have been converted for purposes of the table presentation based upon U.S.$1.00 purchasing CAD$1.2040 and CAD$1.3166 at August 31, 2005 and 2004, respectively. 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) Mr. Richard E. Smith, the former Co-Chairman and Co-Chief Executive Officer of the Corporation who passed away on January 29, 2005, was paid by Calip Dairies, Inc. ("Calip") (an ice cream distributor owned then by Mr. Richard E. Smith and members of his family) pursuant to the terms of a management agreement effective July 1, 2003 between Calip and Integrated Brands. Calip received a fixed fee of $1,300,000 per year for providing a variety of management services, including making available Mr. Richard Smith for the positions of Co-Chairman and Co-Chief Executive Officer of the Corporation. The management agreement was terminated following the passing of Mr. Smith on January 29, 2005. The fees paid to Calip in fiscal 2005 prior to its termination amounted to $542,000. 5) Mr. Aaron Serruya resigned from the position of Executive Vice President of the Corporation in connection with sale by the Corporation in December 2005 of its franchise division to International Franchise Corp., a company controlled by Mr. Aaron Serruya. - 20 - Option Grants During The Most Recently Completed Financial Year The following table sets forth the grants of options made to Named Executive Officers during the most recently completed financial year.
Market Value of Securities Securities Under % of Total Underlying Options Options Granted Options on Date Granted to Employees In Exercise or Base of Grant Name (#)(1) Fiscal Year Price ($/Security) ($/Security) Expiration Date - ------------------------------------------------------------------------------------------------------- Gary P. Stevens 75,000(2) 7.3 4.03 4.03 June 7, 2015 - ------------------------------------------------------------------------------------------------------- J. Leo Glynn 100,000(2) 9.7 4.03 4.03 June 7, 2015 - -------------------------------------------------------------------------------------------------------
Notes: 1) Options granted were to purchase subordinate voting shares. 2) Options vest as to 33% on the date of the grant and 33% on subsequent anniversary dates. Aggregated Option Exercises During the Most Recently Completed Financial Year and Financial Year-End Option Values The following table sets out details of the exercise of stock options during the financial year ended August 31, 2005 by the Named Executive Officers and the financial year-end values of unexercised options held, on an aggregate basis.
Shares Value of Unexercised Acquired on Aggregate Value Unexercised Options in-the-Money Options Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable Name (#) ($) (#) ($)(1) - ------------------------------------------------------------------------------------------------------- David J. Stein - - 709,983/NIL NIL/NIL - ------------------------------------------------------------------------------------------------------- Gary P. Stevens 20,000 124,000 34,000/87,000 9,250/44,250 - ------------------------------------------------------------------------------------------------------- Michael Serruya - - 599,275/NIL NIL/NIL - ------------------------------------------------------------------------------------------------------- Aaron Serruya - - 599,275/NIL NIL/NIL - ------------------------------------------------------------------------------------------------------- J. Leo Glynn - - 53,333/96,667 NIL/NIL - -------------------------------------------------------------------------------------------------------
Note: 1) Market value of underlying subordinate voting shares as at August 31, 2005, being CAD$3.00 minus the exercise price of the options. Termination of Employment, Change in Responsibilities and Employment Contracts Integrated Brands, 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 $520,000 in calendar 2005, and provides for an annual $20,000 increase in each calendar year through 2013, and for an annual salary of $700,000 in any calendar year subsequent to 2013. The contract also provides for annual bonuses at the discretion of the Board. No bonus was paid in fiscal 2005 under the employment agreement. 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 after December 31, 2013 without cause, Integrated Brands must pay Mr. Stein a severance amount equal to 36 months salary at - 21 - the annual rate in effect as of the date of termination. The obligations of Integrated Brands under the agreement are guaranteed by the Corporation. The Corporation has entered into five-year employment agreements with Michael Serruya dated April 9, 1999, which was amended in fiscal 2004. The amended agreement provides for a base salary of CAD$420,000 per annum, increasing by the rate of inflation annually on the anniversary of the employment agreement, and a bonus of up to CAD$100,000 per year, 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 the Corporation. The employment agreement provides for a severance payment in the amount of CAD$500,000 to be made to Mr. Serruya 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 2005, the base salary for Mr. Serruya was CAD$420,000. No bonus was paid for in fiscal 2005 under the employment agreement. Composition of the Compensation Committee During the most recently completed financial year, the Compensation Committee was comprised of the following three independent directors: L. Joshua Sosland (Chair), Arthur Waldbaum and Robert E. Baker. Report on Executive Compensation The Compensation Committee (the "Committee") is, at present, composed of three independent directors. The Committee was reconstituted with independent directors on April 1, 2005 and held one meeting in the last fiscal year and an additional four meetings from September 1, 2005 until January 11, 2006. The Committee's primary function is to assist the Board in fulfilling its responsibilities by overseeing the Corporation's compensation of senior officers and preparing an annual report on executive compensation for the Board and for inclusion in the Corporation's annual proxy circular. Specific responsibilities of the Committee include: (1) in consultation with senior management of the Corporation, establishing the Corporation's compensation policies and/or practices, seeking to ensure such policies and practices are designed to recognize and reward performance and establish a compensation framework which is industry competitive, and which results in the creation of shareholder value over the long-term; (2) reviewing and approving corporate goals and objectives relevant to the compensation of the Chief Executive Officer, evaluating the performance of the Chief Executive Officer in light of these goals and objectives, and - 22 - setting the Chief Executive Officer's total compensation level based on this evaluation and other factors as the Committee deems appropriate and in the best interests of the Company; (3) reviewing the evaluation of other senior officers' performance and setting the compensation of these senior officers, based on their evaluations and other factors as the Committee deems appropriate and in the best interests of the Corporation; (4) overseeing the Corporation's incentive compensation plans and equity-based plans; (5) reviewing and recommending to the Board the compensation of the members of the Board, including any annual retainer, committee membership fees, meeting fees, and other benefits conferred upon the directors; and (6) reviewing the Committee's charter and recommending to the Board changes to it, as considered appropriate from time to time. The executive compensation policies of the Corporation are designed with the objective of attracting and retaining qualified executives by providing compensation packages which are competitive within the marketplace and by compensating them in a manner that encourages individual performance consistent with shareholder expectations. 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 those officers who are subject to long-term employment agreements) 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. - 23 - The cash compensation paid by the Corporation to Mr. David J. Stein, the Chief Executive Officer, is set through an employment agreement, which is described above. The Committee assesses the performance of Mr. David J. Stein on an annual basis when awarding bonuses pursuant to his employment agreement. There is no pension plan of the Corporation in which executive officers or other employees may participate. Submitted on behalf of the Compensation Committee: L. Joshua Sosland, Arthur Waldbaum and Robert E. Baker. Performance Graph On August 31, 2005, the closing price of a subordinate voting share of the Corporation on The Toronto Stock Exchange was CAD$3.00 per subordinate voting share. The following graph compares the Corporation's cumulative total shareholder return from September 1, 2000 to August 31, 2005 with cumulative returns of the S&P/TSX Composite and the TSX Consumer Products Index for the same period. [PERFORMANCE GRAPH] Relative Performance Graph S&P/TSX Consumer Composite Staples COB.SV.A Aug-00 100 100 100 Sep-00 91 107 89 Oct-00 92 114 80 Nov-00 89 120 63 Dec-00 87 120 61 Jan-01 83 113 106 Feb-01 79 122 110 Mar-01 76 124 90 Apr-01 74 125 93 May-01 73 127 127 Jun-01 70 129 145 Jul-01 69 137 153 Aug-01 69 142 155 Sep-01 61 147 127 Oct-01 61 141 118 Nov-01 66 147 216 Dec-01 68 152 241 Jan-02 68 154 279 Feb-02 68 164 316 Mar-02 70 173 386 Apr-02 68 179 390 May-02 68 184 433 Jun-02 64 177 493 Jul-02 59 164 466 Aug-02 59 166 510 Sep-02 55 164 492 Oct-02 56 161 407 Nov-02 58 156 370 Dec-02 59 154 370 Jan-03 58 152 355 Feb-03 58 149 341 Mar-03 56 148 497 Apr-03 59 152 544 May-03 61 164 652 Jun-03 62 167 928 Jul-03 65 170 1,137 Aug-03 67 168 1,210 Sep-03 66 167 1,099 Oct-03 69 175 1,277 Nov-03 70 172 1,148 Dec-03 73 183 1,169 Jan-04 76 179 1,514 Feb-04 78 182 1,748 Mar-04 76 182 1,577 Apr-04 73 176 1,555 May-04 75 181 1,662 Jun-04 76 183 1,510 Jul-04 75 180 827 Aug-04 74 176 700 Sep-04 77 183 638 Oct-04 79 184 466 Nov-04 80 194 582 Dec-04 82 200 629 Jan-05 82 207 531 Feb-05 86 211 615 Mar-05 85 210 617 Apr-05 83 210 397 May-05 85 212 281 Jun-05 88 211 284 Jul-05 93 212 219 Aug-05 96 213 207 - 24 - Compensation of Directors Non-independent Directors of the Corporation did not receive any fees and/or any other type of compensation in fiscal 2005 for acting as such. Independent directors each received a $25,000 retainer and $2,000 for each board or committee meeting attended in person and $250 for each board or committee meeting attended via telephone. In respect of fiscal 2006, the Lead Director, Robert E. Baker, receives a retainer of $50,000. Directors also received a $5,000 retainer ($10,000 in the case of the Chair of each committee) for being a member of a committee. Each independent director also received 10,000 stock options during the fiscal year ended August 31, 2005. 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 $250,000 per claim plus additional umbrella coverage of $10,000,000. The premium paid for the renewal of the coverage during the fiscal year ended August 31, 2005 was $143,640, all of which was paid by the Corporation. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The Corporation has three equity compensation plans: a stock option plan established in 1998 (the "1998 Stock Option Plan"), a plan established in 1994 (the "Predecessor Plan"), and the 2002 Stock Option Plan, as amended (the "2002 Stock Option Plan"). The Predecessor Plan, the 1998 Stock Option Plan and the 2002 Stock Option Plan have each been approved by the shareholders of the Corporation, or its predecessor corporate entities. The following table provides aggregated information as of August 31, 2005 with respect to these plans.
Number of Common Shares Weighted Average Number of Securities to be Issued Upon Exercise Exercise Price of Remaining Available for of Outstanding Options, Outstanding Options, Future Issuance under Plan Category Warrants and Rights Warrants and Rights Equity Compensation Plans - --------------------------------------------------------------------------------------------------------------- Equity Compensation Plans Approved by Securityholders 3,917,000 $14.89 452,985 - --------------------------------------------------------------------------------------------------------------- Equity Compensation Plans Not Approved by Securityholders N/A N/A N/A - ---------------------------------------------------------------------------------------------------------------
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, 2005, or any associate or affiliate thereof, was indebted to the Corporation. As of the date of this Information - 25 - Circular, no officers, directors or employees of the Corporation or their associates were indebted to the Corporation. CORPORATE GOVERNANCE DISCLOSURE The Board is focused on new threshold regulatory standards of corporate governance as well as best practices that go beyond the requirements mandated by regulation. On June 30, 2005 the Canadian Securities Administrators ("CSA") implemented National Policy 58-201 - Corporate Governance Guidelines (the "Policy") and National Instrument 58-101 - Disclosure of Corporate Governance Practices (the "Instrument"). Together, the Policy and the Instrument replaced the corporate governance guidelines of the Toronto Stock Exchange and provide mandated disclosure under the Instrument, as well as best practices under the Policy. To comply with these various standards and achieve best practices, we have adopted comprehensive corporate governance policies and procedures. Our key policies and documents include the following: o Code of Business Conduct o Audit Committee Charter o Corporate Governance Committee Mandate o Compensation Committee Mandate o Terms of Reference for the Co-Chairs of the Board of Directors o Terms of Reference of the Lead Director of the Board of Directors The text of these documents can be found on our website at www.coolbrandsinc.com and are available in print to any shareholder who requests them. Our current governance practices are substantially in compliance with the Instrument and Policy. Set out in Schedule A is a discussion of our practices. INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS No director or executive officer of the Corporation or a subsidiary, or any person who beneficially owns, directly or indirectly, or exercises control or direction over, more than 10% of the voting rights attached to all outstanding voting securities of the Corporation has had any interest, direct or indirect, in any material transaction involving the Corporation or a subsidiary since the commencement of the Corporation's most recently completed financial year that has materially affected or will materially affect the Corporation other than: (a) 701587 Ontario Ltd., a corporation whose sole shareholder is The Serruya Family Trust, a significant shareholder of the Corporation, routinely - 26 - entered into leases with commercial landlords for the premises used by the Corporation's Canadian franchisees and sublets such premises to such franchisees. 701587 Ontario Ltd. did not earn any fees or premium on such leases. Subsequent to the year ended August 31, 2005, the Corporation sold substantially all of its franchising division; (b) The Corporation sold substantially all of its franchising division on December 23, 2005 to International Franchise Corp., a company controlled by Mr. Aaron Serruya, the Secretary and a director of the Corporation, for cash consideration of $8 million; (c) Integrated Brands, a wholly owned subsidiary of the Corporation, has entered into a distribution agreement with Calip, a company controlled by David M. Smith, the Vice-Chairman and Chief Operating Officer of the Corporation. Pursuant to the agreement, Integrated Brands has appointed Calip as its exclusive distributor for any ice cream or other frozen dessert product manufactured by, on behalf of, or under authority of Integrated Brands, its subsidiaries, affiliates or successors in the State of New Jersey and certain areas in the State of New York and the State of Connecticut. The agreement continues until December 31, 2007 and thereafter renews automatically on December 31 of each year for an additional one year term, provided that as of such date at least 50% of the issued and outstanding shares of Calip are beneficially owned by the Smith Family and/or David Stein, unless Calip gives Integrated Brands written notice on or before September 30th of that same year that Calip will not renew the agreement, in which event the agreement terminates effective on December 31 following such notice. The Corporation has agreed to guarantee the performance of the distribution agreement; and (d) Prior to his death on January 29, 2005, Mr. Richard E. Smith, the former Co-Chairman and Co-Chief Executive Officer of the Corporation, was paid by Calip (an ice cream distributor owned then by Mr. Richard E. Smith and members of his family) pursuant to the terms of a management agreement effective July 1, 2003 between Calip and Integrated Brands. Calip received a fixed fee of $1,300,000 per year for providing a variety of management services, including making available Mr. Richard Smith for the positions of Co-Chairman and Co-Chief Executive Officer of the Corporation. The management agreement was terminated following the passing of Mr. Smith on January 29, 2005. The fees paid to Calip in fiscal 2005 prior to its termination amounted to $542,000. - 27 - APPOINTMENT OF AUDITOR Unless authority to do so is withheld, the persons named in the enclosed proxy intend to vote for the appointment of BDO Seidman, LLP, Melville, New York, U.S.A., 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, the Canadian member firm of BDO World Wide, was the auditor of the Corporation since February 28, 2001 and it is proposed that it be replaced with the U.S. member firm of BDO World Wide. In addition to the majority of the Corporation's business being located in the United States, during the past year the Corporation has changed its financial reporting from Canadian generally accepted accounting principles to United States generally accepted accounting principles and has divested itself of the franchise division, the only significant Canadian-based operation of the Corporation. BDO Seidman, LLP is able to serve the Corporation more efficiently from its office in Melville, New York, U.S.A. than BDO Dunwoody LLP in Toronto, Canada. In this regard, in order to comply with National Instrument 51-102 - Continuous Disclosure Obligations, a copy of the Notice of Change of Auditor, the response letter of BDO Dunwoody LLP, and the response letter of BDO Seidman, LLP are attached hereto as Appendix "1". Information relating to the service fees paid to the Corporation's external auditor in each of the last two financial years is included in the Annual Information Form of the Corporation dated December 13, 2005 under the heading "External Auditor Service Fees (By Category)". MANAGEMENT CONTRACTS The management functions of the Corporation are performed by directors, executive officers or senior officers of the Corporation and not, to any substantial degree, by any other person with whom the Corporation has contracted. However, as noted above, Mr. Richard E. Smith, the former Co-Chairman and Co-Chief Executive Officer of the Corporation who passed away on January 29, 2005, was paid by Calip pursuant to the terms of a management agreement effective July 1, 2003 between Calip and Integrated Brands. Calip received a fixed fee of $1,300,000 per year for providing a variety of management services, including making available Mr. Richard Smith for the positions of Chairman and Co-Chief Executive Officer of the Corporation. The management agreement was terminated following the passing of Mr. Smith on January 29, 2005. The fees paid to Calip in fiscal 2005 prior to its termination amounted to $542,000. PARTICULARS OF MATTERS TO BE ACTED UPON Management of the Corporation is unaware of any matters to come before the Meeting other than those referred to in the Notice of Meeting accompanying this Information Circular. However, if any other matters which are not now known to management should properly come before the Meeting, the proxy solicited hereby will - 28 - be voted on such matters in accordance with the best judgment of the persons voting the proxy. AUDIT COMMITTEE INFORMATION Information relating to the Corporation's Audit Committee, including the text of the Corporation's Audit Committee charter, is included in the Annual Information Form of the Corporation dated December 13, 2005 under the heading "Audit Committee". ADDITIONAL INFORMATION Additional information relating to the Corporation is available on the System for Electronic Document Analysis and Retrieval (SEDAR) on the Internet at www.sedar.com. Any shareholder may request copies of the Corporation's annual or interim financial statements and accompanying management's discussion and analysis ("MD&A") by contacting the Corporation at (905) 479-8762. Financial information regarding the Corporation's most recently completed financial year is provided in the Corporation's comparative annual financial statements and accompanying MD&A. 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 13th, 2006 By: /s/ Michael Serruya ---------------------------------- Michael Serruya Co-Chairman of the Board SCHEDULE "A" Corporate Governance Disclosure Board of Directors Independence The Board is comprised of nine directors, a majority of whom (Mr. Robert E. Baker, Ms. Beth L. Bronner, Mr. Romeo DeGasperis, Mr. L. Joshua Sosland and Mr. Arthur Waldbaum) are independent. Pursuant to the Canadian Securities Administrators' Multilateral Instrument 52-110 - Audit Committees and National Instrument 58-101 - Disclosure of Corporate Governance Practices, independent directors are directors who free from any direct or indirect material relationship which could, in the view of the Board, reasonably interfere with a director's independent judgment. Messrs. Michael Serruya, David Smith and David Stein are not independent under these standards as each is an executive officer of the Corporation. Mr. Aaron Serruya is not independent as his brother (Mr. Michael Serruya) is an executive officer of CoolBrands, and he himself was an executive officer and employee of the Corporation until December 2005. Other Directorships Ms. Beth L. Bronner is a director of The Hain Celestial Group, Inc., Reddy Ice Holding, Inc. and Assurant, Inc. L. Joshua Sosland is a director of UMB Financial Corporation. Mr. William R. McManaman, a nominee for election to the Board, is a director of Amcore Financial, Inc. Other than these directors, none of the directors of CoolBrands currently is also a director of another reporting issuer (or the equivalent) in Canada or in a foreign jurisdiction. Common Board Memberships The Board has not adopted a formal policy limiting the number of directors who sit on the same board of directors of another public company but believes disclosure of common board memberships is important. There are no directors who are members of the same board of another public company. Meetings of Independent Directors As a result of the Corporation's review of its corporate governance practices completed in November 2005, the Corporation has instituted the practice whereby the independent directors on the Board and each of the committees meet regularly without management present. The Lead Director of the Board conducts these sessions at Board meetings (and, on occasion, during separate meetings of the independent directors) and the chair of each committee conducts them at committee meetings. Since September 1, - A2 - 2004, the independent directors have met a total of 4 times without management present. During the year ended August 31, 2005, the Board and the committees met as follows: ----------------------------------------------------------------------- Meetings held Meetings held without management ----------------------------------------------------------------------- Board 12 1 ----------------------------------------------------------------------- Audit Committee 5 -- ----------------------------------------------------------------------- Corporate Governance Committee 4 2 ----------------------------------------------------------------------- Compensation Committee 1 1 ----------------------------------------------------------------------- Co-Chairs of the Board Mr. Michael Serruya and Mr. David Stein are Co-Chairs of the Board. The Corporation has a written mandate which sets out and expands upon the role of the Co-Chairs, which is primarily to provide leadership to enhance Board effectiveness and, with the assistance of the Lead Director, to assist in running Board meetings. The responsibilities of the Co-Chairs include ensuring that the Board works as a cohesive group and providing the leadership essential to achieve this objective, setting Board meeting agendas, adopting procedures allowing the board to conduct its work effectively and efficiently, taking all reasonable steps to ensure the conduct of the Board meetings provides adequate time for serious in-depth discussion or relevant issues, representing the Corporation to external groups such as shareholders, and overseeing the decision-making process with respect to acquisitions and divestitures, financings and similar activities. The position description of the Co-Chairs was established this past year, and is expected to be reviewed by the Corporate Governance Committee and considered by the Board for approval each year. For more detailed information on the Co-Chairs' responsibilities, the position description for the Co-Chairs of the Board is available on our website at www.coolbrandsinc.com. Lead Director Mr. Robert E. Baker is the Lead Director. The Lead Director is an independent director of the Board who is designated by the Board. The Corporation has a written mandate describing the key roles and responsibilities of the Lead Director. As neither of the Corporation's Co-Chairs is independent, the Lead Director's key role is to work with the Co-Chairs and ensure that the Board (i) discharges its responsibilities, (ii) has structures and procedures in place to enable it to function independently of management, and (iii) clearly understands and respects the boundaries between the Board and management's responsibilities. The responsibilities of the Lead Director include recommending and chairing periodic special meetings of the independent directors of the Board, chairing Board meetings when neither Co-Chair is in attendance, - A3 - providing input to the Co-Chairs on the preparation of agendas for Board meetings, serving as Board ombudsman so as to ensure that questions or comments of individual directors are heard and addressed, recommending committee chairs to the Board, in consultation with the Corporate Governance Committee, and acting as liaison between the Board and management. The position description of the Lead Director was established this past year, and is expected to be reviewed by the Corporate Governance Committee and considered by the Board for approval each year. For more detailed information on the Lead Director's responsibilities, the position description of the Lead Director is available on our website at www.coolbrandsinc.com. Attendance Record The following table provides a summary of attendance for Board members since September 2004. ------------------------------------------------- Director Board Meetings Attended ------------------------------------------------- Richard Smith 2 of 3(1) ------------------------------------------------- Romeo DeGasperis(2)(3) 17 of 21 ------------------------------------------------- Robert E. Baker(2)(3) 18 of 18 ------------------------------------------------- Arthur Waldbaum(2)(3) 18 of 18 ------------------------------------------------- Beth L. Bronner(2)(3) 17 of 18 ------------------------------------------------- L. Joshua Sosland(2)(3) 18 of 18 ------------------------------------------------- Michael Serruya 18 of 18 ------------------------------------------------- Aaron Serruya 17 of 18 ------------------------------------------------- David J. Stein 18 of 18 ------------------------------------------------- David M. Smith 18 of 18 ------------------------------------------------- Notes: 1) As noted elsewhere in the Circular, Mr. Richard Smith passed away on January 29, 2005. 2) Three of the Board meetings held since September 2004 were meetings to which only the independent directors were invited. 3) Other than Mr. DeGasperis, the independent members of the Board were elected to the Board in February 2005. Mandate of the Board of Directors The Board is responsible for supervising the management of the Corporation's business and affairs. The Board's principal responsibilities relate to the stewardship of management and are summarized below: o Strategic planning - the Board reviews and approves the Corporation's strategic planning process and annual strategic plan in light of management's assessment of emerging trends, the competitive environment, risk issues and significant business practices and products; o Risk management - the Board (with assistance from the Audit Committee) reviews management reports on material risks associated with our businesses and operations, the implementation by management of - A4 - systems to manage these risks and material deficiencies in the operation of these systems; o Human resources management - the Board (through the Compensation Committee) reviews the Corporation's approach to human resource management and executive compensation, the extent to which senior management fosters a culture of integrity and succession planning for the Chief Executive Officer and key senior management positions; o Financial corporate governance - the Board (with assistance from the Corporate Governance Committee) reviews the Corporation's approach to corporate governance, director independence, the Corporation's code of conduct, and policies relating to reputation and legal risk; o Information - the Board (with assistance from the Audit Committee) reviews the integrity of the Corporation's financial information and systems; o Communications - the Board reviews the Corporation's overall communications strategy, measures for receiving shareholder feedback and compliance with the Corporation's disclosure policy; o Board committees - the Board establishes committees and their mandates and requires committee chairs to present a report to the Board on material matters considered by the committee at the next Board meeting; o Director development and evaluation - the Board (with assistance from management, the Co-Chairs of the Board and the committees) develops director orientation programs and continuing development programs for directors and evaluates the performance of the Board, its committees and each director. Position Descriptions As described above, the Board has developed written position descriptions for the Co-Chairs and Lead Directors. The Board has not developed written position descriptions for the chairs of each of its standing committees, although it expects these chairs to provide the leadership on these committees to ensure that these committees fulfill their roles and responsibilities as set out in the written mandates for these committees. The Board has not at this time developed a written position description for the Chief Executive Officer; however, in the written charter recently adopted for the Corporate Governance Committee it has delegated the responsibility to develop such a written position description to this committee. - A5 - Orientation and Continuing Education The Corporation elected a number of new independent directors to the Board in fiscal 2005, and presented a comprehensive orientation meeting for these new directors at which the head of each principal business function provided a detailed description of his area of responsibility, and his short and medium term goals and objectives. This meeting has been followed over the course of the year with shorter presentations from these executives on their contribution to the Corporation's overall strategy and direction. Ethical Business Conduct The Board adopted a Code of Business Conduct that applies to all employees, officers and directors of the Corporation and its subsidiaries from time to time. The principles outlined in the code are intended to: o establish a minimum standard of conduct by which all employees are expected to abide; o protect the business interests of CoolBrands, its employees and customers; o maintain CoolBrands' reputation for integrity; and o facilitate compliance by CoolBrands employees with applicable legal and regulatory obligations. The Code of Business Conduct addresses honesty and integrity, conflicts of interest, gifts and entertainment, political activities, protection and use of the Corporation's assets, records and document retention, information security, corporate opportunities, confidentiality of corporate information, fair dealing with other people and organizations, diversity and harassment-free environment, complying with the law, whistleblowing procedures, and compliance standards and procedures. The Code of Conduct requires that each officer and employee in a supervisory role annually certify that he or she has reviewed the Code of Conduct and has reported any relationship or circumstance that could place that person in a potential conflict of interest with the Corporation. The text of our Code of Business Conduct is available on our website at www.coolbrandsinc.com. Nomination of Directors The Corporation has a Corporate Governance Committee which is comprised of Ms. Beth L. Bronner (Chair), and Messrs. L. Joshua Sosland and Robert E. Baker, each of whom is independent within the meaning of applicable securities laws. The responsibility for overseeing the Corporation's nomination process has been delegated by the Board to the Corporation's Corporate Governance Committee. The Board has established a written charter that describes the role and function of the Corporate Governance Committee. The written charter is available on our website at www.coolbrandsinc.com. - A6 - The primary function of the Corporate Governance Committee is to assist the Board in fulfilling its corporate governance oversight responsibilities by assessing the effectiveness of the Board as a whole as well as well as discussing the contribution of individual members; periodically assessing the Corporation's governance; proposing to the Board for consideration and decision nominees for appointment to the Board at each annual meeting of shareholders and nominees for appointment to fill any vacancies on the Board; and proposing to the Board for consideration and decision a nominee for appointment as Lead Director, in the event that the Chair, or either of the Co-Chairs of the Board is not independent within the meaning of securities laws. The Corporate Governance Committee uses the network of personal contacts in the consumer products and frozen dessert industries and capital markets of the members of the Board for identifying potential new Board members. The Corporate Governance Committee may also utilize the services of a professional search firm to assist in the identification of director candidates when necessary. Compensation The Corporation has a Compensation Committee which is comprised of Messrs. L. Joshua Sosland (Chair), Robert E. Baker and Arthur Waldbaum, each of whom is independent within the meaning of applicable securities laws. The Board has established a written charter that describes the role and function of the Compensation Committee. The written charter is available on our website at www.coolbrandsinc.com. The responsibilities, powers and operation of the Compensation Committee include establishing the Corporation's senior officer compensation policy and practices, reviewing and approving the corporate goals and objectives relevant to the compensation of the Chief Executive Officer and other senior officers and evaluating their performance in light of these goals and objectives; overseeing the Corporation's incentive compensation plans and preparing an annual report on executive compensation to the Board. The Compensation Committee is also responsible for recommending to the Board any changes to director compensation. Assessments of the Board Part of the mandate of the Corporate Governance Committee is to evaluate and review the Co-Chairs', the Lead Director's, the Chief Executive Officer's, and the Board's performance and that of its committees and its directors annually. Since most of the Corporation's independent directors have served on the Board for less than one year, the Corporate Governance Committee has not yet commenced this assessment process. The Corporate Governance Committee may retain an external consultant to assist in conducting this assessment. SCHEDULE "B" Special Resolution Continuing Coolbrands International Inc. under the Canada Business Corporations Act RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. subject to and conditional upon the authorization of the Nova Scotia Registrar of Joint Stock Companies pursuant to Section 133(5) of the Companies Act (Nova Scotia), CoolBrands International Inc. (the "Company") make application to the Director of the Canada Business Corporations Act for a certificate of continuance continuing the Company under the Canada Business Corporations Act; 2. subject to and effective upon the issuance of such certificate of continuance and without affecting the validity of the incorporation and existence of the Company, the Company hereby approves and adopts, in substitution for the existing memorandum of association and articles of association of the Company, articles of continuance pursuant to the Canada Business Corporations Act with such changes as are required to comply with the Canada Business Corporations Act; 3. the adoption of General By-Law No. 1 substantially in form of the draft General By-Law No. 1 attached as Schedule G to the Management Information Circular of CoolBrands dated January 13, 2006 for use at the annual and special meeting of shareholders of CoolBrands to be held on February 27, 2006, with such amendments and variations as the directors may approve, effective on the date that CoolBrands is continued under the CBCA, adopted by resolution of the board of directors of CoolBrands dated the 11th day of January, 2006, is hereby confirmed; 4. notwithstanding that this resolution has been passed by the members of the Company, the directors of the Company are hereby authorized and empowered to not proceed with the application for continuance at any time prior to the issue of a certificate of continuance giving effect to the application for continuance without the further approval of the members of the Company if they determine it appropriate in the exercise of their fiduciary duties as the directors of the Company; and 5. any one of the directors or officers of the Company is hereby authorized, acting for, in the name of and on behalf of the Company, to execute or cause to be executed, under the seal of the Company or otherwise, and to deliver or to cause to be delivered, all such documents, agreements and instruments, and to do or cause to be done all such other acts and things, as such person determines to be necessary or desirable in order to carry out the intent of the foregoing paragraphs of this 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. SCHEDULE "C" CONFIRMATORY RESOLUTION RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. The resolution reproduced below be and is hereby confirmed; and 2. The secretary of the Company is hereby directed to file a true copy of the attached resolution with the Nova Scotia Registrar of Joint Stock Companies certified under the hand of the secretary of the Company as being passed as a special resolution in accordance with section 87(l) of the Companies Act (Nova Scotia). ********** Special Resolution Continuing Coolbrands International Inc. under the Canada Business Corporations Act RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. subject to and conditional upon the authorization of the Nova Scotia Registrar of Joint Stock Companies pursuant to Section 133(5) of the Companies Act (Nova Scotia), CoolBrands International Inc. (the "Company") make application to the Director of the Canada Business Corporations Act for a certificate of continuance continuing the Company under the Canada Business Corporations Act; 2. subject to and effective upon the issuance of such certificate of continuance and without affecting the validity of the incorporation and existence of the Company, the Company hereby approves and adopts, in substitution for the existing memorandum of association and articles of association of the Company, articles of continuance pursuant to the Canada Business Corporations Act with such changes as are required to comply with the Canada Business Corporations Act; 3. the adoption of General By-Law No. 1 substantially in form of the draft General By-Law No. 1 attached as Schedule G to the Management Information Circular of CoolBrands dated January 13, 2006 for use at the annual and special meeting of shareholders of CoolBrands to be held on February 27, 2006, with such amendments and variations as the directors may approve, effective on the date that CoolBrands is continued under the CBCA, adopted by resolution of the board of directors of CoolBrands dated the 11th day of January, 2006, is hereby confirmed; 4. notwithstanding that this resolution has been passed by the members of the Company, the directors of the Company are hereby authorized and empowered to not proceed with the application for continuance at any time prior to the issue of a certificate of continuance giving effect to the application for continuance without the further approval of the members of the Company if they determine it appropriate in the exercise of their fiduciary duties as the directors of the Company; and 5. any one of the directors or officers of the Company is hereby authorized, acting for, in the name of and on behalf of the Company, to execute or cause to be executed, under the seal of the Company or otherwise, and to deliver or to cause to be delivered, all such documents, agreements and instruments, and to do or cause to be done all such other acts and things, as such person determines to be necessary or desirable in order to carry out the intent of the foregoing paragraphs of this 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. SCHEDULE "D" SHARE CAPITAL RESTRUCTURING RESOLUTION RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. CoolBrands International Inc. (the "Corporation") is hereby authorized, following the time that the Corporation is continued under the Canada Business Corporations Act (the "Act"), to amend the articles of the Corporation by: (a) increasing the authorized capital of the Corporation by creating a new class of shares, unlimited in number, designated as Common Shares; (b) changing each issued and outstanding subordinate voting share and each issued and outstanding multiple voting share into one of the Common Shares created hereby; (c) decreasing the authorized capital of the Corporation by cancelling all authorized and unissued subordinate voting shares and multiple voting shares in the capital of the Corporation; (d) removing all of the rights, privileges, restrictions and conditions attaching to the subordinate voting shares and multiple voting shares; (e) declaring that the authorized capital of the Corporation, after giving effect to the foregoing, shall consist of an unlimited number of Common Shares; and (f) by making such conforming amendments to the certificate and articles as may be required to reflect the foregoing resolution; 2. upon articles of amendment having become effective (the "Effective Date") in accordance with the Act, the articles of the Corporation are hereby amended accordingly; 3. the termination, as at the Effective Date, of the trust agreement among Richard E. Smith, David M. Smith, David J. Stein, Michael Serruya, Aaron Serruya, 1082272 Ontario Inc., The Serruya Family Trust, Yogen Fruz World-Wide Incorporated and the Chase Manhattan Bank dated March 18, 1998 is hereby approved; and 4. any director or officer of the Corporation be and he or she is hereby authorized and directed on behalf of the Corporation to deliver articles of amendment in duplicate to the Director under the Act and to sign and execute all documents and do all things necessary or advisable in connection with the foregoing, provided that such director or officer shall cause the articles of amendment to be effective on May 31, 2007 or such earlier date as may be determined by unanimous consent of the independent directors of the Corporation in their discretion. SCHEDULE "E" CONFIRMATORY RESOLUTION RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. The resolution reproduced below be and is hereby confirmed; and 2. The secretary of the Company is hereby directed to file a true copy of the attached resolution with the Nova Scotia Registrar of Joint Stock Companies certified under the hand of the secretary of the Company as being passed as a special resolution in accordance with section 87(l) of the Companies Act (Nova Scotia). ********** Share Capital Restructuring Resolution RESOLVED, AS A SPECIAL RESOLUTION, THAT: 1. CoolBrands International Inc. (the "Corporation") is hereby authorized, following the time that the Corporation is continued under the Canada Business Corporations Act (the "Act"), to amend the articles of the Corporation by: (a) increasing the authorized capital of the Corporation by creating a new class of shares, unlimited in number, designated as Common Shares; (b) changing each issued and outstanding subordinate voting share and each issued and outstanding multiple voting share into one of the Common Shares created hereby; (c) decreasing the authorized capital of the Corporation by cancelling all authorized and unissued subordinate voting shares and multiple voting shares in the capital of the Corporation; (d) removing all of the rights, privileges, restrictions and conditions attaching to the subordinate voting shares and multiple voting shares; (e) declaring that the authorized capital of the Corporation, after giving effect to the foregoing, shall consist of an unlimited number of Common Shares; and (f) by making such conforming amendments to the certificate and articles as may be required to reflect the foregoing resolution; 2. upon articles of amendment having become effective (the "Effective Date") in accordance with the Act, the articles of the Corporation are hereby amended accordingly; 3. the termination, as at the Effective Date, of the trust agreement among Richard E. Smith, David M. Smith, David J. Stein, Michael Serruya, Aaron Serruya, 1082272 Ontario Inc., The Serruya Family Trust, Yogen Fruz World-Wide Incorporated and the Chase Manhattan Bank dated March 18, 1998 is hereby approved; and 4. any director or officer of the Corporation be and he or she is hereby authorized and directed on behalf of the Corporation to deliver articles of amendment in duplicate to the Director under the Act and to sign and execute all documents and do all things necessary or advisable in connection with the foregoing, provided that such director or officer shall cause the articles of amendment to be effective on May 31, 2007 or such earlier date as may be determined by unanimous consent of the independent directors of the Corporation in their discretion. SCHEDULE "F" Section 2 of the Third Schedule of the NSCA 1. A holder of shares of any class of a company may dissent if the company is subject to an order under clause (d) of Section 3 hereof that affects the holder or if the company resolves to (a) amend its memorandum or articles to add, change or remove any provisions restricting or constraining the issue or transfer of the shares of that class; (b) amend its memorandum or articles to add, change or remove any restriction upon the business or businesses that the company may carry on; (c) amalgamate with another company, other than any wholly-owned subsidiary of the company; (d) be continued under the laws of another jurisdiction under subsection (5) of Section 133 of the Act; or (e) sell, lease or exchange all or substantially all its property other than in the ordinary course of business of the company. 2. A holder of shares of any class or series of shares entitled to vote separately as a class or series upon any such amendment may dissent if the company resolves to amend its memorandum or articles to (a) increase or decrease any maximum number of authorized shares of such class, or increase any maximum number of authorized shares of a class having rights or privileges equal or superior to the shares of such class; (b) effect an exchange, reclassification or cancellation of all or part of the shares of such class; (c) add, change or remove the rights, privileges, restrictions or conditions attached to the shares of such class and, without limiting the generality of the foregoing, (i) remove or change prejudicially rights to accrued dividends or rights to cumulative dividends, (ii) add, remove or change prejudicially redemption rights, (iii) reduce or remove a dividend preference or a liquidation preference, or - F2 - (iv) add, remove or change prejudicially conversion privileges, options, voting, transfer or pre-emptive rights, or rights to acquire securities of the company, or sinking fund provisions; (d) increase the rights or privileges of any class of shares having rights or privileges equal or superior to the shares of such class; (e) create a new class of shares equal or superior to the shares of such class; (f) make any class of shares having rights or privileges inferior to the shares of such class equal or superior to the shares of such class; (g) effect an exchange or create a right of exchange of all or part of the shares of another class into the shares of such class; or (h) constrain the issue or transfer of the shares of such class or extend or remove such constraint. 3. Management's proxy circular or notice of meeting relating to a meeting of shareholders at which a proposal or other resolution with respect to any matter referred to in subsection (1) or (2) of this Section is to be raised or voted on shall state that a dissenting shareholder is entitled to be paid the fair value of his shares in accordance with this Section, but failure to make that statement does not invalidate the meeting or business thereat. 4. In addition to any other right he may have, but subject to subsection (26) of this Section, a shareholder who complies with this Section is entitled, when the action approved by the resolution from which he dissents or an order made under clause (d) of Section 3 hereof becomes effective, to be paid by the company the fair value of the shares held by him in respect of which he dissents, determined as of the close of business on the day before the resolution was adopted or the order was made. 5. A dissenting shareholder may only claim under this Section with respect to all the shares of a class held by him on behalf of any one beneficial owner and registered in the name of the dissenting shareholder. 6. A dissenting shareholder shall send to the company, at or before any meeting of shareholders at which a proposal or other resolution with respect to any matter referred to in subsection (1) or (2) of this Section is to be raised or voted on, a written objection to the resolution, unless the company did not give notice to the shareholder of the purpose of the meeting or of his right to dissent. 7. The company shall, within ten days after the shareholders adopt the resolution, send to each shareholder who has filed the objection referred to in subsection (6) of this Section notice that the resolution has been adopted, but such notice is not - F3 - required to be sent to any shareholder who voted for the resolution or who has withdrawn his objection. 8. A dissenting shareholder shall, within twenty days after he receives a notice under subsection (7) of this Section or, if he does not receive such notice, within twenty days after he learns that the resolution has been adopted, send to the company a written notice containing (a) his name and address; (b) the number and class of shares in respect of which he dissents; (c) and a demand for payment of the fair value of such shares. 9. A dissenting shareholder shall, within thirty days after sending a notice under subsection (8) of this Section, send the certificates representing the shares in respect of which he dissents to the company or any securities registrar of the company. 10. A dissenting shareholder who fails to comply with subsection (9) of this Section has no right to make a claim under this Section. 11. A company or its securities registrar shall endorse on any share certificate received under subsection (9) of this Section a notice that the holder is a dissenting shareholder under this Section and shall forthwith return the share certificates to the dissenting shareholder. 12. On sending a notice under subsection (8) of this Section, a dissenting shareholder ceases to have any rights as a shareholder other than the right to be paid the fair value of his shares as determined under this Section except where (a) the dissenting shareholder withdraws his notice before the company makes an offer under subsection (13) of this Section; (b) the company fails to make an offer in accordance with subsection (13) of this Section and the dissenting shareholder withdraws his notice; or (c) the resolution to amend the memorandum or articles is revoked, the Share Capital Restructuring or application for continuance terminated, or the sale, lease or exchange abandoned, as the case may be, in which case his rights as a shareholder are reinstated as of the date he sent the notice referred to in subsection (8) of this Section. 13. A company shall, not later than seven days after the later of the day on which the action approved by the resolution is effective or the day the company received - F4 - the notice referred to in subsection (8) of this Section, send to each dissenting shareholder who has sent such notice (a) a written offer to pay for his shares in an amount considered by the directors of the company to be the fair value thereof, accompanied by a statement showing how the fair value was determined; or (b) if subsection (26) of this Section applies, a notification that it is unable lawfully to pay dissenting shareholders for their shares. 14. Every offer made under subsection (13) of this Section for shares of the same class or series shall be on the same terms. 15. Subject to subsection (26) of this Section, a company shall pay for the shares of a dissenting shareholder within ten days after an offer made under subsection (13) of this Section has been accepted, but any such offer lapses if the company does not receive an acceptance thereof within thirty days after the offer has been made. 16. Where a company fails to make an offer under subsection (13) of this Section, or if a dissenting shareholder fails to accept an offer, the company may, within fifty days after the action approved by the resolution or order made under clause (d) of Section 3 hereof becomes effective or within such further period as the court may allow, apply to the court to fix a fair value for the shares of any dissenting shareholder. 17. If a company fails to apply to the court under subsection (16) of this Section, a dissenting shareholder may apply to the court for the same purpose within a further period of twenty days or within such further period as the court may allow. 18. A dissenting shareholder is not required to give security for costs in an application made under subsection (16) or (17) of this Section. 19. Upon an application under subsection (16) or (17) of this Section (a) all dissenting shareholders whose shares have not been purchased by the company shall be joined as parties and are bound by the decision of the court; and (b) the company shall notify each affected dissenting shareholder of the date, place and consequences of the application and of his right to appear and be heard in person or by counsel. 20. Upon an application to the court under subsection (16) or (17) of this Section, the court may determine whether any other person is a dissenting shareholder who - F5 - should be joined as a party, and the court shall then fix a fair value for the shares of all dissenting shareholders 21. The court may in its discretion appoint one or more appraisers to assist the court to fix a fair value for the shares of the dissenting shareholders. 22. The final order of the court shall be rendered against the company in favour of each dissenting shareholder and for the amount of his shares as fixed by the court. 23. The court may in its discretion allow a reasonable rate of interest on the amount payable to each dissenting shareholder from the date the action approved by the resolution is effective until the date of payment. 24. If subsection (26) of this Section applies, the company shall, within ten days after the pronouncement of an order under subsection (22) of this Section, notify each dissenting shareholder that it is unable lawfully to pay dissenting shareholders for their shares. 25. If subsection (26) of this Section applies, a dissenting shareholder, by written notice delivered to the company within thirty days after receiving a notice under subsection (24) of this Section, may (a) withdraw his notice of dissent, in which case the company is deemed to consent to the withdrawal and the shareholder is reinstated to his full rights as a shareholder; or (b) retain a status as a claimant against the company, to be paid as soon as the company is lawfully able to do so or, in a liquidation, to be ranked subordinate to the rights of creditors of the company but in priority to its shareholders. 26. A company shall not make a payment to a dissenting shareholder under this Section if there are reasonable grounds for believing that (a) the company is or would after the payment be unable to pay its liabilities as they become due; or (b) the realizable value of the company's assets would thereby be less than the aggregate of its liabilities. 27. Notwithstanding the foregoing, a shareholder is not entitled to dissent under this Section if an amendment to the memorandum or articles of the company is effected by court order made under any other Act that affects the rights among the company, its shareholders and creditors or under Section 5 hereof. SCHEDULE "G" By-Law No. 1 of CoolBrands International Inc. ARTICLE 1 INTERPRETATION Section 1.1 Definitions. As used in this by-law, the following terms have the following meanings: "Act" means the Canada Business Corporations Act and the regulations under the Act, all as amended, re-enacted or replaced from time to time. "Authorized Signatory" has the meaning specified in Section 2.2. "Corporation" means CoolBrands International Inc. "person" means a natural person, partnership, limited partnership, limited liability partnership, corporation, limited liability corporation, unlimited liability company, joint stock company, trust, unincorporated association, joint venture or other entity or governmental or regulatory entity, and pronouns have a similarly extended meaning. "recorded address" means (i) in the case of a shareholder or other securityholder, the shareholder's or securityholder's latest address as shown in the records of the Corporation, (ii) in the case of joint shareholders or other joint securityholders, the address appearing in the records of the Corporation in respect of the joint holding or, if there is more than one address in respect of the joint holding, the first address that appears, and (iii) in the case of a director, officer or auditor, the person's latest address as shown in the records of the Corporation or, if applicable, the last notice filed with the Director under the Act, whichever is the most recent. "show of hands" means a show of hands by persons present at the meeting, the functional equivalent of a show of hands by telephonic, electronic or other means of communication and any combination of such methods. Terms used in this by-law that are defined in the Act have the meanings given to such terms in the Act. Section 1.2 Interpretation. The division of this by-law into Articles, Sections and other subdivisions and the insertion of headings are for convenient reference only and do not affect its interpretation. Words importing the singular number include the plural and vice versa. Any reference in this by-law to gender includes all genders. In this by-law the words - G2 - "including", "includes" and "include" means "including (or includes or include) without limitation". Section 1.3 Subject to Act and Articles. This by-law is subject to, and should be read in conjunction with, the Act and the articles. If there is any conflict or inconsistency between any provision of the Act or the articles and any provision of this by-law, the provision of the Act or the articles will govern. Section 1.4 Conflict With Unanimous Shareholder Agreement. If there is any conflict or inconsistency between any provision of a unanimous shareholder agreement and any provision of this by-law, the provision of such unanimous shareholder agreement will govern. ARTICLE 2 BUSINESS OF THE CORPORATION Section 2.1 Financial Year. The financial year of the Corporation ends on such date of each year as the directors determine from time to time. Section 2.2 Execution of Instruments and Voting Rights. Contracts, documents and instruments may be signed on behalf of the Corporation, either manually or by facsimile or by electronic means, (i) by any one of the following: a director, the chair or, if there are co-chairs of the board, either co-chair, the president, the chief executive officer, the chief financial officer, the corporate secretary and the treasurer and (ii) by any other person authorized by the directors from time to time, (each Person referred to in (i) and (ii) is an "Authorized Signatory"). Voting rights for securities held by the Corporation may be exercised on behalf of the Corporation by any one Authorized Signatory. In addition, the directors or any two Authorized Signatories may, from time to time, authorize any person or persons (i) to sign contracts, documents and instruments generally on behalf of the Corporation or to sign specific contracts, documents or instruments on behalf of the Corporation and (ii) to exercise voting rights for securities held by the Corporation generally or to exercise voting rights for specific securities held by the Corporation. Any Authorized Signatory, or other person authorized to sign any contract, document or instrument on behalf of the Corporation, may affix the corporate seal, if any, to any contract, document or instrument when required. As used in this Section, the phrase "contracts, documents and instruments" means any and all kinds of contracts, documents and instruments in written or electronic form, including cheques, drafts, orders, guarantees, notes, acceptances and - G3 - bills of exchange, deeds, mortgages, hypothecs, charges, conveyances, transfers, assignments, powers of attorney, agreements, proxies, releases, receipts, discharges and certificates and all other paper writings or electronic writings. Section 2.3 Qualifications Each director shall be eighteen (18) or more years of age and no person who is not an individual, who has the status of a bankrupt or who is of unsound mind and has been so found by a court in Canada or elsewhere shall be a director. If a director acquires the status of a bankrupt or becomes of unsound mind and is so found, he shall thereupon cease to be a director. Section 2.4 Banking Arrangements. The banking and borrowing business of the Corporation or any part of it may be transacted with such banks, trust companies or other firms or corporations as the directors determine from time to time. All such banking and borrowing business or any part of it may be transacted on the Corporation's behalf under the agreements, instructions and delegations, and by the one or more officers and other persons, that the directors authorize from time to time. This paragraph does not limit in any way the authority granted under Section 2.2. ARTICLE 3 DIRECTORS Section 3.1 Number of Directors. If the articles specify a minimum and a maximum number of directors, the number of directors is the number within the minimum and maximum determined by the directors from time to time. No decrease in the number of directors will shorten the term of an incumbent director. Section 3.2 Place of Meetings. Meetings of directors may be held at any place in or outside Canada. Section 3.3 Calling of Meetings. The president or any director may call a meeting of the directors at any time. Meetings of directors will be held at the time and place as the person(s) calling the meeting determine. Section 3.4 Regular Meetings. The directors may establish regular meetings of directors. Any resolution establishing such meetings will specify the dates, times and places of the regular meetings and will be sent to each director. - G4 - Section 3.5 Notice of Meeting. Subject to this section, notice of the time and place of each meeting of directors will be given to each director not less than 48 hours before the time of the meeting. No notice of meeting is required for any regularly scheduled meeting except where the Act requires the notice to specify the purpose of, or the business to be transacted at, the meeting. Provided a quorum of directors is present, a meeting of directors may be held, without notice, immediately following the annual meeting of shareholders. The accidental omission to give notice of any meeting of directors to, or the non-receipt of any notice by, any person, or any error in any notice not affecting the substance of the notice, does not invalidate any resolution passed or any action taken at the meeting. Section 3.6 Waiver of Notice. A director may waive notice of a meeting of directors, any irregularity in a notice of meeting of directors or any irregularity in a meeting of directors. Such waiver may be given in any manner and may be given at any time either before or after the meeting to which the waiver relates. Waiver of any notice of a meeting of directors cures any irregularity in the notice, any default in the giving of the notice and any default in the timeliness of the notice. Section 3.7 Quorum. A majority of the number of directors in office or such greater or lesser number as the directors may determine from time to time, constitutes a quorum at any meeting of directors. Notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of the directors. Section 3.8 Meeting by Telephonic, Electronic or Other Communication Facility. A director may, if all the directors of the Corporation consent, participate in a meeting of directors by means of a telephonic, electronic or other communication facility. A director participating in a meeting by such means is deemed to be present at the meeting. Any consent is effective whether given before or after the meeting to which it relates and may be given with respect to all meetings of the directors. Section 3.9 Chair. The chair of any meeting of directors is the first mentioned of the following officers that is a director and is present at the meeting: a) the chair of the board, or, if there are co-chairs, either co-chair of the board; or b) the lead director, if any; or - G5 - c) the president. If no such person is present at the meeting, the directors present shall choose one of their number to chair the meeting. Section 3.10 Secretary. The corporate secretary, if any, will act as secretary at meetings of directors. If a corporate secretary has not been appointed or the corporate secretary is absent, the chair of the meeting will appoint a person, who need not be a director, to act as secretary of the meeting. Section 3.11 Votes to Govern. At all meetings of directors, every question shall be decided by a majority of the votes cast. In case of an equality of votes, the chair of the meeting is not entitled to a second or casting vote. Section 3.12 Remuneration and Expenses. The directors may determine from time to time the remuneration, if any, to be paid to a director for his or her services as a director. The directors are also entitled to be reimbursed for travelling and other out-of-pocket expenses properly incurred by them in attending directors meetings, committee meetings and shareholders meetings and in the performance of other duties of directors of the Corporation. The directors may also award additional remuneration to any director undertaking special services on the Corporation's behalf beyond the services ordinarily required of a director by the Corporation. A director may be employed by or provide services to the Corporation otherwise than as a director. Such a director may receive remuneration for such employment or services in addition to any remuneration paid to the director for his or her services as a director. ARTICLE 4 COMMITTEES Section 4.1 Committees of Directors. The directors may appoint from their number one or more committees and delegate to such committees any of the powers of the directors except those powers that, under the Act, a committee of directors has no authority to exercise. Section 4.2 Proceedings. Meetings of committees of directors may be held at any place in or outside Canada. At all meetings of committees, every question shall be decided by a majority of - G6 - the votes cast on the question. Unless otherwise determined by the directors, each committee of directors may make, amend or repeal rules and procedures to regulate its meetings including: (i) fixing its quorum, provided that quorum may not be less than a majority of its members; (ii) procedures for calling meetings; (iii) requirements for providing notice of meetings; (iv) selecting a chair for a meeting; and (v) determining whether the chair will have a deciding vote in the event there is an equality of votes cast on a question. Subject to a committee of directors establishing rules and procedures to regulate its meetings, Sections 3.3 to 3.12 inclusive apply to committees of directors, with such changes as are necessary. ARTICLE 5 OFFICERS Section 5.1 Appointment of Officers. The directors may appoint such officers of the Corporation as they deem appropriate from time to time. The officers may include any of a chair of the board, a president, a chief executive officer, a chief operating officer, one or more vice-presidents, a chief financial officer, a corporate secretary and a treasurer and one or more assistants to any of the appointed officers. No person may be the chair of the board unless that person is a director. Section 5.2 Powers and Duties. Unless the directors determine otherwise, an officer has all powers and authority that are incident to his or her office. An officer will have such other powers, authority, functions and duties that are prescribed or delegated, from time to time, by the directors, or by other officers if authorized to do so by the directors. The directors or authorized officers may, from time to time, vary, add to or limit the powers and duties of any officer. Section 5.3 Chair of the Board. If appointed, the chair of the board (or one of the co-chairs, if these are co-chairs appointed) will preside at directors meetings and shareholders meetings in accordance with Section 3.10 and Section 7.9, respectively. The chair(s) of the board will have such other powers and duties as the directors determine. Section 5.4 Chief Executive Officer If appointed, the chief executive officer of the Corporation will have general supervision of the business and affairs of the Corporation. The chief executive officer will have such other powers and duties as the directors determine. Subject to Section 3.10 and Section 7.9, during the absence or disability of the corporate secretary, - G7 - treasurer or president, or if no corporate secretary, treasurer or president has been appointed, the chief executive officer will also have the powers and duties of the office of corporate secretary, treasurer or president, as the case may be. Section 5.5 President. If appointed, the president of the Corporation will have supervision of such business and affairs of the Corporation as the directors determine. The president will have such other powers and duties as the directors determine. Subject to Section 3.10 and Section 7.9, during the absence or disability of the corporate secretary, treasurer or chief executive officer, or if no corporate secretary, treasurer or chief executive officer has been appointed, the president will also have the powers and duties of the office of corporate secretary, treasurer and chief executive officer, as the case may be. Section 5.6 Corporate Secretary. If appointed, the corporate secretary will have the following powers and duties: (i) the corporate secretary will give or cause to be given, as and when instructed, notices required to be given to shareholders, directors, officers, auditors and members of committees of directors; (ii) the corporate secretary may attend at and be the secretary of meetings of directors, shareholders, and committees of directors and will have the minutes of all proceedings at such meetings entered in the books and records kept for that purpose; and (iii) the corporate secretary will be the custodian of any corporate seal of the Corporation and the books, papers, records, documents, and instruments belonging to the Corporation, except when another officer or agent has been appointed for that purpose. The corporate secretary will have such other powers and duties as the directors or the president of the Corporation determine. Section 5.7 Treasurer. If appointed, the treasurer of the Corporation will have the following powers and duties: (i) the treasurer will ensure that the Corporation prepares and maintains adequate accounting records in compliance with the Act; (ii) the treasurer will also be responsible for the deposit of money, the safekeeping of securities and the disbursement of the funds of the Corporation; and (iii) at the request of the directors, the treasurer will render an account of the Corporation's financial transactions and of the financial position of the Corporation. The treasurer will have such other powers and duties as the directors or the president of the Corporation determine. Section 5.8 Removal of Officers. The directors may remove an officer from office at any time, with or without cause. Such removal is without prejudice to the officer's rights under any employment contract with the Corporation. - G8 - ARTICLE 6 PROTECTION OF DIRECTORS, OFFICERS AND OTHERS Section 6.1 Limitation of Liability. Subject to the Act and other applicable law, no director or officer is liable for: (i) the acts, omissions, receipts, failures, neglects or defaults of any other director, officer or employee; (ii) joining in any receipt or other act for conformity; (iii) any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired for or on behalf of the Corporation; (iv) the insufficiency or deficiency of any security in or upon which any of the monies of the Corporation shall be invested; (v) any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any of the monies, securities or effects of the Corporation shall be deposited; or (vi) any loss occasioned by any error of judgment or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation to his office. Section 6.2 Indemnity. The Corporation will indemnify to the fullest extent permitted by the Act (i) any director or officer of the Corporation, (ii) any former director or officer of the Corporation, (iii) any individual who acts or acted at the Corporation's request as a director or officer, or in a similar capacity, of another entity, and (iv) their respective heirs and legal representatives if a) he acted honestly and in good faith with a view to the best interest o the Corporation; and b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. The Corporation is authorized to execute agreements in favour of any of the foregoing persons evidencing the terms of the indemnity. Nothing in this by-law limits the right of any person entitled to indemnity to claim indemnity apart from the provisions of this by-law. Section 6.3 Insurance. The Corporation may purchase and maintain insurance for the benefit of any person referred to in Section 6.2 against such liabilities and in such amounts as the directors may determine and as are permitted by the Act. - G9 - ARTICLE 7 SHAREHOLDERS Section 7.1 Calling Annual and Special Meetings. The Chair of the board, or, if there are co-chairs of the board, either co-chair, or any two directors, the president and the chief executive officer have the power to call annual meetings of shareholders and special meetings of shareholders. Annual meetings of shareholders and special meetings of shareholders will be held on the date and at the time and place in Canada as the person(s) calling the meeting determine. Section 7.2 Electronic Meetings. Meetings of shareholders may be held entirely by means of telephonic, electronic or other communications facility that permits all participants to communicate adequately with each other during the meeting. The directors may establish procedures regarding the holding of meetings of shareholders by such means. Section 7.3 Notice of Meetings. No public notice or advertisement or any meeting of shareholders shall be required, but notice of the time and place of each such meeting shall be given not less than twenty-one (21) days nor more than sixty (60) days before the day on which the meeting is to be held, to the auditor, if any, the directors and to each shareholder of record entitled to vote at the meeting. Notice of a special meeting of shareholders shall state the nature of the business to be transacted in sufficient detail to permit the shareholder to form a reasoned judgment thereon together with the text of any special resolution to be submitted to the meeting. A special meeting and an annual meeting may be convened by one and the same notice and it shall not be objectionable that the notice only convenes the second meeting contingent on any special resolution being passed by the requisite majority at the first meeting. The accidental omission to give notice of any meeting of shareholders to, or the non-receipt of any notice by, any person, or any error in any notice not affecting the substance of the notice, does not invalidate any resolution passed or any action taken at the meeting. Section 7.4 Waiver of Notice. A shareholder, a proxyholder, a director or the auditor and any other person entitled to attend a meeting of shareholders may waive notice of a meeting of shareholders, any irregularity in a notice of meeting of shareholders or any irregularity in a meeting of shareholders. Such waiver may be waived in any manner and may be given at any time either before or after the meeting to which the waiver relates. Waiver of any notice of a meeting of shareholders cures any irregularity in the notice, any default in the giving of the notice and any default in the timeliness of the notice. - G10 - Section 7.5 Representatives. A representative of a shareholder that is a body corporate or an association will be recognized if (i) a certified copy of the resolution of the directors or governing body of the body corporate or association, or a certified copy of an extract from the by-laws of the body corporate or association, authorizing the representative to represent the body corporate or association is deposited with the Corporation, or (ii) the authorization of the representative is established in another manner that is satisfactory to the corporate secretary or the chair of the meeting. Section 7.6 Persons Entitled to be Present. The only persons entitled to be present at a meeting of shareholders are those persons entitled to vote at the meeting, the directors, the officers, the auditor of the Corporation and others who, although not entitled to vote, are entitled or required under any provision of the Act or the articles or by-laws to be present at the meeting. Any other person may be admitted with the consent of the chair of the meeting or the persons present who are entitled to vote at the meeting. Section 7.7 Quorum. A quorum of shareholders is present at a meeting of shareholders if the holders of not less than 10% of the shares entitled to vote at the meeting are present in person or represented by proxy, irrespective of the number of persons actually present at the meeting. Section 7.8 Proxies. A proxy shall comply with the applicable requirements of the Act and other applicable law and will be in such form as the directors may approve from time to time or such other form as may be acceptable to the chair of the meeting at which the instrument of proxy is to be used. A proxy will be acted on only if it is deposited with the Corporation or its agent prior to the time specified in the notice calling the meeting at which the proxy is to be used or it is deposited with the corporate secretary or the chair of the meeting or any adjournment of the meeting prior to the time of voting, or at such earlier time and in such manner as the board of directors may prescribe in accordance with the Act. Section 7.9 Chair, Secretary and Scrutineers. The chair of any meeting of shareholders is the first mentioned of the following officers that is present at the meeting: a) the chair of the board, or, if there are co-chairs, either co-chair of the board; b) the chief executive officer; or - G11 - c) a vice-president (in order of corporate seniority). If no such person is present at the meeting, the persons present who are entitled to vote shall choose a director who is present, or a shareholder who is present, to chair the meeting. The corporate secretary, if any, will act as secretary at meetings of shareholders. If a corporate secretary has not been appointed or the corporate secretary is absent, the chair of the meeting will appoint a person, who need not be a shareholder, to act as secretary of the meeting. If desired, the chair of the meeting may appoint one or more persons, who need not be shareholders, to act as scrutineers at any meeting of shareholders. Section 7.10 Procedure. The chair of a meeting of shareholders will conduct the meeting and determine the procedure to be followed at the meeting. The chair's decision on all matters or things, including any questions regarding the validity or invalidity of a form of proxy or other instrument appointing a proxy, shall be conclusive and binding upon the meeting of shareholders. Section 7.11 Manner of Voting. Subject to the Act and other applicable law, any question at a meeting of shareholders shall be decided by a show of hands, unless a ballot on the question is required or demanded. Subject to the Act and other applicable law, the chair of the meeting may require a ballot or any person who is present and entitled to vote may demand a ballot on any question at a meeting of shareholders. The requirement or demand for a ballot may be made either before or after any vote on the question by a show of hands. A ballot will be taken in the manner the chair of the meeting directs. A requirement or demand for a ballot may be withdrawn at any time prior to the taking of the ballot. The result of such ballot shall be the decision of the shareholders upon the question. In the case of a vote by a show of hands, each person present who is entitled to vote has one vote. If a ballot is taken, each person present who is entitled to vote is entitled to the number of votes that are attached to the shares which such person is entitled to vote at the meeting. Section 7.12 Votes to Govern. Any question at a meeting of shareholders shall be decided by a majority of the votes cast on the question unless the articles, the by-laws, the Act or other applicable law requires otherwise. In case of an equality of votes either when the vote is by a show - G12 - of hands or when the vote is by a ballot, the chair of the meeting is not entitled to a second or casting vote. Section 7.13 Adjournment. The chair of any meeting of shareholders may, with the consent of the persons present who are entitled to vote at the meeting, adjourn the meeting from time to time and place to place, subject to such conditions as such persons may decide. Any adjourned meeting is duly constituted if held in accordance with the terms of the adjournment and a quorum is present at the adjourned meeting. Any business may be considered and transacted at any adjourned meeting which might have been considered and transacted at the original meeting of shareholders. ARTICLE 8 SECURITIES Section 8.1 Form of Security Certificates. Subject to the Act, security certificates, if required, will be in the form that the directors approve from time to time or that the Corporation adopts. Section 8.2 Transfer of Shares. Transfers of securities of the Corporation shall be registerable on the register of transfers or on one of the branch registers of transfers (if any) kept by or for the Corporation in respect thereof upon surrender of the security properly endorsed together with such additional assurance as the Corporation shall require and subject to the provisions of the Act and the restrictions on transfer set forth in the articles of the Corporation. If no security certificate has been issued by the Corporation in respect of a security issued by the Corporation, clause (i) above may be satisfied by presentation of a duly executed security transfer power, together with such reasonable assurance that the security transfer power is genuine and effective as the directors may require. Section 8.3 Transfer Agents and Registrars. The Corporation may from time to time appoint one or more agents to maintain, for each class or series of securities issued by it in registered or other form, a central securities register and one or more branch securities registers. Such an agent may be designated as transfer agent or registrar according to their functions and one person may be designated both registrar and transfer agent. The Corporation may at any time terminate such appointment. - G13 - ARTICLE 9 PAYMENTS Section 9.1 Payments of Dividends and Other Distributions. Any dividend or other distribution payable in cash to shareholders will be paid by cheque or by electronic means or by such other method as the directors may determine. The payment will be made to or to the order of each registered holder of shares in respect of which the payment is to be made. Cheques will be sent to the registered holder's recorded address, unless the holder otherwise directs. In the case of joint holders, the payment will be made to the order of all such joint holders and, if applicable, sent to them at their recorded address, unless such joint holders otherwise direct. The sending of the cheque or the sending of the payment by electronic means or the sending of the payment by a method determined by the directors in an amount equal to the dividend or other distribution to be paid less any tax that the Corporation is required to withhold will satisfy and discharge the liability for the payment, unless payment is not made upon presentation, if applicable. Section 9.2 Non-Receipt of Payment. In the event of non-receipt of any payment made as contemplated by Section 9.1 by the person to whom it is sent, the Corporation may issue re-payment to such person for a like amount. The directors may determine, whether generally or in any particular case, the terms on which any re-payment may be made, including terms as to indemnity, reimbursement of expenses, and evidence of non-receipt and of title. Section 9.3 Unclaimed Dividends. To the extent permitted by law, any dividend or other distribution that remains unclaimed after a period of 2 years from the date on which the dividend has been declared to be payable is forfeited and will revert to the Corporation. ARTICLE 10 MISCELLANEOUS Section 10.1 Notices. Any notice, communication or document required to be given, delivered or sent by the Corporation to any director, officer, shareholder or auditor is sufficiently given, delivered or sent if delivered personally, or if delivered to the person's recorded address, or if mailed to the person at the person's recorded address by prepaid mail, or if otherwise communicated by electronic means permitted by the Act. The directors may establish procedures to give, deliver or send a notice, communication or document to any director, officer, shareholder or auditor by any means of communication permitted by the Act or other applicable law. In addition, any notice, communication or document may be delivered by the Corporation in the form of an electronic document. - G14 - Section 10.2 Notice to Joint Holders. If two or more persons are registered as joint holders of any security, any notice may be addressed to all such joint holders but notice addressed to one of them constitutes sufficient notice to all of them. Section 10.3 Computation of Time. In computing the date when notice must be given when a specified number of days' notice of any meeting or other event is required, the date of giving the notice is excluded and the date of the meeting or other event is included. Section 10.4 Persons Entitled by Death or Operation of Law. Every person who, by operation of law, transfer, death of a securityholder or any other means whatsoever, becomes entitled to any security, is bound by every notice in respect of such security which has been given to the securityholder from whom the person derives title to such security. Such notices may have been given before or after the happening of the event upon which they became entitled to the security. ARTICLE 11 EFFECTIVE DATE Section 11.1 Effective Date. This by-law comes into force on the date of issuance of a certificate of continuance continuing the Corporation under the Canada Business Corporations Act. Section 11.2 Repeal. All previous by-laws of the Corporation are repealed as of the coming into force of this by-law. Such repeal does not affect the previous operation of any by-law so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under any such by-law prior to its repeal. This by-law was made by resolution of the directors on January 11, 2006. _____________________________________ Secretary This by-law was confirmed by resolution of the shareholders on March 20, 2006. _____________________________________ Secretary APPENDIX "1" Items Relating to Change of Auditor NOTICE OF CHANGE OF AUDITOR TO: BDO Dunwoody LLP, Chartered Accountants AND TO: BDO Seidman, LLP, Certified Public Accountants It is proposed that CoolBrands International Inc. (the "Corporation") will change its auditor from BDO Dunwoody LLP, Chartered Accountants, Toronto, Ontario, Canada (the "former auditor") to BDO Seidman, LLP, Certified Public Accountants, Melville, New York, U.S.A. (the "successor auditor"), effective as of the close of the Annual and Special Meeting of Shareholders of the Corporation scheduled to be held on February 27, 2006 (the "Annual and Special Meeting"). The Audit Committee's recommendation for the change of auditor to the Board of Directors was made as a result of several factors, including that in addition to a majority of the Corporation's business being located in the United States, during the past year the Corporation has changed its financial reporting from Canadian generally accepted accounting principles to United States generally accepted accounting principles and has divested itself of the franchise division, the only significant Canadian-based operation of the Corporation. The Corporation believes that BDO Seidman, LLP is therefore able to serve the Corporation more efficiently from its office in Melville, New York, U.S.A. than BDO Dunwoody LLP in Toronto, Canada. In accordance with National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102"), the Corporation reports that: 1. the former auditor has therefore been terminated as auditor of the Corporation effective the close of the Meeting; 2. the former auditor will not be proposed to shareholders at the Meeting for reappointment; 3. there were no reservations in the former auditor's reports in connection with the audits of the two most recently completed fiscal years and any period subsequent to the most recently completed fiscal year for which an audit report was issued and preceding the date of expiry of the former auditor's term of office; and 4. there are no "reportable events" as such term is defined in NI 51-102. The change of auditor and the recommendation to appoint the successor auditor was approved by the audit committee and the board of directors of the Corporation. DATED this 11th day of January, 2006. ON BEHALF OF THE BOARD OF DIRECTORS /s/ David Stein - ------------------------------ David Stein President and Chief Executive Officer EX-99 3 ex99-2.txt EXHIBIT 99.2 COOLBRANDS INTERNATIONAL INC. PROXY SOLICITED BY MANAGEMENT FOR USE AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 27, 2006 AND FOR USE AT THE SPECIAL CONFIRMATORY MEETING OF SHAREHOLDERS TO BE HELD ON MARCH 20, 2006 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 "Annual and Special Meeting") of the Corporation to be held on February 27, 2006 and at any adjournments or postponements thereof and at the special confirmatory meeting of shareholders (the "Confirmatory Meeting") of the Corporation to be held on March 20, 2006 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 of directors of those persons named in the Management Information Circular of the Corporation dated January 13, 2006 (the "Circular"). (b) VOTED FOR [ ] WITHHELD FROM VOTING [ ] in respect of the appointment of BDO Seidman, LLP as auditor for the ensuing year and authorizing the directors to fix the auditor's remuneration. (c) VOTED FOR [ ] VOTE AGAINST [ ] the approval of the Continuance Resolution, set forth in Schedule B to the Circular. (d) VOTED FOR [ ] VOTE AGAINST [ ] the approval of the Share Capital Restructuring Resolution, set forth in Schedule D to the Circular. (e) VOTED FOR [ ] VOTE AGAINST [ ] the approval of the Continuance Confirmatory Resolution, set forth in Schedule C to the Circular (f) VOTED FOR [ ] VOTE AGAINST [ ] the approval of the Share Capital Confirmatory Resolution, set forth in Schedule E to the Circular. If no choice is specified with respect to matters identified above, the proxy will be voted "FOR" such matters. - 2 - If an amendment or variation to matters identified in the Notice of Meeting are proposed at the Annual and Special Meeting or Confirmatory Meeting or any adjournments or postponements thereof or if any other matters properly come before the Annual and Special Meeting or Confirmatory 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 Annual and Special Meeting or Confirmatory Meeting or any adjournments or postponements thereof. The undersigned hereby revokes any proxy previously given: DATED the __________ day of __________, 2006. ________________________________________ Name of Shareholder (Please Print) ________________________________________ Signature of Shareholder DIRECTIONS: 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. 2. 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. 3. 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. 4. This proxy form is to be read in conjunction with the accompanying Circular and Notice of Meeting. 5. To be effective at the Annual and Special Meeting, this proxy must be received no later than 5:00 p.m. (Toronto time) on February 24, 2006 at Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1 or by facsimile at 416-361-0470, or with the Secretary of the Corporation at any time prior to the Annual and Special Meeting. 6. To be effective at the Confirmatory Meeting, this proxy must be received no later than 5:00 p.m. (Toronto time) on March 16, 2006 at Equity Transfer Services Inc., 120 Adelaide Street West, Suite 420, Toronto, Ontario, M5H 3V1 or by facsimile at 416-361-0470, or with the Secretary of the Corporation at any time prior to the Confirmatory Meeting. EX-99 4 ex99-3.txt EXHIBIT 99.3 SELECTED FINANCIAL DATA (in thousands of dollars, except share data) Year ended August 31, - -------------------------------------------------------------------------------- 2005 2004 2003 - -------------------------------------------------------------------------------- Total net revenues $ 385,070 $ 449,938 $ 214,272 - -------------------------------------------------------------------------------- Net (loss) earnings (74,070) 23,512 16,833 - -------------------------------------------------------------------------------- (Loss) earnings per share - -------------------------------------------------------------------------------- Basic (1.32) 0.42 0.33 - -------------------------------------------------------------------------------- Diluted (1.32) 0.42 0.31 - -------------------------------------------------------------------------------- Total assets 297,845 317,257 223,661 - -------------------------------------------------------------------------------- Total debt 60,962 27,754 32,022 - -------------------------------------------------------------------------------- 1 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Pg3 - Letter to the Shareholders pg7 - Management's Discussion and Analysis pg22 - Auditor's Report pg23 - Consolidated Financial Statements pg27 - Notes to Consolidated Financial Statements pg51 - Board of Directors and Officers pg52 - Corporate Information and Manufacturing Plants 2 - -------------------------------------------------------------------------------- Dear Fellow Shareholders: 2005 was a challenging year for CoolBrands International during which the Company's financial results reflected the loss of two significant brands, as well as unfavorable industry dynamics throughout the year. As we move forward, our strategy is to aggressively rebuild and refocus our brand portfolio. We began implementing this strategy during 2005 by acquiring Breyers Yogurt, an established brand in a high growth category and a manufacturing platform for further refrigerated products brand introductions. In 2006, we plan to continue implementing this strategy by: - Introducing a new all natural reformulation of Breyers "Fruit On The Bottom" Yogurt and a nutritionally enhanced reformulation of Breyers Light Yogurt with probiotic benefits; - Launching a broad range of new Godiva Ice Cream offerings in pints and, for the first time, chocolate coated ice cream bars; - Building national distribution for Yoplait Frozen Yogurt and Cereal Bars; and - Rolling out an exciting new line of "better for you" frozen snacks for kids featuring popular Disney characters under license from Disney Consumer Products, our newest licensing partner. Operating results In 2005, the Company adopted generally accepted accounting principles in the United States ("U.S. GAAP") and changed its reporting currency from Canadian dollars to U.S. dollars. For comparative purposes, our historical financial statements and amounts have been restated to reflect these changes. For fiscal 2005, net revenues declined to $385,070,000 as compared with $449,938,000 for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was $74,070,000 ($1.32 basic and diluted loss per share) as compared with net earnings of $23,512,000 ($0.42 basic and diluted earnings per share) for fiscal 2004. Our 2005 results were adversely affected by the non-cash pre-tax asset impairment charge of $55,525,000 (Nil in 2004), which resulted from the impairment of goodwill and intangible assets related to the Company's frozen dessert and franchising segments. The decrease in net revenues for fiscal 2005 reflects the decrease in net sales and the decreases in drayage income. Net sales for fiscal 2005 declined by 10.3% to $364,686,000 in 2005 as compared with $406,470,000 for 2004. This decrease reflects a reduction in sales volume, as well as an increase in trade promotion payments to customers for promotions with consumers. The decline in net sales came principally from the discontinuation of sales of Weight Watchers Smart Ones brand products and the decline in sales of Atkins brand products, but declines also came from our other frozen dessert brands. These sales declines were partially offset by sales from newly introduced frozen dessert products, the acquisition of the Breyers Yogurt business on March 27, 2005 and the increase in sales as a result of the change in the business arrangement with Dreyer's Grand Ice Cream Holding, Inc. ("Dreyer's"). Effective September 1, 2004, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale, instead of delivering products to customers on a drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. Gross profit percentage for fiscal 2005 declined to 0.8% as compared to 19% for fiscal 2004, primarily due to (1) the increase in trade promotion payments to customers, (2) write downs for obsolete and slow moving inventories, (3) the impact of fixed overhead costs in our manufacturing and distribution operations resulting from the decrease in sales, and (4) product mix changes. Selling, general and administrative expenses for fiscal 2005 increased as a percentage of revenues to 13.6% as compared to 11.5% for fiscal 2004 primarily due to the decline in revenues and certain write offs related to inactive or expired license agreements. In accordance with U.S. GAAP, the Company recognized $1,918,000 and $30,983,000 in stock-based compensation expense representing the estimated fair value of stock options earned during 2005 and 2004, respectively. Cash and working capital Cash, investments and restricted cash decreased to $41,562 at August 31, 2005 from $64,327 at August 31, 2004. Working capital declined to $28,469 at August 31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August 31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and current liabilities are attributable to the use of cash and short term debt to finance the Company's acquisitions and fixed asset purchases. Comparability of results 3 - -------------------------------------------------------------------------------- The Company's 2005 financial statements reflect the March 27, 2005 acquisition of the Breyers Yogurt business. This acquisition was accounted for under the purchase method of accounting and the 2005 Consolidated Statement of Operations includes the results of this acquisition from the date of acquisition. In fiscal 2005, the revenues and operating results from the Breyers Yogurt business represent five months of activity as compared with no activity in fiscal 2004. The third quarter of fiscal 2006, ending May 31, 2006, will be the first quarter following this acquisition in which the Consolidated Statement of Operations for the quarter can be directly compared with the prior-year period. Corporate Governance Changes As previously announced, following the election of additional independent directors at the last annual and special shareholders' meeting, the board of directors of CoolBrands formed a Corporate Governance Committee consisting of three independent directors to review CoolBrands' corporate governance practices and to recommend changes with respect to these practices to the board of directors. Based on the recommendations of the Corporate Governance Committee, CoolBrands is instituting the following changes and initiatives: - - Collapse of Dual Class Structure - CoolBrands will propose a special resolution to its holders of multiple voting shares and holders of subordinate voting shares at the upcoming annual and special meeting scheduled for February 27, 2006. If passed, the special resolution will result in the change of each multiple voting share and each subordinate voting share into one common share on May 31, 2007, unless the independent directors of CoolBrands unanimously determine to effect the change earlier. Aaron Serruya, Michael Serruya, David Smith and David Stein, and entities affiliated with them (collectively, the "Management MVS Holders"), have each entered into a voting agreement with the Corporation pursuant to which they each agreed to vote all of the shares that they beneficially own or control in favour of the special resolution. The Management MVS Holders beneficially control, in the aggregate, 5,986,043 multiple voting shares (representing approximately 99% of the issued and outstanding multiple voting shares) and 120,449 subordinate voting shares (representing less than 1% of the issued and outstanding subordinate voting shares). Currently, each multiple voting share carries 10 votes, and each subordinate voting share carries one vote. Following the change to the Corporation's dual class structure becoming effective, each common share will carry one vote. The change will not result in any conversion premium being paid to the holders of the multiple voting shares. - - Board Representation Agreement and Trust Agreement - upon the change to the Corporation's dual class structure becoming effective, these agreements will terminate. In the meantime, the parties have agreed that all nominations for membership on the board of directors of the Corporation made by the Corporation will be made by the Corporate Governance Committee. Copies of the Board Representation Agreement and the Trust Agreement are available on the Internet at www.sedar.com. - - Continuance under the Canada Business Corporations Act - at its upcoming annual and special meeting, CoolBrands will propose a special resolution to its holders of multiple voting shares and holders of subordinate voting shares to continue the Corporation under the Canada Business Corporations Act. If passed, this will allow the Corporation to be governed by a more modern corporate statute than the Nova Scotia Companies Act, under which the Corporation is currently organized. - - Lead director - as previously announced, the Corporation has appointed Robert E. Baker as lead director of the board of directors of CoolBrands. The board of directors has also adopted written terms of reference for the position of lead director and for the Co-Chairmen of the Corporation. - - Committee Charters - the board of directors has adopted written charters for each of the Audit Committee, Compensation Committee and Corporate Governance Committee. - - Code of Conduct - the board of directors has adopted a corporate Code of Conduct which applies to all employees, officers and directors of the Corporation. As part of the Corporate Governance Committee's ongoing mandate, it will continue to monitor the Corporation's corporate governance practices and those of "best practices" with a view to making further recommendations from time to time as it determines appropriate. Copies of the voting agreement entered into by the Corporation and the Management MVS Holders, the terms of reference of the Lead Director and the Co-Chairmen, the committee charters and CoolBrands' Code of Conduct are all available at www.coolbrandsinc.com. 4 - -------------------------------------------------------------------------------- I am pleased that our Company is continuing to act on the governance recommendations of our Board of Directors. The Board's commitment to adoption of better governance practices will help make CoolBrands better able to deliver the best possible results for our shareholders. These best practice corporate governance changes, and in particular the elimination of the dual class share structure, are further steps in management's and the board of directors' commitment to the partnership we are building with all our shareholders. Although we considered an immediate collapse of the dual class share structure, the board of directors and management, after careful consideration over several months, determined that an immediate action could jeopardize the Company's ability to stabilize the business and maximize value for our shareholders, given the several extraordinary events of the past year, including the loss of the Weight Watchers product line, the untimely death of our former Co-Chairman Richard Smith, and the need to refocus and reinvigorate our business plan and strategy. Divestiture of Non-Core Business Assets As part of these rebuilding efforts, CoolBrands continues to evaluate disposition of various non-core business assets. As a result of this evaluation process, on December 23, 2005, the Company divested substantially all of its franchising division for cash consideration of $8,000,000 to International Franchise Corp., a company headed by Mr. Aaron Serruya. As a result of this transaction, Mr. Serruya is no longer an executive officer of CoolBrands but he remains on the board of directors of CoolBrands. After a very difficult 2005, during which our results fell far short of expectations formed on the basis of our past record of success, all of us at CoolBrands International are committed to returning the Company to an upward trajectory of growth and profitability. We believe our strategy is sound and we will spare no effort in 2006 and beyond as we work to achieve that objective. David J. Stein President, CEO and Co-Chairman of CoolBrands International Inc. 5 - -------------------------------------------------------------------------------- ESKIMO PIE In 1921, Eskimo Pie created the frozen novelty industry with the invention of the world's first chocolate covered ice cream bar. GODIVA ICE CREAM The world's best chocolate is also the world's best chocolate ice cream, and now the world's best chocolate covered ice cream bar. BREYERS YOGURT America's second leading brand for "fruit-on-the-bottom" yogurt, with a strong heritage of high quality, all natural dairy products. NO PUDGE New and delicious - low-fat, low-carb and no sugar added. Giant ice cream novelties that uniquely fit everyone's diet plan. True indulgence without the guilt. WHOLE FRUIT SORBET The leading brand nationwide for all natural fruit sorbet sold in pint sized containers. SNAPPLE ON ICE POPS New Regular and No Sugar Added varieties, available in popular Snapple flavors. The best flavors on earth made for some of the best people on earth. CRAYOLA COLOR POPS New Regular and No Sugar Added varieties naturally fat-free and with vitamins A, C and E. A highly recognized, world-class brand trusted by moms and kids around the world. CHIPWICH The chocolate chip cookie ice cream sandwich that created the premium frozen snack category. 6 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (Tabular amounts expressed in thousands of dollars, except per share data) This management's discussion and analysis ("MD&A") addresses the results of operations and financial position of CoolBrands International Inc. ("CoolBrands" or the "Company") for the fiscal year ended August 31, 2005 compared to the fiscal year ended August 31, 2004. This MD&A is dated December 13, 2005 and has been approved by the board of directors of CoolBrands on the recommendation of the Audit Committee. This MD&A should be read in conjunction with the Company's audited consolidated financial statements and the related notes, which may be accessed on the Internet at www.sedar.com. Additional information relating to the Company, including the Company's Annual Information Form, can also be accessed on the SEDAR website. Unless otherwise indicated, all financial information herein is prepared in accordance with United States generally accepted accounting principles and all dollar amounts referred to herein are in thousands of United States dollars, except per share data. The information in this document contains certain forward-looking statements with respect to CoolBrands International Inc., its subsidiaries and affiliates. These statements are often, but not always made through the use of words or phrases such as "expect", "should continue", "continue", "believe", "anticipate", "estimate", "contemplate", "target", "plan", "budget" "may", "will", "schedule" and "intend" or similar formulations. By their nature, these forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to significant, known and unknown, business, economic, competitive and other risks, uncertainties and other factors affecting CoolBrands specifically or its industry generally that could cause actual performance, achievements and financial results to differ materially from those contemplated by the forward-looking statements. These risks and uncertainties include the tastes and preferences of the global retail consumer of CoolBrands' products; the ability of CoolBrands to be competitive in the highly competitive U.S. market for frozen dessert fluctuations in consumption of CoolBrands' products and services as a result the seasonal nature of the frozen dessert industry; the ability of CoolBrands to retain or acquire shelf space for its products in supermarkets, club stores and convenience stores; the ability of CoolBrands to effectively manage the risks inherent with mergers and acquisitions; the effect on foreign operation of political, economic and regulatory risks; currency risk exposure; the ability to recruit and retain qualified employees; changes in prices for raw materials; the ability of CoolBrands to pass on cost increases resulting from inflation and other risks described from time to time in publicly filed disclosure documents of CoolBrands and its subsidiaries and affiliates. In view of these uncertainties we caution readers not to place undue reliance on these forward-looking statements. CoolBrands disclaims any intention or obligation to update or revise any statements made herein, whether as a result of new information, future events or otherwise. Business strategy The Company manufactures and distributes ice cream, sorbet, frozen yogurt and fresh yogurt and other refrigerated and frozen dairy-based snacks. The Company's line of ice cream and frozen dessert products is marketed throughout the United States and select markets in Canada and Europe. The "Breyers Yogurt" line of refrigerated yogurt products is marketed primarily in the eastern United States. The Company also manufactures and/or distributes frozen and refrigerated products for other companies (the "Partner Brands"). The Company's marketing strategy is based on management's belief that superior brand image can be combined with high quality and product innovation to develop products in the refrigerated and frozen snack food categories that will earn consumers' loyalty and deliver attractive margins and long-term revenue growth to the Company, and that brand licensing arrangements can help reduce costs, accelerate growth and maximize opportunities for success in building significant market share for the Company's products. The Company's objective is to develop brands - both owned and licensed, in both the frozen and refrigerated snack foods categories - that deliver these benefits to the Company and consumers of the Company's products. Brand portfolio The Company's brands include, among others, the following: Breyers Yogurt. America's second leading brand for "fruit-on-the-bottom" yogurt, with a strong heritage of high quality, all natural dairy products. This brand, which the Company acquired from Kraft Foods in March 2005, is manufactured and distributed under license from Unilever. The Company's yogurt portfolio also includes the "Creme Savers Yogurt" product line manufactured and sold under license from Wm. Wrigley Jr. Company. 7 - -------------------------------------------------------------------------------- Eskimo Pie. The original chocolate-coated ice cream bar, invented in 1921 and still one of the nation's best known ice cream snack brands. Eskimo Pies come in regular and no-sugar-added varieties, and have proven especially popular with diabetic consumers. The Company acquired the Eskimo Pie brand when it acquired Eskimo Pie Corporation in October 2000. Chipwich. The chocolate chip cookie ice cream sandwich that created the premium frozen snack category, Chipwich was acquired by the Company in July 2002. Whole Fruit Sorbet. The leading brand nationwide for all natural fruit sorbet sold in pint sized containers, Whole Fruit Sorbet was acquired from Dreyer's in July 2003. Godiva Ice Cream. The Company acquired the license rights to the Godiva trademark for ice cream from Dreyer's in July 2003 and manufactures and distributes Godiva Ice Cream in pints and ice cream bars under license from Godiva Chocolatier, Inc. No Pudge! Frozen Snacks. In 2005, the Company introduced its "No Pudge!" line of low fat frozen snacks under license from No Pudge! Foods, Inc., marketers of the popular low fat brownie mix. Tropicana Fruit Bars. Since 1997, the Company has manufactured and distributed Tropicana fruit bars under license from Tropicana Products, Inc. Snapple On Ice Pops. In 2005, the Company introduced its "Snapple On Ice" line of frozen juice pops, under license from Snapple Beverage Corp. Crayola Color Pops. In 2005, the Company introduced its "Crayola Color Pops" line of frozen snacks, under license from Binney & Smith Properties, Inc. The Company has continuously pursued acquisitions and new brand licensing partnerships in an effort to keep pace with rapid changes in consumer preferences and new trends in the snack food industry. During 2002, the Company acquired Chipwich and Fruit-a-Freeze. During 2003, the Company acquired three super-premium brands from Dreyer's Grand Ice Cream: Dreamery Ice Cream, Whole Fruit Sorbet and the license for Godiva Ice Cream. During 2004, as low-carb dieting became a powerful force throughout the food industry, the Company entered into a license with Atkins Nutritionals, Inc. to manufacture, sell and distribute Atkins Endulge super premium ice cream products for carb-conscious consumers. This license enabled the Company to realize significant revenue and earnings growth in 2004. However, in 2005 the rapid decline in low-carb dieting led to a similarly rapid decline in the Company's sales of Atkins Endulge Ice Cream. In July 2004, the Company learned that our license for Weight Watchers Smart Ones would not be extended beyond September 28, 2004, on which date our license would expire, subject to a negotiated nine-month period ended May 1, 2005 to sell off and balance out inventories. Primarily due to the decline in Atkins Endulge sales and the elimination of Weight Watchers Smart Ones from the Company's portfolio, the Company experienced significant erosion of its sales and market share in 2005, partially offset by several new product introductions, specifically the No Pudge!, Snapple On Ice and Crayola Color Pops. In 2005, the Company added significant diversity to its brand portfolio through the acquisition of Breyers Yogurt from Kraft Foods Inc. in March 2005. The Breyers brand gives the Company an established position in the market for refrigerated yogurt, one of the fastest growing food categories, and a platform for future brand development in the refrigerated snack foods category, including via the Company's license-based strategy. Distribution channels The Company's products are offered for sale in a diverse range of retail outlets, including supermarkets, mass merchants, drug stores, convenience stores and club stores, as well as foodservice outlets, such as restaurants, cafeterias, theme parks and ice cream parlors. The Company also franchises and licenses ice cream parlors and frozen yogurt shops that offer the Company's products for sale. CoolBrands' Franchising division franchises and licenses frozen dessert outlets operated under a family of brands including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I Can't Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and Ice Cream Churn, with company-owned, franchised and non-traditional partnership locations around the world. The Company distributes its products primarily by direct shipment to supermarket owned warehouses, independent distributors and foodservice broad-line distributors. In addition, the Company operates a proprietary direct-store-distribution ("DSD") system that services all distribution channels in selected U.S. markets, including out-of-home accounts such as convenience stores, drug stores and gas station food marts. The Company also provides distribution 8 - -------------------------------------------------------------------------------- services through its DSD system for Partner Brands. Significant current Partner Brands include Unilever, Masterfoods/M&M Mars and Dreyer's. In 2004, the Company enhanced its DSD system by acquiring the assets of Kinnett Distribution and integrating them into the Company's Atlanta, Georgia DSD operation. In 2005, the Company increased its penetration of the out-of-home (or "impulse") channel by introducing a complete line of single-serve frozen snacks under our proprietary brands, primarily Eskimo Pie, for DSD distribution. Also in 2005, the Company refocused its DSD operations in western states (California, Oregon and Washington) to reduce supermarket distribution operations in those markets in favor of increased focus on the impulse channel. Manufacturing operations The Company manufactures its frozen products primarily at Americana Foods in Dallas, Texas, its 50.1% owned subsidiary. Americana Foods produces a diverse range of high quality soft serve mixes, packaged ice cream, frozen snacks and other similar products. In addition to Americana Foods, the Company manufactures its frozen products in Russellville, Arkansas at its Eskimo Pie Foodservice facility and in Norwalk, California at its Fruit-a-Freeze fruit bar plant. The Company also contracts with other companies to manufacture certain of the Company's frozen products. The Company manufactures its refrigerated yogurt products at its 100% owned subsidiary CoolBrands Dairy, Inc. in North Lawrence, New York. Americana Foods and CoolBrands Dairy also manufacture products for Partner Brands. The Company's Dairy components division manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, eggnog bases and other ingredients, and flexible packaging products for use in private label dairy products, in addition to the Company's brands. Overall performance In 2005, the Company adopted generally accepted accounting principles in the United States ("U.S. GAAP") and changed its reporting currency from Canadian dollars to U.S. dollars. For comparative purposes, historical financial statements and notes and Management's Discussion and Analysis have been restated to reflect these changes. For fiscal 2005, net revenues decreased to $385,070 as compared with $449,938, for fiscal 2004, a 14.4% decrease. The net loss for fiscal 2005 was ($74,070) (($1.32) basic and diluted loss per share) as compared with net earnings of $23,512 ($0.42 basic and diluted earnings per share) for fiscal 2004. The decrease in net revenues for fiscal 2005 reflects the decrease in sales, primarily from the frozen dessert segment, the increase in trade promotion payments made to customers, and the decline in drayage income. In fiscal 2005, Net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. The decline in sales came from all of our frozen dessert brands, but principally from the Weight Watchers and Atkins. These sales declines were partially offset by the sales from newly introduced frozen dessert products, acquisition of the Breyers yogurt business on March 27, 2005 and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's"). Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales increase due to this change partially offset sales decline in our base frozen dessert business. In fiscal 2005, drayage and other income decreased by 64.3% to $14,246 as compared with $39,873 for fiscal 2004, primarily as a result of this change. Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19% for fiscal 2004. The decline in gross profit percentage was primarily due to: 1. Increased trade promotion payments to customers, excluding the yogurt segment, which amounted to $52,359 and $32,913 in 2005 and 2004 respectively; 2. The write down of obsolete and slow moving finished goods inventories, packaging, and ingredients. This write down amounted to $12,723 in 2005 and was the result of a settlement of litigation with Weight Watchers International, a new labeling law which will become effective January 1, 2006, and a provision for slow moving inventories due to changes in consumer preferences; 9 - -------------------------------------------------------------------------------- 3. Our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales; and 4. The change in mix of frozen dessert products being sold in 2005 with lower gross profit margins as compared with 2004. Selling, general and administrative expenses for fiscal 2005 increased as a percentage of revenues to 13.6% as compared with 11.5% for fiscal 2004. This increase occurred primarily due to the decline revenues. Selling, general and administrative expenses increased by $484 or 0.9% from $51,688 in 2004 to $52,172 in 2005. Selling, general and administrative expenses for 2005 and 2004 were adversely impacted by the write-off of certain license agreements and the write-off of deferred package design costs, primarily related to Weight Watchers, in 2005. These charges amounted to $2,358 and $3,684 in 2005 and 2004, respectively. In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123), the Company recognized stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which represents the estimated fair value of stock options earned during the respective fiscal years. The 2005 fiscal year results were adversely affected by the non-cash pre-tax asset impairment charge of $55,525 (Nil in 2004), which resulted from the impairment of goodwill and intangible assets related to the Company's frozen dessert and franchising segments. Cash and working capital Cash, investments and restricted cash decreased to $41,562 at August 31, 2005 from $64,327 at August 31, 2004. Working capital decreased to $28,469 at August 31, 2005 from $118,138. CoolBrands' current ratio declined to 1.2 to 1 at August 31, 2005 from 2.6 to 1 at August 31, 2004. These changes in current assets and current liabilities are attributable primarily to the use of cash and short term borrowings to finance the Company's acquisitions and fixed asset purchases. The Company is currently negotiating the refinance of its long-term debt and short term borrowings, including $40,000 due January 3, 2006 and $7,145 due January 10, 2006. Selected annual information The following chart shows selected annual information for the three most recently completed fiscal years. Year ended August 31, 2005 2004 2003 - ---------------------------------------------------------------- Total net revenues $ 385,070 $ 449,938 $ 214,272 Net (loss) earnings (74,070) 23,512 16,833 (Loss) earnings per share Basic (1.32) 0.42 0.33 Diluted (1.32) 0.42 0.31 Total assets 297,845 317,257 223,661 Total debt 60,962 27,754 32,022 CoolBrands' decline in total net revenues during fiscal 2005 reflects the decrease in net sales, primarily from the frozen dessert segment, partially offset by net sales gained from the acquisition of the Breyers yogurt business in March 2005 and the decline in drayage income. In fiscal 2005, net sales declined by 10.3% to $364,686 as compared with $406,470 for fiscal 2004. In fiscal 2005, drayage and other income decreased by 64.3% to $14,246 as compared with $39,873 for fiscal 2004. Revenue growth in fiscal 2004 and 2003 was the result of the successful introduction of new frozen dessert products in the Better for You category, the acquisition of 50.1% of Americana Foods effective July 1, 2003 and acquisition of certain assets from Dreyer's Grand Ice Cream, Inc. and Nestle Ice Cream Company LLC on July 6, 2003. CoolBrands' net loss in 2005 was primarily due to the substantial decline in net sales due to the loss of the Weight Watchers Smart Ones license agreement, the decline in net sales of the Atkins Endulge and other frozen dessert product lines and the resulting decrease in gross profit dollars, the $25,627 decline in drayage and other income and the asset impairment charge of $55,525. CoolBrands' net earnings in 2004 and 2003 reflected the growth in revenues and effective control of selling, general and administrative expenses. During this time, we developed and expanded our Better for You product lines, including Weight Watchers Smart Ones and Atkins Endulge. We obtained higher than normal gross profit margins and lower 10 - -------------------------------------------------------------------------------- than normal promotion, marketing and advertising expenses due to the initial low level of competition in this niche category. Comparison of 2005 and 2004 We manage our business based on five industry segments: frozen dessert, yogurt, foodservice, dairy components, and franchising and licensing. Net sales Net sales for each segment are summarized in the following table: Year Ended August 31, Percentage of sales 2005 2004 2005 2004 -------------------------------------------------- Frozen dessert $ 271,086 $ 356,399 74.3 87.7 Yogurt 44,007 12.1 Foodservice 17,736 15,679 4.9 3.9 Dairy components 19,538 23,184 5.4 5.7 Franchising and licensing 12,319 11,208 3.3 2.7 --------- --------- ----- ----- Total $ 364,686 $ 406,470 100.0 100.0 ========= ========= ===== ===== The decrease in net sales for fiscal 2005 in the frozen dessert segment reflects the deduction from sales for payments made to customers by the Company, excluding the yogurt segment, of $52,359 in 2005 as compared with $32,913 in 2004 (a net reduction of $19,446). The decline in net sales in the frozen dessert segment came from all of our frozen dessert brands, but principally from the Weight Watchers and Atkins. In connection with the settlement of the Weight Watchers litigation, CoolBrands agreed to discontinue the sale of all Weight Watchers products on May 1, 2005, approximately five months sooner than required by the Weight Watchers License Agreement. These declines in net sales were partially offset by the net sales from newly introduced frozen dessert products and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales increase due to this change partially offset sales decline in our base frozen dessert business. The net sales for the yogurt segment reflect the acquisition of the Breyers yogurt business from Kraft Foods, Inc. on March 27, 2005. The decline in sales by our Dairy components segment reflects the decrease in sales due to the decline in the demand for Weight Watchers and Atkins ingredients and packaging from the Company's various contract manufacturers. Royalties, licensing, and consumer products license revenues Royalties, licensing and consumer products license revenues increased by 70.7% to $6,138 in fiscal 2005 from $3,595 in fiscal 2004 due primarily to the Whole Fruit license revenues the Company earned from Dreyer's of $3,103. The Company will continue to earn Whole Fruit license revenues through December 2005, estimated to be approximately $850. Drayage and other income Drayage and other income decreased by 64.3% to $14,246 in fiscal 2005 from $39,873 in fiscal 2004. This decline was due to the change in the business arrangement with Dreyer's discussed above. Drayage income in 2005 represents the fees paid to CoolBrands by Dreyer's for the delivery of products to Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. 11 - -------------------------------------------------------------------------------- Gross profit margin The following table presents the gross profit margin dollars and gross profit percentage for our segments: Year Ended August 31 Percentage of sales 2005 2004 2005 2004 -------------------------------------------------- Frozen dessert $ (15,488) $ 64,779 (5.7) 18.2 Yogurt 7,369 16.7 Foodservice 3,626 3,439 20.4 21.9 Dairy components 4,287 5,975 21.9 25.8 Franchising and licensing 3,224 2,931 26.2 26.2 --------- --------- ----- ----- Total $ 3,018 $ 77,124 0.8 19.0 ========= ========= ===== ===== Gross profit dollars declined to $3,018 in fiscal 2005 from $77,124 in fiscal 2004 primarily due to the decline in gross profit dollars in frozen dessert segment of $80,267, partially offset by the $7,369 in gross profit dollars generated by the yogurt segment. The decline in gross profit dollars in the frozen dessert segment resulted from the decline in sales in 2005 versus 2004, the impact on the segment for payments made to customers which as previously discussed reduced net sales and gross profit dollars, excluding the yogurt segment, in 2005 by $52,359 as compared with $31,337 in 2004 (a net reduction of $19,446) and our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales. Gross profit dollars in the frozen dessert segment were also adversely affected by the write down of $12,723 of obsolete and slow moving finished goods inventory, packaging, ingredients and finished goods inventory which could not be used or sold resulting from the settlement of the Weight Watchers litigation and the estimated impact on packaging which will not be used due to a new labeling law which will become effective January 1, 2006. Gross profit percentage for fiscal 2005 declined to 0.8% as compared with 19% for fiscal 2004. The decline in gross profit percentage was primarily due to: 1. Increased trade promotion payments to customers, excluding the yogurt segment, which amounted to $52,359 and $32,913 in 2005 and 2004 respectively; 2. The write down of obsolete and slow moving finished goods inventory, packaging, and ingredients. This write down amounted to $12,723 in 2005 and was the result of a settlement of litigation with Weight Watchers International, a new labeling law which will become effective January 1, 2006, and a provision for slow moving inventories due to changes in consumer preferences; 3. Our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of production and sales; and 4. The change in mix of frozen dessert products being sold in 2005 with lower gross profit margins as compared with 2004. Selling, general and administrative expenses Selling, general and administrative expenses are summarized by industry segment in the following table: Year Ended August 31, Percentage of sales 2005 2004 2005 2004 -------------------------------------------------- Frozen dessert $ 38,818 $ 41,054 14.3 11.5 Yogurt 4,993 11.4 Foodservice 1,486 1,890 8.4 12.1 Dairy components 1,694 1,942 8.7 8.4 Franchising and licensing 5,109 4,934 41.5 44.0 Corporate 72 1,868 --------- --------- Total $ 52,172 $ 51,688 ========= ========= 12 - -------------------------------------------------------------------------------- Selling, general and administrative expenses increased by $484 from $51,688 in 2004 to $52,172 in 2005 due primarily to the increase in selling, general and administrative expenses incurred by the yogurt segment which relate to the Breyers yogurt business which was acquired March 27, 2005, partially offset by the decrease in selling, general and administrative expenses in the frozen dessert segment which resulted from a decline in expenses directly related to the decline in sales The frozen dessert segment's selling, general and administrative expenses were adversely impacted in fiscal 2005 by approximately $2,358, including the write-off of deferred package design costs, primarily related to Weight Watchers, and the write-off of certain license agreements with General Mills. However, selling, general and administrative expenses increased overall as a percentage of revenues to 13.6% for fiscal 2005 from 11.5% for fiscal 2004 due primarily to the decline in revenues of $64,868 from 2004 to 2005. Selling, general and administrative expenses in 2004 were adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers' intangible license agreement asset. This write-off was required when Weight Watchers International notified CoolBrands on July 28, 2004 that the license agreement would not be extended. Stock-based compensation expense In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123), the Company recognized stock-based compensation expense of $1,918 and $30,983 in 2005 and 2004 which represents the estimated fair value of stock options earned during the respective fiscal years. Interest expense Interest expense was $2,586 in fiscal 2005 compared with $1,498 in fiscal 2004. The increase in interest expense in fiscal 2005 as compared with fiscal 2004 was due to a $40,000 increase in short term borrowings related to the acquisition of the Breyers yogurt business and a $7,214 increase in debt at Americana Foods LLP, 50.1% owned by CoolBrands, offset by repayments of short term borrowings and long-term debt of $14,007. Asset impairment The Company is required to conduct an annual review of goodwill and non-amortizable intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During 2005, the Company completed its annual review of goodwill and intangible assets. This review resulted in a non-cash pre-tax charge related to a goodwill impairment of $48,701 and in a non-cash pre-tax charge related to intangible asset impairment related to the Company's frozen dessert segment of $1,401. Also, this review resulted in a non-cash pre-tax charges related to goodwill and intangible asset impairments related to the Company's franchise and licensing segment of $4,940. Additionally, the Company wrote-off certain company-owned store leasehold improvements and equipment related to the Company's franchise and licensing segment of $483. (Recovery of) provision for income taxes The effective (benefit) tax rate was (10.2)% in fiscal 2005 and 37.1% for fiscal 2004. The effective tax rate differs from the Canadian Federal/Provincial Statutory Rate primarily due to permanent differences related to the non-deductible goodwill impairment charges recognized in 2005, a valuation allowance established in 2005, and due to our operations in foreign countries with lower effective tax rates. Future effective tax rates could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates or changes in the valuation of our future income tax assets or liabilities. Net loss The net loss for fiscal 2005 was $(74,070) as compared with net earnings of $23,512 for fiscal 2004. CoolBrands' net loss in 2005 was primarily due to the substantial decline in net sales due to the loss of the Weight Watchers Smart Ones license agreement, the decline in net sales of the Atkins Endulge products and other frozen dessert product lines and the resulting decrease in gross profit dollars, the $25,627 decline in drayage and other income and the asset impairment charge of $58,250. 13 - -------------------------------------------------------------------------------- Comparability of 2005 results with 2004 The Company's 2005 financial statements reflect the March 27, 2005 acquisition of the Breyers yogurt business. This acquisition was accounted for under the purchase method of accounting and the 2005 Consolidated Statements of Operations include the results of this acquisition from the date of acquisition. In fiscal 2005, the revenues and operating results from the Breyers yogurt business represent five months of activity as compared to no activity in fiscal 2004. The third quarter of fiscal 2006, ended May 31, 2006, will be the first quarter following this acquisition in which the Consolidated Statement of Operations for the quarter can be directly compared with the prior-year period. Summary of quarterly results The following table presents a summary of our results for the last eight quarters:
August 31, 2005 May 31, 2005 February 28, 2005 November 30, 2004 Quarter ended $ $ $ $ - ------------------------------------------------------------------------------------------- Total revenues 124,055 97,890 73,833 89,292 Net earnings (64,093) (6,233) (8,077) 4,333 Earnings per share Basic (1.15) (.11) (0.14) 0.08 Diluted (1.15) (.11) (0.14) 0.08
August 31, 2004 May 31, 2004 February 29, 2004 November 30, 2004 Quarter ended $ $ $ $ - ------------------------------------------------------------------------------------------- Total revenues 129,052 128,140 99,946 92,800 Net earnings 12,484 (625) 8,465 3,188 Earnings per share Basic 0.22 (0.01) 0.15 0.06 Diluted 0.22 (0.01) 0.15 0.06
The ice cream and frozen dessert industry generally experiences its highest volume during the spring and summer months and its lowest volume in the winter months. Liquidity The following sets forth certain measures of our liquidity: Year Ended August 31, 2005 2004 ----------------------- Cash, investments and restricted cash $ 41,562 $ 64,327 Working capital $ 28,469 $ 118,138 Current ratio 1.2 to 1 2.6 to 1 The decrease in working capital of $89,669 was primarily due to a decrease in cash, investments and restricted cash of $22,765 and a decrease in total receivables of $14,669, an increase in current maturities of long-term debt and short term borrowings of $44,222, an increase in accounts payable and accrued liabilities of $25,185, and offset by the increase in income taxes recoverable of $9,767 and the reduction the income tax payable of $4,938. CoolBrands is currently negotiating the refinance of its long-term debt and short term borrowings, including the $40,000 due on January 3, 2006 and $7,145 due January 10, 2006. Cash flows from operating activities The Company generated cash flow from operating activities of $11,239 for the year ended August 31, 2005 as compared with $43,769 for the year ended August 31, 2004 due primarily to the decrease in net earnings (exclusive of depreciation and amortization and asset impairment) for 2005 as compared with 2004. This was offset by changes in other operating assets and liabilities, which were primarily driven by the timing of certain payments. 14 - -------------------------------------------------------------------------------- Cash used in investing activities The cash used in investing activities in 2005 was primarily due to the acquisitions of the yogurt business and the Zipp flavors and ingredients businesses which aggregated $59,609 and the purchase of property, plant and equipment of $12,409, offset by the net redemption of investments of $20,550 and the proceeds from the sale of our City of Industry facility for $5,434. The cash used in investing activities in 2004 was primarily due to the purchase of property, plant and equipment of $13,363 and the purchase of investments, net of redemptions of $28,050. Cash provided by financing activities In 2005, $33,264 was provided by financing activities as compared with $14,926 provided by financing activities in 2004. In 2005, the proceeds from short term borrowings of $44,553, and an increase in the revolving line of credit of $2,661 at Americana Foods. These additions were off set by the repayment of long-term debt. The exercise of stock options in 2004 provided $12,286 and Americana Foods' minority partner provided $6,907, net of a $2,000 repayment, as their share for the expansion of production capacity at Americana Foods. These additions were offset by the repayment of long-term debt of $5,781 and the increase in the secured revolving line of credit at Americana Foods of $1,514. Contractual obligations The following table presents our contractual obligations:
Total Less than 1 - 3 4 - 5 After 5 1 year years years years - ------------------------------------------------------------------------------------------------- Contractual obligations - ------------------------------------------------------------------------------------------------- Long-term debt $ 60,808 $ 52,560 $ 8,248 Capital lease obligations 154 154 Operating leases 12,393 4,363 6,590 $ 554 $ 886 Other long-term obligations 2,881 2,881 ------------------------------------------------------- Total contractual obligations $ 76,236 $ 57,077 $ 17,719 $ 554 $ 886 =======================================================
Capital resources The Company is planning to spend approximately $3,000 on capital projects during fiscal 2006. The planned capital projects are primarily for the continuing expansion of capacity at Americana Foods and certain information technology infrastructure improvements. The Company will use existing cash on hand to fund the planned capital expenditures. However, the Company has not ruled out the possibility that it will fund the planned capital expenditures plus previous capital spent by restructuring Americana Foods' long-term debt. Additionally, CoolBrands is committed to the expansion of its frozen dessert segment in 2006 with the introduction of new products to respond to the increase in competition in the ice cream industry for shelf space and market share. As a result, CoolBrands has made or will make offers to retailers for new product introductory placement costs (slotting fees) of approximately $11,250. Payment requirements In connection with the acquisition of the yogurt business from Kraft in March 2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The unsecured term loan requires monthly payments of interest with the $40,000 principle balance due November 1, 2005. Interest is payable monthly on the unpaid principle balance with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates plus applicable margin were the lower of Prime plus 0.5% or LIBOR plus 2.5% (6.02% at August 31, 2005). The Company made a principal payment of $10,000 on August 23, 2005 in anticipation of the September 2, 2005 amendment as discussed below. As of August 31, 2005 the term loan balance was $30,000. In connection with the acquisition of Eskimo Pie Corporation, a U.S. subsidiary borrowed U.S. $30,000 to finance the acquisition. The loan is payable in monthly installments of U.S. $250, which began December 1, 2000, with the remaining principal balance due on November 1, 2005. Interest on the term loan is payable monthly on the unpaid principal balance. CoolBrands and all of its significant subsidiaries guarantee all borrowings under the above loan agreement. The principal balance outstanding at August 31, 2005 was U.S. $10,500. 15 - -------------------------------------------------------------------------------- The Company was in default of its financial covenants at May 31, 2005 and August 31, 2005. On September 2, 2005 the Company entered into an amendment to its existing credit facilities. The Amendment extends the maturity of the existing facilities from November 1, 2005 until January 3, 2006 and waives defaults in its financial covenants resulting from the Company's financial performance. The Amendment eliminates all of the existing financial covenants from the loan agreements through the remainder of the term and grants a security interest in the personal property assets (other than certain excluded assets relating to the operations of the company's 50.1% owned limited partnership), reduced its outstanding indebtedness to the bank by $10,000 to a total of $40,500 and the Company has agreed to an increase of the interest rate by 2.0% basis points on all remaining outstanding balances to 4.5% basis points over LIBOR. In addition, the amendment reduced the Company's $5,000 revolving credit facility to $925 and requires the Company to maintain $20,000 of cash balances, of which $10,000 is restricted to use as approved by the lender. On April 27, 2005, Americana Foods LP, which is owned 50.1% by the Company, borrowed $4,553 for use in purchasing a building and adjacent acreage. Loan terms call for monthly, interest-only payments until anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The note provides a one-time right to extend the maturity date by two years. Monthly payments during the extension period will be based on a 25-year period. The Partnership may also at that time choose to continue any interest rate for Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender. Due to the one-year maturity date (before exercise of the extension option), this note is classified as a current liability. On November 19, 2002, Americana Foods LP, which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that included a term loan of U.S. $10,000, which is secured by the Partnership's property, plant, and equipment. Principal payments are payable in fixed monthly installments of U.S. $80 and matures on November 19, 2007. The term of the loan bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). The Partnership's amended credit agreement also includes a revolving loan of up to U.S. $9,000, subject to a borrowing base calculation, which bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and was due on November 30, 2005. At August 31, 2005, approximately U.S. $1,855 was available to the Partnership under this loan. The revolving loan is secured by the Partnership's receivables and inventory and is classified as a current liability. On November 30, 2005 the Partnership executed an amendment to the credit agreement which extended the maturity date for the revolving loan until January 10, 2006. Americana Foods must maintain compliance with certain financial covenants, including fixed charge ratio, debt-to-tangible net worth ratio and tangible net worth. CoolBrands is currently negotiating the refinance of its long-term debt and short term borrowings with its current lenders, including $40,000 due on January 3, 2006 and $7,145 due January 10, 2006. Risk factors and uncertainties Inflation can significantly impact ice cream and frozen yogurt ingredients, including butterfat and packaging costs. In 2005 and 2004, CoolBrands passed on ingredient, energy and freight cost increases by raising prices on selected product lines. In 2006, CoolBrands believes that it will be able to pass on cost increases, if any, in the normal course of business within a relatively short period of time. However, the ability of CoolBrands to pass on cost increases will depend, to some extent, on whether its competitors have also done so. CoolBrands believes that, in the past, its competitors have passed on cost increases in a relatively short period of time. CoolBrands products are ultimately purchased by the global retail consumer, whose tastes and preferences are subject to variation and change. Although carefully monitored, these changes cannot be controlled and are difficult to predict. Management believes that CoolBrands' family of products is based on well-established brand names and is easily adaptable to meet changes in consumer tastes and demands. CoolBrands derives a substantial portion of its revenues from its operations in the United States. The U.S. market for frozen dessert and yogurt is highly competitive. As competitors introduce new products or revise their supply or pricing strategies, CoolBrands may encounter additional and more intense competition. Such competitors have greater name recognition and more extensive financial, technological, marketing and personnel resources than CoolBrands. In addition, CoolBrands may experience increased competition in its other markets as its competitors expand their international operations. 16 - -------------------------------------------------------------------------------- CoolBrands existing shelf space in supermarkets, club stores and convenience stores for ice cream and frozen dessert treats and yogurt is at risk due to decisions by CoolBrands' customers. The Company's existing shelf space for our products, along with that of all other products, is reviewed at least annually by our customers. Supermarket, club store and convenience store chains reallocate their total shelf space taking into effect a number of variables, including the number of new products being introduced at any given time, the amount of new product placement fees (slotting fees) being offered by companies in the ice cream and frozen dessert and yogurt segments and by changing consumer tastes and fads. As a result, CoolBrands is subject, in any given year, to the loss of shelf space with its customers and the loss in revenues associated with the sale of those products. CoolBrands responds to this action by developing and introducing new products annually which will either maintain or increase its shelf space. There is also substantial risk that the sales of such new products will not be as successful as CoolBrands had previously estimated or as successful as new products introduced by CoolBrands in the past. The risks associated with the reallocation of shelf space by our customers and the development and introduction of new products could have a substantial adverse impact upon CoolBrands' financial position and results of operations. CoolBrands is subject to risks with respect to its cost of raw materials, some of which are subject to changes in commodity prices, particularly the cost of butterfat, which is used to produce ice cream products. From time to time, CoolBrands has used hedging contracts to reduce its exposure to such risks with respect to its raw material costs. CoolBrands has made, and may in the future make acquisitions of, or significant investments in, businesses or assets with complementary products or unrelated industries. Acquisitions involve numerous risks, including but not limited to: 1) diversion of management's attention from other operational matters; 2) the inability to realize expected synergies from the acquisition; 3) impairment of acquired intangible assets as a result of worse-than-expected-performance of the acquired operations; 4) integration and retention of key employees; and 5) integration of operations. Mergers and acquisitions are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect CoolBrands' business, financial condition and results of operations. CoolBrands operates in some countries that are subject to potential political and economic uncertainty. Such factors, beyond the control of CoolBrands, are lessened because of international diversification and the sharing of risks with Master and Sub-franchises. The Corporation is currently dependent upon a small number of key management personnel and continued success will depend, in part, upon their abilities. The loss of these key personnel may adversely affect the performance of the Corporation. The Company relies on major retailers in the U.S. for a substantial portion of its sales. As a result of this concentration of sales and accounts receivable the Company is subject to certain credit risks. Such risks are somewhat mitigated by the fact that net sales to any one customer do not exceed ten percent of the Company's consolidated net sales CoolBrands is subject to interest rate risk as it long-term debt and short term borrowings are based up the prime rate and/or Libor. If these bases rates increase, CoolBrands will incur incremental interest expense. The Company is subject to future legal proceedings and disputes with franchisees, former franchisees and others, which arise in the ordinary course of business. Transactions with related parties Integrated Brands, a wholly owned subsidiary of CoolBrands, has entered into a distribution agreement with Calip Dairies, Inc. ("Calip") an ice cream distribution company owned by Susan Smith and David M. Smith, the widow and son, respectively, of Richard E. Smith, former Co-Chairman, Co-Chief Executive Officer and Director of the Company. David M. Smith is currently Vice-Chairman and Chief Operating Officer of the Company. Calip was previously owned by Richard E. Smith and Susan Smith. Pursuant to the agreement, Integrated Brands Inc. has appointed Calip as its exclusive distributor for any ice cream or other frozen dessert product manufactured by, on behalf of, or under authority of, Integrated Brands Inc., its subsidiaries, affiliates or successors in the State of New Jersey and certain areas in the State of New York and the State of Connecticut. The agreement continues until December 31, 2007 and thereafter renews automatically on December 31 of each year for an additional one year term, provided that as of such date at least 50% of the issued and outstanding shares of Calip are beneficially owned by the Smith Family and/or David Stein, unless Calip gives Integrated Brands written notice on or before September 30th of that same year that Calip will not renew the agreement, in which event the agreement terminates effective December 31 following such notice. CoolBrands has agreed to guarantee the performance of the distribution agreement. Sales of products to Calip were $9,781 for the year ending August 31, 2005 (2004 - $9,482). At August 31, 2005, $1,840 of the receivables - affiliates represent receivables from Calip (2004 - $3,883). The transactions with Calip occur in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. 17 - -------------------------------------------------------------------------------- Integrated Brands also entered into a management agreement effective July 1, 2003 with Calip pursuant to which Calip provided the full time management services and certain other ancillary services of Mr. Richard Smith, CoolBrands' former Co-Chairman and Co-Chief Executive Officer, for a fixed payment of $1,300 per year. The management agreement with Calip was terminated following the passing of Mr. Smith on January 29, 2005. Management fees incurred under the agreement were $542 and $1,300 for the years ended August 31, 2005 and 2004, respectively. As at August 31, 2005, the $620 balance of payables - affiliates (2004 - $850) represents payables to Calip. Fourth quarter Revenues for the fourth quarter of fiscal 2005 decreased to $124,055 from $129,052 for the same quarter last year, a 3.9% decrease. Net (loss) for the fourth quarter was ($64,093) (($1.15) basic and diluted loss per share) as compared with net earnings of $12,484 ($0.22 basic and diluted earnings per share) for the same quarter last year. The decrease in net revenues for the fourth quarter of fiscal 2005 reflects the decline in drayage income from $9,308 in 2005 to $3,409 in 2005 that was due to the change in the business arrangement with Dreyer's. In the fourth quarter 2005, net sales increased by 0.4% to $118,893 as compared with $118,457 for fiscal 2004. However, net sales declined in the frozen dessert segment which reflects deduction from sales for payments made to customers by the Company, excluding the yogurt segment, of $ 11,626 in 2005 as compared with $5,251 in 2004 (a net reduction $6,375). The decline in sales came from all of our frozen dessert brands, but principally from a decline in sales in our Weight Watchers and Atkins lines. The sales declines in the frozen dessert segment were partially offset by the sales from newly introduced frozen dessert products and the increase in distribution sales as a result of the change in the business arrangement with Dreyer's. Effective September 1, 2004, CoolBrands began the distribution of Dreyer's products as an independent distributor, changing from the previously used drayage basis, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale. The sales increase due to this change partially offset sales decline in our base frozen dessert business. The decline in sales in the frozen dessert segment were substantially offset by an increase in sales of $26,397 from the yogurt segment which resulted from the acquisition of the Kraft yogurt business on March 27, 2005. Gross profit percentage for the fourth quarter of fiscal 2005 declined to 2.3% as compared to 20.9% for the fourth quarter of fiscal 2004. The decline in gross profit percentage was primarily due to payments made to customers, including sales price promotions and cooperative advertising, by the Company which as previously discussed reduced sales and gross profits by $11,626 and $5,251 in the fourth quarter of 2005 and 2004, respectively and our inability to cover fixed overhead costs in both our manufacturing and distribution operations due to the lack of sales. Gross profit percentage was also adversely affected by the write down of $8,163 in connection with slow-moving and obsolete inventory and packaging, ingredients and finished goods inventories which will not be used or sold resulting from the settlement of the Weight Watchers litigation and the change in mix of frozen dessert products being sold in the fourth quarter of 2005 with lower gross profit margins as compared with the fourth quarter of 2004. The fourth quarter of 2004 was impacted by the pre-tax operating losses at Americana Foods LP (50.1% owned) of approximately $2,089. These losses were primarily due to plant production losses incurred during the installation of new production lines and the related start-up expenses which occurred in the fourth quarter of fiscal 2004. Selling, general and administrative expenses increased by $2,573 or 15% from $17,115 in 2004 to $19,688 in 2005. However, selling, general and administrative expenses for the fourth quarter of fiscal 2005 increased as a percentage of revenues to 15.9% as compared to 13.3% for fiscal 2004 primarily due to the decline revenues and the additional selling, general and administrative expenses incurred by the yogurt segment which was acquired March 27, 2005. Selling, general and administrative expenses for the fourth quarter of 2004 were adversely impacted by $3,684 for the pre-tax write-off of the Weight Watchers' agreement license. This write-off was required when Weight Watchers International notified the Company on July 28, 2004 that the license agreement would not be extended. The 2005 fiscal fourth quarter results were adversely affected by the non-cash pre-tax asset impairment charge of $54,124, which resulted from the impairment of goodwill, intangible assets and property, plant and equipment related to the Company's frozen dessert and franchising segments. Critical accounting policies and related estimates The accounting policies and related estimates discussed in this section are those that we consider to be particularly critical to an understanding of our financial statements because their application places the most significant demands on our ability to judge the effect of inherently uncertain matters on our financial results. For all of these policies, we caution that future events rarely develop exactly as forecasted, and our management's best estimates may require adjustment. 18 - -------------------------------------------------------------------------------- Allowance for doubtful accounts We have an allowance for doubtful accounts for estimated losses resulting from customers' inability to pay amounts owed to us, for unresolved amounts that our customers have refused to pay due to disputes over promotions, co-op advertising and new product introductory allowances (slotting fees). The allowance is a combination of specific and general reserves based upon our evaluation of the customers' ability to pay determined by our assessment of their liquidity and financial condition through credit rating agencies, or the credibility of backup provided on disputed amounts. Write-offs against the allowances generally occur after we assess the particular customer's liquidity, financial condition and their basis for non-payment on disputed items and conclude that collection is highly unlikely. Our estimates of losses bear the risk of change due to the uncertainty of determining the likelihood of customer non-payment. The general reserve includes an amount for our Foodservice customers' price volume rebates. Accrual for promotion and co-op advertising expenses CoolBrands estimates promotion expenses for each of our customers, excluding our DSD customers, who receive off invoice promotion allowances, using a detail annual plan consisting of each promotion offered to each customer. The promotional sales volume is estimated using the sales history of each customer when the product or like product was previously promoted. An estimate of the promotion expense is then calculated using the estimated sales volume and the specific promotion dollar amount offered for each particular promotion. The estimates for all promotions for all customers are accumulated and recorded as expense in the accounting period in which the promotion runs. The results of all promotions are updated monthly, after the fact, with actual sales promotion volume. If actual sales were to be substantially higher than estimated, this could cause an additional promotions expense to be recorded. The amounts of these accruals are recognized by the Company as a reduction in sales and accounts receivables. Inventory valuation method Inventory is valued at the individual item level using the cost method which values inventory at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method. Market is determined based on the estimated net realizable value, which is generally the inventory item's selling price. CoolBrands reviews its inventory levels in order to identify slow-moving and obsolete inventory, which requires adjustment and evaluates the potential for slow-moving and obsolete inventory by analyzing historical and anticipated demand. If actual demand were to be substantially lower than estimated, an additional allowance for excess and obsolete inventory might be required. Asset impairment The Company is required to conduct an annual review of goodwill and non-amortizable intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. Income taxes We record reserves for estimates of probable settlements of foreign and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We also record a valuation allowance against our future tax assets arising from certain net operating losses when it is more likely than not that some portion or all of such net operating losses will not be realized. Our effective tax rate in a given financial statement period may be materially impacted by the changes in the mix and level of earnings, changes in the expected outcome of audit controversies or changes in the deferred tax valuation allowance. We currently expect the fiscal 2006 effective tax rate to be within the range of 38 percent to 39 percent. The ultimate rate will depend on several variables, including the future utilization of net operating losses, the mix of earnings between domestic and international operations and the overall level of earnings, and could also be affected by the resolution of tax contingencies for amounts different from our current estimates. 19 - -------------------------------------------------------------------------------- Legal matters CoolBrands is subject to various legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. CoolBrands evaluates, among other things, the degree of probability of an unfavorable outcome and reasonably estimates the amount of the loss. Significant judgment is required in both the determination of the probability and as to whether an exposure can be reasonably estimated. When CoolBrands determines that it is probable that a loss has been incurred, the effect is recorded in the Consolidated Financial Statements. Although the legal outcome of these claims cannot be predicted with certainty, CoolBrands does not believe that any of the existing legal matters will have a material adverse affect on its financial condition or results of operations. However, significant changes in legal proceedings and claims or the factors considered in the evaluation of those matters could have a material adverse affect on CoolBrands business, financial condition and results of operation. Changes in accounting policies including initial adoption The Company initially adopted the following new accounting policies for the year ended August 31, 2005. Change in reporting currency Effective September 1, 2004, the Company has changed its reporting currency from Canadian dollars to U.S. dollars since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars in accordance with generally accepted accounting principles. Adoption of U.S. GAAP During the fourth quarter of 2005, the Company adopted, on a retroactive basis, U.S. GAAP. Previously, the Company prepared its annual and interim consolidated financial statements in accordance with generally accepted accounting principals in Canada ("Canadian GAAP"). As a result, the following adjustments have been made to previously issued Consolidated Financial Statements. The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). Such consumer and trade promotion activities have been historically accounted for as selling, general and administrative expenses. In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures must be deducted from revenue. Accordingly, our Consolidated Statement of Operations for 2004 has been restated to reflect a reduction in revenues and selling, general and administrative expenses of $32,913. The reduction in revenues and selling, general and administrative expenses in our 2005 Consolidated Statement of Operations is $68,155. The following summarizes the impact of restatement for the change from Canadian GAAP to U.S. GAAP for consumer trade promotion expenses in our Consolidated Statement of Operations:
2005 2004 Total net revenues in accordance with Canadian GAAP $ 453,225 $ 482,851 Less consumer and trade promotion expenses (68,155) (32,913) --------------------- Total net revenues in accordance with U.S. GAAP $ 385,070 $ 449,938 =====================
2005 2004 Total selling, general and administrative expenses in accordance with Canadian GAAP $ 120,327 $ 84,601 Less consumer and trade promotion expenses (68,155) (32,913) --------------------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 52,172 $ 51,688 =====================
20 - -------------------------------------------------------------------------------- Product introduction expenditures (i.e. slotting fees) incurred by the Company have been historically recognized as expense by amortizing the slotting fees over the twelve months subsequent to the actual acceptance of product introduction offers by our customers. Under U.S. GAAP, such expenditures are recognized as reductions in revenues at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained Earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported net earnings for the year ended August 31, 2004 have been increased by $756. Our reported net loss for the year ended August 31, 2005 was increased by $553, when compared with the Net loss that would have been reported using our historical accounting principles. The following summarizes the impact of restatement for the change from Canadian GAAP to U.S. GAAP for new product introduction expenditures (slotting fees) in our Consolidated Statement of Operations:
2005 2004 Net (loss) income in accordance with Canadian GAAP $ (73,517) $ 22,756 Adjustment for new product introduction expense (553) 756 --------------------- Net (loss) income in accordance with U.S. GAAP $ (74,070) $ 23,512 ========== =========
Stock-based compensation On September 1, 2005, the Company adopted, on a retroactive basis without restatement, the recommendation of CICA Handbook Section 3870, "Stock-based compensation and other stock-based payments", which required companies to adopt the fair value based method for all stock-based awards granted on or after September 1, 2002. Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. As a result of adopting U.S. GAAP during the fourth quarter of 2005, as previously discussed, the Company adopted, on a modified prospective basis, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS123). Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. The effect of adopting this accounting policy increased the loss before income taxes and minority interest for fiscal 2005 by $1,918 with a corresponding increase to additional paid-in capital and reduced earnings before income tax and minority interest for fiscal 2004 by $24,270 with a corresponding increase to additional paid-in capital. Annual information form Additional information relating to CoolBrands, including CoolBrands' Annual Information Form, is available on the website for Canadian regulatory filings at www.sedar.com. Outstanding share data As of December 13, 2005, the Company had 50,004,069 subordinate voting shares, 6,028,864 multiple voting shares and 3,840,517 stock options outstanding. 21 - -------------------------------------------------------------------------------- AUDITORS' REPORT To the Shareholders of CoolBrands International Inc.: We have audited the consolidated balance sheets of CoolBrands International Inc. as at August 31, 2005 and 2004 and the consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at August 31, 2005 and 2004 and the results of its operations, and its cash flows for the years then ended in accordance with United States generally accepted accounting principles. BDO DUNWOODY LLP Chartered Accountants Toronto, Ontario December 9, 2005 22 - -------------------------------------------------------------------------------- CoolBrands International Inc. Consolidated Balance Sheets as at August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars) 2005 2004 ---------- --------- Assets Current assets: Cash $ 24,062 $ 36,277 Investments 7,500 28,050 Restricted cash 10,000 Receivables, net 54,526 67,152 Receivables - affiliates 1,840 3,883 Inventories 49,955 49,076 Income taxes recoverable 9,767 Prepaid expenses 2,413 1,203 Deferred income taxes 5,148 4,907 ---------------------- Total current assets 165,211 190,548 Deferred income taxes, net of valuation allowance 14,799 13,711 Property, plant and equipment 47,639 28,730 Intangible and other assets 22,369 12,180 Goodwill 47,827 72,088 ---------------------- $ 297,845 $ 317,257 ====================== Liabilities and shareholders' equity 2005 2004 ---------- --------- Current liabilities: Accounts payable $ 53,300 $ 37,506 Payables - affiliates 620 850 Accrued liabilities 30,015 20,624 Income taxes payable 4,938 Deferred income taxes 93 Short term borrowings 34,553 Current maturities of long-term debt 18,161 8,492 ---------------------- Total current liabilities 136,742 72,410 Long-term debt 8,248 19,262 Other liabilities 2,881 2,758 Deferred income taxes 6,180 3,638 ---------------------- Total liabilities 154,051 98,068 ---------------------- Minority interest 5,388 8,088 ---------------------- Commitments and contingencies Shareholders' equity Capital stock 97,578 97,485 Additional paid-in capital 46,376 44,494 Accumulated other comprehensive earnings (1,696) (1,096) Retained earnings (3,852) 70,218 ---------------------- Total shareholders' equity 138,406 211,101 ---------------------- $ 297,845 $ 317,257 ====================== See accompanying notes to consolidated financial statements. Approved by the Board, "David J. Stein" "Romeo DeGasperis" ---------------- ------------------ David J. Stein Romeo DeGasperis Director Director 23 - -------------------------------------------------------------------------------- CoolBrands International Inc. Consolidated Statements of Operations for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars, except for per share data)
2005 2004 Net revenues: Net sales $ 364,686 $ 406,470 Royalties, licensing, and consumer products license revenues 6,138 3,595 Drayage and other income 14,246 39,873 ---------------------- Total net revenues 385,070 449,938 ---------------------- Cost of goods sold 361,668 329,346 Selling, general and administrative expenses 52,172 51,688 Stock-based compensation expense 1,918 30,983 Interest expense 2,586 1,498 Asset impairment 55,525 Gain on sale of building (3,634) ---------------------- (Loss) earnings before income taxes and minority interest (85,165) 36,423 Minority interest (2,700) (958) ---------------------- (Loss) earnings before income taxes (82,465) 37,381 ---------------------- (Recovery of) provision for income taxes: Current (10,193) 29,183 Deferred 1,798 (15,314) ---------------------- (8,395) 13,869 ---------------------- Net (loss) earnings $ (74,070) $ 23,512 ====================== Per share data: (Loss) earnings per share: Basic and diluted $ (1.32) $ .42 ====================== Weighted average shares outstanding: Shares used in per share calculation - basic 55,924 55,441 Shares used in per share calculation - diluted 55,924 56,329
See accompanying notes to consolidated financial statements. 24 - -------------------------------------------------------------------------------- CoolBrands International Inc. Consolidated Statements of Shareholders' Equity for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
Accumulated other comprehensive Total Capital Additional paid-in (losses) Retained shareholders' stock capital earnings earnings equity -------------------------------------------------------------------------------- Balance at August 31, 2003 $ 85,199 $ 1,649 $ (840) $ 46,706 $ 132,714 Comprehensive earnings: Net earnings 23,512 23,512 Other comprehensive earnings, net of income taxes: Currency translation adjustment (256) (256) Tax benefit relating to exercise of non-qualified stock options 11,862 11,862 Stock-based compensation expense 30,983 30,983 -------------- Total other comprehensive earnings 42,589 -------------- Total comprehensive earnings 66,101 -------------- Issuance of shares for stock options exercised 11,779 11,779 Issuance of shares for warrants exercised 507 507 -------------------------------------------------------------------------------- Balance at August 31, 2004 97,485 44,494 (1,096) 70,218 211,101 Comprehensive losses: Net loss (74,070) (74,070) Other comprehensive earnings (losses), net of income taxes: Currency translation adjustment (600) (600) Stock-based compensation expense 1,918 1,918 -------------- Total other comprehensive earnings 1,318 -------------- Total comprehensive loss (72,752) -------------- Issuance of shares for stock options exercised 93 (36) 57 -------------------------------------------------------------------------------- Balance at August 31, 2005 $ 97,578 $ 46,376 $ (1,696) $ (3,852) $ 138,406 ================================================================================
See accompanying notes to consolidated financial statements. 25 - -------------------------------------------------------------------------------- CoolBrands International Inc. Consolidated Statements of Cash Flows for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts expressed in thousands of dollars)
2005 2004 Cash and short term investments provided by (used in): Operating activities: Net (loss) earnings $ (74,070) $ 23,512 Adjustments to reconcile net (loss) net earnings to net cash flows from operating activities Depreciation and amortization 5,042 7,314 Asset impairment 55,525 Stock-based compensation expense 1,918 30,983 Deferred income taxes 1,798 (15,314) Gain on sale of building (3,634) Minority interest (2,700) (958) Cash effect of changes, net of the effects from businesses acquired Receivables 13,815 (21,115) Receivables - affiliates 2,043 (1,464) Allowance for doubtful accounts (56) 126 Inventories 4,500 (6,845) Prepaid expenses (2,207) 6,252 Income taxes recoverable (9,767) Accounts payable 15,842 16,740 Payables - affiliates (230) 277 Accrued liabilities 8,744 (4,843) Income taxes payable (4,935) 9,319 Other assets (513) 53 Other liabilities 124 (268) --------------------- Cash provided by operating activities 11,239 43,769 --------------------- Investing activities: Purchase of property, plant and equipment (12,409) (13,363) Purchase of intangible assets (76) Purchase of license agreements (26) (300) Proceeds from sale of building 5,434 Increase in restricted cash (10,000) Purchase of investments (2,500) (33,050) Redemption of investments 23,050 5,000 Acquisitions, net of cash acquired (59,609) Increase in notes receivable (28) Collection of notes receivable 65 23 --------------------- Cash used in investing activities (56,023) (41,766) --------------------- Financing activities: Change in revolving line of credit, secured 2,661 1,514 Capital contributions from minority interest 8,907 Proceeds from short term borrowings 44,553 Return of capital contribution to minority interest (2,000) Proceeds from issuance of Class A and B shares 57 12,286 Repayment of short term borrowings (10,000) Repayment of long-term debt (4,007) (5,781) --------------------- Cash provided by financing activities 33,264 14,926 --------------------- Increase (decrease) in cash flows due to changes in foreign exchange rates (695) (2,412) --------------------- (Decrease) increase in cash and cash equivalents (12,215) 14,517 Cash and cash equivalents - beginning of year 36,277 21,760 --------------------- Cash and cash equivalents - end of year $ 24,062 $ 36,277 =====================
See accompanying notes to consolidated financial statements. 26 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies Frozen dessert segment (formerly Prepackaged consumer products) Revenues and profits in the Frozen dessert (formerly Prepackaged consumer products) segment are generated from manufacturing and selling a variety of prepackaged frozen desserts to distributors, including Eskimo Pie Frozen Distribution, and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. CoolBrands competes in the fast-growing Better for You ice cream category with offerings such as fat-free, non-dairy WholeFruit Sorbet and Atkins Endulge controlled-carbohydrate super premium ice cream. New Better for You offerings by CoolBrands include No Pudge! branded frozen snacks and a line of Better for Kids frozen snacks sold under the Crayola, Justice League, Snapple, Care Bears and Trix Pops brands. CoolBrands also competes in the super premium ice cream category with the Dreamery Ice Cream and Godiva Ice Cream brands. In addition, CoolBrands markets a wide variety of "all family" premium ice creams and frozen snacks under brand names including Eskimo Pie, Chipwich, Tropicana and Yoplait. CoolBrands' subsidiary, Eskimo Pie Frozen Distribution, operates a direct store door ice cream distribution system in selected markets in the U.S., serving these CoolBrands products and a growing family of Partner Brands to supermarkets, convenience stores and other retail customers. CoolBrands' 50.1% owned subsidiary, Americana Foods, is a leading U.S. manufacturer and supplier of packaged ice cream, frozen yogurt and sorbet products, frozen snacks, soft-serve mixes and other food products to well-known national retailers, food companies and restaurant chains. Yogurt segment CoolBrands' subsidiary, CoolBrands Dairy Inc., manufactures cup yogurt at its plant located in North Lawrence, New York and markets the products under the Breyers brand pursuant to a trademark rights agreement, which grants the rights in perpetuity, and under the Creme Savers brand pursuant to a long-term license agreement. Foodservice segment Revenues and profits in the Foodservice segment are generated from manufacturing and selling soft-serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft-serve ice cream and yogurt products to consumers. Dairy components segment Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. CoolBrands' Dairy Components division manufactures and sells a full line of quality flavours, chocolate coatings, fudge sauces, powders for chocolate milk, eggnog bases and other ingredients, and flexible packaging products for use in private label dairy products, in addition to the Company's brands. Franchising and licensing segment Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring franchise revenues, and from the sale of proprietary products to franchisees and licensees and from Company-owned stores selling ice cream and soft-serve yogurt out of company-owned stores and outlets. CoolBrands' Franchising division franchises and licenses frozen dessert outlets operated under a Family of Brands including Tropicana Smoothies, Juices & More, Swensen's Ice Cream, I Can't Believe It's Yogurt, Yogen Fruz, Bresler's Premium Ice Cream, Golden Swirl and Ice Cream Churn, with company-owned, franchised and non-traditional partnership locations around the world. 27 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Basis of presentation The consolidated financial statements are prepared by management using accounting principles generally accepted in the United States and include all wholly and majority owned subsidiaries. All significant intercompany transactions of consolidated subsidiaries are eliminated. Acquisitions recorded as purchases are included in the statement of operations from the date of acquisition. All amounts are reported in U.S. dollars unless otherwise indicated. Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated. Cash All highly liquid commercial paper purchased with maturities of three months or less is classified as a cash equivalent. Cash equivalents are stated at cost, which approximates market value. Investments The Company's investment portfolio consisted of investments in Auction rate securities. Auction rate securities are variable rate bonds tied to short term interest rates with maturities on the face of the securities in excess of 90 days. The Company evaluates whether to redeem or rollover each security no later than every 35 days. At August 31, 2005 and 2004 the Company had investment balances of $7,500 and $28,050, respectively. Inventories Inventories consist primarily of ice cream, frozen yogurt and frozen dessert products, cup yogurt products, food supplies and packaging. Inventories are valued at the lower of cost and net realizable value, with cost determined principally by the first-in, first-out (FIFO) method. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of buildings and machinery and equipment is provided by the straight-line or declining balance methods, using the estimated useful lives of the assets, principally 20 to 38 years and 2 to 10 years, respectively. Store leasehold improvements are amortized on a straight-line basis over the terms of the leases, principally 5 to 10 years. Intangible and other assets Intangible and other assets consist of license agreements, trademarks, trademark rights, franchise agreements and rights and other assets. Amortizing intangibles are stated at cost less accumulated amortization. Amortization is provided by the straight-line method using the terms of the agreements, which range from 4 to 20 years. Goodwill and other non-amortizable asset In accordance with Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"), goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but instead are to be tested for impairment at least annually or earlier if there are impairment indicators. Other intangible assets continue to be amortized over their estimated useful lives. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. 28 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) The Company completed its annual impairment testing of goodwill and intangible assets. This review resulted in a $48,701 non-cash pre-tax charge related to a goodwill impairment in the Company's frozen dessert segment and a $3,400 non-cash pre-tax goodwill impairment in the Company's franchise business segment. Also this review resulted in a $1,401 and $ 1,540 non-cash pre-tax charge related to intangible asset impairment for the Company's frozen dessert segment and franchise business segment, respectively. Long-lived assets The Company's other long-lived assets include property, plant and equipment and amortizable intangibles. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of any of these assets may not be recoverable, the Company will assess the recoverability of such assets based upon estimated undiscounted cash flow forecasts, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". When any such impairment exists, the related assets will be written down to fair value. During the fourth quarter, due to the presence of indicators, the Company completed impairment testing of other long-lived assets. This review resulted in a $ 483 impairment of property, plant and equipment. Revenue recognition Revenue from sales of the Company's products is recognized at the time of sale, which is generally when products are shipped to customers. Revenue from drayage income is recognized at the time the product is delivered for the vendor to their customer by the Company. Effective September 1, 2004, CoolBrands began the distribution of Dreyer's Grand Ice Cream Holdings, Inc. ("Dreyer's") products as an independent distributor, changing from the previously used drayage basis. As a result of this change, CoolBrands began purchasing products from Dreyer's and selling those products to customers at wholesale, except for Dreyer's scanned based trading customers which continue to be delivered on a drayage basis. Revenue from sales by company-owned and operated stores is recognized when products are purchased by customers. Master franchise fee revenues are recognized at the time the Company has received the deposit specified in the master franchise agreement, has substantially performed all significant services to be provided in accordance with the terms of the agreement and when collectibility is reasonably determinable. Single store franchise fees are recognized as revenue when the franchise application is approved, cash payments are received, and the Company has performed substantially all services required under the agreement. Continuing franchise royalties are based on a percentage of gross sales as reported by the franchisees or gross products purchased by the franchisees. These fees are recognized on an accrual basis as they are earned. Product introduction expenses Product introduction expenses (i.e. slotting fees) are recognized as expenses at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. Advertising The Company spends a significant amount of its advertising dollars with its supermarket customers in the form of co-operative advertising in the chains' weekly circulars. The remainder of the Company's advertising is spent on media and other direct advertising. All advertising costs are expensed as incurred. The Company spent $7,165 on advertising for the year ended August 31, 2005 (2004 - - $5,600). 29 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Financial instruments The carrying amount of financial instruments including cash, investments, restricted cash, receivables, receivables - affiliates, accounts payable, payables - affiliates, accrued liabilities and income taxes payable and income taxes recoverable approximates fair value at August 31, 2005 because of the relatively short maturity of these instruments. The fair value of short term borrowings and long-term debt are disclosed in Note 9. The carrying amount of the remaining long-term debt approximates fair value at August 31, 2005 because of their fluctuating interest rates. The carrying amount of other liabilities approximates fair value at August 31, 2005 because the fair value estimates are based upon pertinent information available to management at August 31, 2005. Concentration of credit risk Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash, investments and receivables. The Company attempts to minimize credit risk with respect to receivables by reviewing customers' credit history before extending credit, and by regularly monitoring customers' credit exposure. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Earnings (loss) per share The Company uses the treasury stock method to determine the dilutive earnings per share. The following table presents the numerators and denominators used in the basic and diluted (loss) earnings per share calculations: 2005 2004 --------- --------- Numerator Net (loss) earnings $ (74,070) $ 23,512 ===================== Denominator Basic weighted average shares outstanding 55,924 55,441 Dilutive effect of stock awards 888 --------------------- 55,924 56,329 ===================== Net (loss) earnings Basic $ (1.32) $ .42 Diluted $ (1.32) $ .42 Diluted net loss per share for 2005 is equal to basic Net loss per share because the effect of common stock equivalents is anti-dilutive. Potentially dilutive securities, calculated in terms of weighted-average share equivalent of stock options outstanding, are excluded from the calculations of diluted Net loss per share when their inclusion would have anti-dilutive effect. During 2005,145,000 shares of potentially dilutive securities were excluded from weighted-average share calculation for purposes of calculating weighted-average diluted shares and diluted loss per share. Foreign currency translation Translation gains or losses of accounts of foreign subsidiaries considered financially and operationally self-sustaining are deferred as a separate component of shareholders' equity until there has been a realized reduction in the net investment. Foreign currencies are translated into U.S. dollars using the average exchange rate for the year for items included in the Consolidated Statements of Earnings. Foreign currencies are translated into U.S. dollars using the current rate for assets and liabilities included in the consolidated balance sheets except for earnings reinvested in the business, which are translated at historical rates. 30 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 1. Description of business and summary of significant accounting policies (cont'd) Income taxes Income taxes are calculated using the asset and liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current period. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. New accounting pronouncements In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). This interpretation, which was subsequently revised in December 2003 (FIN 46-R), clarifies certain issues related to Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and addresses consolidation by business enterprises of the assets, liabilities, and results of the activities of a variable interest entity. The Company has determined that it does not hold a variable interest in a variable interest entity under FIN 46-R at August 31, 2005. In November 2004, the FASB issued SFAS No.151, "Inventory Costs", which is an amendment of Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing". This Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current period charges. The provisions of this statement are effective for inventory costs incurred during the fiscal year beginning after June 15, 2005 and are applied on a prospective basis. The Company does not expect the impact of implementing this Statement to have a material effect on its financial statements. In December 2004, the FASB issued Statement No. 153, "Exchange of Nonmonetary Assets" ("SFAS 153"). SFAS 153 eliminates prior guidance for nonmonetary transactions by eliminating the exception for nonmonetary exchanges of similar production assets and replaces it with a general exception for exchange of nonmonetary assets lacking commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a material effect on its financial position or results of operations. In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 requires companies to recognize changes in accounting principle, including changes required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods' financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS 154 will have a material effect on its financial position or results of operations. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces "Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first annual reporting period that begins after June 15, 2005. Under SFAS 123R, the pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. The Company has not at this time evaluated the impact of implementing this statement on its financial statements. Reclassifications Certain 2004 amounts have been reclassified to conform with the 2005 presentation. Certain auction rate securities have been reclassified from cash to investments. Auction rate securities are variable rate bonds tied to short term interest rates with maturities on the face of the securities in excess of 90 days. The Company historically classified these instruments as cash if the period between interest rate resets was 90 days or less, which was based on the Company's ability to either liquidate its holdings or roll the investment over to the next reset period. The Company has classified its auction rate securities at August 31, 2005 of $7,500 and $28,050 at August 31, 2004 as investments. In addition, "Purchase of investments" and "Redemption of investments" included in the accompanying consolidated statements of cash flows, have been revised to reflect the purchase and sale of auction rate securities for the year ended August 31, 2004. 31 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 2. Changes in accounting policies Change in reporting currency Effective September 1, 2004, the Company changed its reporting currency from Canadian dollars to U.S. dollars since the majority of its business is conducted in the United States and to make comparisons between current and prior periods more meaningful to investors. For comparative purposes, historical financial statements and notes have been restated into U.S. dollars. Adoption of US GAAP During the fourth quarter of 2005, the Company adopted, on a retroactive basis, accounting principles generally accepted in the United States of America. Previously the Company prepared its annual and interim consolidated financial statements in accordance with generally accepted accounting principals in Canada ("CAN GAAP"). As a result, the following adjustments have been made to previously issued Consolidated Financial Statements. The Company promotes its products with advertising, consumer incentive and trade promotions. Such programs include, but are not limited to, cooperative advertising, promotional discounts, coupons, rebates, in-store display incentives, volume based incentives and product introductory payments (i.e. slotting fees). Such consumer and trade promotion activities have been historically accounted for as selling, general and administrative expenses. In accordance with EITF No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendors Products" certain payments made to customers by the Company, including promotional sales allowances, cooperative advertising and product introductory expenditures must be deducted from revenue. Accordingly, our Consolidated Statement of Operations for 2004 has been restated to reflect a reduction in revenues and selling, general and administrative expenses of $32,913. The reduction in revenues and selling, general and administrative expenses in our 2005 Consolidated Statement of Operations is $68,155. The following summarizes the impact of restatement for the change from CAN to US GAAP for consumer trade promotion expenses in our Consolidated Statement of Operations:
2005 2004 Total net revenues in accordance with Canadian GAAP $ 453,225 $ 482,851 Less consumer and trade promotion expenditures (68,155) (32,913) ----------------------- Total net revenues in accordance with U.S. GAAP $ 385,070 $ 449,938 =======================
2005 2004 Total selling, general and administrative expenses in accordance with Canadian GAAP $ 120,327 $ 84,601 Less consumer and trade promotion expenditures (68,155) (32,913) ----------------------- Total selling, general and administrative expenses in accordance with U.S. GAAP $ 52,172 $ 51,688 =======================
Product introduction expenditures (i.e. slotting fees) incurred by the Company have been historically recognized as expense by amortizing the slotting fees over the twelve months subsequent to the actual acceptance of product introduction offers by our customers. Under U.S. GAAP, such expenditures are recognized as reductions in revenues at the time product introduction offers are accepted by our customers, which for measurement purposes is at the time of the first shipment of the product to each customer. As a result of this change, Retained earnings as of August 31, 2003 has been reduced to reflect the cumulative effect of this change through that date by $3,644. Our previously reported Net earnings for the year ended August 31, 2004 has been increased by $756. Our reported Net loss for the year ended August 31, 2005 was increased by $553, when compared with the Net loss that would have been reported using our historical accounting principles. 32 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 2. Changes in accounting policies (cont'd) The following summarizes the impact of restatement for the change from CAN to US GAAP for new product introduction expenditures (slotting fees) in our Consolidated Statement of Operations:
2005 2004 Net (loss) earnings income in accordance with Canadian GAAP $ (73,517) $ 22,756 Adjustment for new product introduction expenditures (553) 756 ----------------------- Net (loss) earnings income in accordance with U.S. GAAP $ (74,070) $ 23,512 =======================
Stock-based compensation On September 1, 2005, the Company adopted, on a retroactive basis without restatement, the recommendation of CICA Handbook Section 3870, "Stock-based compensation and other stock-based payments", which required companies to adopt the fair value based method for all stock-based awards granted on or after September 1, 2002. Previously, the Company was required to disclose only the pro-forma effect of stock options issued to employees and employee directors in the notes to the financial statements. As a result of adopting U.S. GAAP during the fourth quarter of 2005, as previously discussed, the Company adopted, on a modified prospective basis, the recommendations of Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting for Stock Based Compensation." This statement superseded Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and amends FASB Statement No. 95, "Statement of Cash Flows". The effect of adopting this accounting policy increased the loss before income taxes and minority interest for fiscal 2005 by $1,918 with a corresponding increase to additional paid-in capital and reduced earnings before income tax and minority interest for fiscal 2004 by $24,270 with a corresponding increase to additional paid-in capital. Note 3. Acquisitions 2005 Acquisitions On March 27, 2005, the Company completed the acquisition of the yogurt business of Kraft Foods, Inc. The acquired brands included Breyers Fruit on the Bottom, Light and Creme Savers cup yogurt varieties and Cream Savers Smoothie drinkable yogurt and included substantially all of Kraft's assets related to its yogurt business, including a license for the Breyers trademark, a license for the Creme Savers trademark, a license for the Light 'n Lively trademark and Kraft's manufacturing facility in North Lawrence, New York. The purpose of this acquisition was to diversify CoolBrands business and to reduce its concentration of operations in the frozen dessert segment. Factors that contributed to the purchase price and resulting goodwill were based upon negotiations with the seller and the valuation of the business based upon future contributions to net earnings and cash flow. The following is a summary of the assets and liabilities acquired and the fair value assigned thereto, and the purchase consideration given: Fair value acquired: Purchase consideration: Current assets $ 5,373 Cash $ 17,500 Property, plant and equipment 11,846 Acquisition costs 1,652 Trademark rights 15,000 Bank loan 40,000 ---------- Goodwill 27,582 $ 59,152 ----------- ========== 59,801 Less Liabilities (649) ----------- $ 59,152 =========== 33 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - ------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 3. Acquisitions (cont'd) In April 2005, the Company acquired the assets of Zipp Manufacturing, Inc., a manufacturer of flavors and ingredients. The assets and related business of Zipp Manufacturing were acquired to provide additional volume to our dairy components segment which has excess capacity. The primary factors that contributed to the purchase price and resulting goodwill were based upon negotiations with the seller, CoolBrands' desire for additional production volume and the resulting projected incremental earnings and cash flow. The following is a summary of the assets and liabilities acquired and the fair value assigned thereto, and the purchase consideration given: Fair value acquired: Purchase consideration: Current assets $ 208 Cash $ 457 =========== Equipment 80 Goodwill 258 ----------- 546 Less Liabilities (89) ----------- $ 457 =========== Note 4. Receivables, net 2005 2004 Trade accounts receivable $ 57,213 $ 69,692 Franchise and license fees receivable 324 516 Notes receivable, current maturities 97 108 ----------------------- 57,634 70,316 Less Allowance for doubtful accounts (3,108) (3,164) ----------------------- $ 54,526 $ 67,152 ======================= Allowance for doubtful accounts: Year ended August 31, 2003 $ 2,888 Charges to costs and expenses 818 Reserve utilized (542) ---------- Ending balance August 31, 2004 3,164 Charges to costs and expenses 1,846 Reserve utilized (1,902) ---------- Ending balance August 31, 2005 $ 3,108 ========== No customer accounted for 10 percent or more of Total net revenues in 2005 and 2004. Note 5. Inventories 2005 2004 Raw materials and packaging $ 35,304 $ 32,484 Finished goods 14,651 16,592 ----------------------- $ 49,955 $ 49,076 ======================= Write-downs of obsolete and slow moving inventories in 2005 and 2004 were $12,723 and $1,165, respectively. 34 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 6. Property, plant and equipment 2005 2004 Land $ 1,577 $ 924 Buildings 19,292 10,826 Machinery and equipment 35,412 24,341 Leasehold improvements 1,740 2,342 ------------------- 58,021 38,433 Less Accumulated depreciation and amortization Buildings 1,906 1,030 Machinery and equipment 7,497 7,769 Leasehold improvements 979 904 ------------------- $ 47,639 $ 28,730 =================== Note 7. Intangible and other assets and Goodwill Definite life intangible assets are amortized over their estimated useful lives. The Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. During the fourth quarter of 2005, the Company completed its annual review of goodwill and intangible assets. This review resulted in a $2,941 non-cash pre-tax charge related to intangible asset impairment and a non-cash pre-tax charge of $52,101 related to goodwill impairment. At August 31, 2005 and 2004 goodwill by reportable segment was as follows: 2005 2004 ------------------- Frozen dessert $ 3,752 $ 52,461 Yogurt 27,582 Foodservice 11,302 11,302 Dairy components 745 488 Franchising and licensing 4,446 7,837 ------------------- Total Goodwill $ 47,827 $ 72,088 =================== 35 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 7. Intangible and other assets and Goodwill (cont'd) Intangible assets at August 31, 2005 and 2004 were as follows:
2005 2004 ----------------------- ----------------------- Gross Gross carrying Accumulated carrying Accumulated amount amortization amount amortization -------- ------------ -------- ------------ Non-amortizable intangible assets $ 15,000 $ $ $ Amortizable intangible assets 8,126 3,362 12,567 4,305 Other assets 2,605 3,918 -------- ------------ -------- ------------ Total Intangible assets and other assets $ 25,731 $ 3,362 $ 16,485 $ 4,305 ======== ============ ======== ============
Non-amortizable intangible assets are substantially comprised of trademark rights purchased through the acquisitions. Amortizable intangible assets consist primarily of certain trademarks, license agreements and franchise agreements and rights. Pre-tax amortization expense for intangible assets was $745 and $872 for the years ended August 31, 2005 and 2004 respectively. Amortization expense for each of the next five years is currently estimated to be $745 or less. The movement in goodwill and gross carrying amounts of intangible and other assets is as follows:
2005 2004 --------------------------- ------------------------- Intangible and Intangible and Goodwill other assets Goodwill other assets --------- --------------- -------- -------------- Balance at August 31 $ 72,088 $ 16,485 $ 71,977 $ 19,928 Changes due to: Acquisitions 27,840 15,000 111 Goodwill impairment (52,101) Intangible asset impairment (2,941) Other (2,813) (3,443) --------- --------------- -------- -------------- Balance at August 31 $ 47,827 $ 25,731 $ 72,088 $ 16,485 =======================================================
Note 8. Short term borrowings 2005 Unsecured $ 30,000 Secured 4,553 -------- $ 34,553 ======== There were no short term borrowings during the year ended August 31, 2004. 36 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 8. Short term borrowings (cont'd) Unsecured In Connection with the acquisition of the Breyer's yogurt business from Kraft in March 2005, a U.S. subsidiary borrowed $40,000 to finance the acquisition. The unsecured term loan requires monthly payments of interest and repayment of the $40,000 principle balance on November 1, 2005. Interest is payable monthly with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates plus applicable margin are the lower of Prime plus 0.5% or libor plus 2.5% (6.02% at August 31, 2005). On August 23, 2005, the Company made a principal payment of $10,000 in anticipation of the September 2, 2005 amendment as discussed in Note 9. As of August 31, 2005 the term loan balance was $30,000. Secured On April 27, 2005 Americana Foods LLP, which is owned 50.1% by the Company, borrowed $4,553 to purchase a building and adjacent acreage. The loan terms requires monthly, interest-only payments until the April 27, 2006 anniversary date of the note. The note bears interest at Prime plus 0.5% (7.0% at August 31, 2005). The agreement provides a one-time right to extend the maturity date by two years until April 27, 2008. Monthly payments during the two year extension period will be based on a 25-year amortization period. Americana may also at the extension date choose to continue an interest rate at Prime plus 0.5% or convert to a fixed interest rate to be quoted by the lender. Due to the one year maturity date of April 27, 2006 (before exercise of the extension option), this note is classified as a current liability. Note 9. Long-term debt 2005 2004 Term loan, unsecured $ 10,500 $ 13,587 Term loan, secured 8,610 9,117 Revolving loan, secured 7,145 4,483 Capitalized leases 154 567 ---------------------- 26,409 27,754 Less Current maturities 18,161 8,492 ---------------------- $ 8,248 $ 19,262 ====================== In connection with the acquisition of Eskimo Pie Corporation, a subsidiary borrowed $30,000, to finance the acquisition. The unsecured term loan is payable in monthly installments of $250, with the remaining principal balance due November 1, 2005. Interest is payable monthly on the unpaid principal balance with interest rates fluctuating with changes in the prime lending or libor rate and the ratio of funded debt to EBITDA. The interest rates, plus applicable margins were the lower of Prime plus 0.5% or libor plus 2.0% (5.49% at August 31, 2005). As of August 31, 2005 and 2004, the term loan balance was $10,500 and $13,500, respectively. All borrowings under the above unsecured term loan agreement are guaranteed by the Company. The agreement contains restrictions relating to the payment of dividends, rental obligations, liens, indebtedness, dispositions of property, change in the nature of its business, change in ownership and requires that the net proceeds from the sale (other than in the ordinary course of business) of any assets of Eskimo Pie Corporation must be utilized to reduce the then outstanding principal balance of the term loan. In addition, the Company must maintain certain financial ratios and limit capital expenditures to $5,000 during any fiscal year. The company was in default of it's financial covenants at May 31, 2005 and August 31, 2005. On September 2, 2005 the company entered into an amendment to its existing credit facilities. The Amendment extends the maturity of the existing facilities from November 1, 2005 until January 3, 2006 and waives defaults in its financial covenants resulting from the company's financial performance. 37 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 9. Long-term debt (cont'd) The September 2, 2005 amendment eliminated all of the financial covenants from the loan agreements through the remainder of the term and grants a security interest in the personal property assets (other than certain excluded assets relating to the operations of the Company's 50.1% owned limited partnership), reduced its outstanding indebtedness to the bank to $40,500, including short term borrowings of $30,000. The Company agreed to an increase of the interest rate from libor plus 2.0% on all remaining outstanding balances to libor plus 4.5%. In addition, the amendment reduced the Company's $5,000 revolving credit facility to $925 and required the Company to maintain $20,000 of cash balances, of which $10,000 is restricted to use as approved by the lender. The increases in interest rates as a result of this Amendment increases the fair value of the related short term borrowings and long-term debt by approximately $331. Term loan, secured On November 19, 2002, Americana Foods LLP ("Americana"), which is owned 50.1% by the Company, entered into a credit agreement with a financial institution that includes a term loan of $10,000. This term loan is secured by Americana's property, plant and equipment. Principal payments are payable in fixed monthly installments of $81 based upon a fifteen-year amortization and matures on November 19, 2007. The loan bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004). As of August 31, 2005 and 2004 the term loan balance was $8,610 and $9,117, respectively. On March 19, 2005 Americana executed an amendment to the credit agreement. Pursuant to this amendment, a fixed charge coverage ratio of 1.25:1 and a debt-to-tangible net worth ratio of 2:1 must be maintained. The minimum tangible net worth requirement was increased to $20,500 effective March 19, 2005. The partnership is in compliance with its loan covenants at August 31, 2005. Revolving loan, secured Americana's credit agreement includes a revolving loan up to $9,000, subject to a borrowing base calculation, and bears interest at Prime plus 0.5% (7.0% at August 31, 2005 and 5.0% at August 31, 2004) and was due on November 30, 2005. At August 31, 2005 approximately $1,855 was available to the Partnership under this loan. The revolving loan is secured by Americana's accounts receivable and inventory and is classified as a current liability. On November 30, 2005 Americana executed an amendment to the credit agreement which extends the maturity date of the revolving note to January 10, 2006. Repayments of long-term debt due in each of the next five years are as follows: 2006 $ 18,161 2007 416 2008 7,832 2009 - 2010 - -------- $ 26,409 ======== Interest paid during the year ended August 31, 2005 was $2,350 (2004 - $1,461). 38 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (thousands of shares) Capital stock The Company's articles of incorporation authorize 200,000 shares of both Class A Subordinate and Class B Multiple voting no par value shares. The paid-in-balance for each class of stock at August 31, 2005 was as follows: Paid-In-balance --------------- Class A Subordinate voting shares $ 85,659 Class B Multiple voting shares $ 11,919 Changes in Capital stock for the two years ended August 31, 2005 were as follows:
Class A Class B Subordinate Multiple voting shares voting shares outstanding outstanding # # ------------------------------ Balance at August 31, 2003 45,629 6,179 Issuance of shares for stock options exercised 3,985 Issuance of shares for warrants exercised 100 Multiple voting shares converted to subordinate voting shares 149 (149) ------------------------------ Balance at August 31, 2004 49,863 6,030 Multiple voting shares converted to subordinate voting shares 1 (1) Issuance of shares for stock options exercised 54 ------------------------------ Balance at August 31, 2005 49,918 6,029 ==============================
Class A subordinate voting shares have a preferential right to receive cash dividends when, as and if declared by the Board of Directors. Class B multiple voting shares can be converted at any time into an equivalent number of Class A subordinate voting shares. The Class A subordinate voting shares are entitled to one vote per share and the Class B multiple voting shares are entitled to ten votes per share. 39 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (cont'd) Stock options Under the Company's stock option plans, non-qualified options to purchase subordinate voting shares are granted to directors, officers, consultants and key employees at exercise prices equal to the fair market value of the stock at the date of grant. On November 1, 2002 the Company's shareholders approved The 2002 Stock Option Plan, which reserved 5.17 million options for issuance and limited the number of options that may be granted in any one fiscal year to 2.5% of outstanding shares. On February 27, 2004 the Company's shareholders approved the elimination of the limitation on the number of options that may be granted in any one fiscal year. The following table summarizes stock option activity for all stock option plans: Weighted Weighted average average contractual exercise life Shares CAD Price (in years) -------------------------------------------------------------------------- Outstanding at August 31, 2003 4,362 $ 3.98 2.7 Granted 3,420 $ 20.03 Exercised (3,986) $ 4.00 Cancelled (20) $ 8.35 ------ Outstanding at August 31, 2004 3,776 $ 18.47 4.2 Granted 1,024 $ 4.03 Exercised (54) $ 1.27 Cancelled (829) $ 18.69 ------ Outstanding at August 31, 2005 3,917 $ 14.89 4.9 ====== Options exercisable at August 31, 2005 3,103 $ 17.58 The following table summarizes stock options outstanding, exercisable and exercise price range at August 31, 2005:
Options Outstanding Options Exercisable ---------------------------------------------------------------- Weighted- average Weighted- Weighted- Outstanding remaining average Exercisable average Range of as of contractual exercise as of exercise exercise prices 08/31/2005 life price 08/31/2005 price - ------------------------------------------------------------------------------------ $ 1.15 - $ 1.35 128 0.2 $ 1.27 63 $ 1.26 $ 4.03 - $ 5.00 1,083 9.2 $ 4.10 393 $ 4.09 $ 13.75 - $ 15.93 1,096 3.1 $ 15.74 1,037 $ 15.80 $ 22.65 - $ 22.65 1,610 3.5 $ 22.65 1,610 $ 22.65 ----- ----- 3,917 4.9 $ 14.89 3,103 $ 17.57 ===== =====
Stock options reserved for future grant at August 31, 2005 aggregated 452,985. 40 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 10. Shareholders' equity and stock options (cont'd) The Company accounts for stock-based compensation using the fair value method of accounting. Stock-based compensation expense was recognized in the amount of $1,918 (2004 - $30,983) in the Consolidated Statements of Operation. Under the Black-Scholes option pricing model, the weighted-average fair value of the stock options granted during fiscal 2005 was CAD $4.03(2004 - CAD $10.21) per option. The value of each option granted is estimated on the date of the grant using the Black-Scholes options pricing model with the following "weighted-average assumptions":
For the year ended August 31, 2005 2004 ---------------- Expected dividend yield Nil Nil Risk-free interest rate (percentage) 3.92 2.98 Expected volatility 66.73 67.39 Expect life (in years) 10 4.2
Note 11. Income taxes The effective income tax rate on (loss) earnings is affected from year to year by the geographic mix of the consolidated (loss) earnings before income taxes. The following table reconciles income tax (recovery) expense computed by applying the combined Canadian Federal/Provincial statutory rate with the actual income tax provision:
2005 2004 Combined basic Canadian Federal and Provincial income tax rate (36.12)% 36.21% Impact of operating in foreign countries with different effective rates (1.00) 1.93 Permanent differences: Non-deductible goodwill impairment 24.39 Valuation allowance 5.89 Other (3.34) (1.04) ---------------- (10.18)% 37.10% ================
In 2005 the Company established an allowance for non-capital loss carry-forwards as the utilization of such loss carry-forwards was considered unlikely. Significant components of the Company's deferred tax assets and liabilities as of August 31, 2005 are as follows:
Deferred tax assets - ------------------- Stock options $ 10,241 Federal net operating loss carry forwards 5,100 Intangible assets 4,201 Accrued liabilities 1,639 Inventory 2,188 State net operating loss carry forwards 995 Bad debts 467 Inventory reserve 124 Property, plant and equipment 92 ---------- 25,047 Valuation allowance (5,100) ---------- Total deferred tax assets $ 19,947 ==========
Deferred tax liabilities - ------------------------ Intangible assets $ 3,761 Property, plant and equipment 2,423 Other 89 ---------- Total deferred tax liabilities $ 6,273 ==========
Income taxes paid during the year ended August 31, 2005 was approximately $4,731 (2004 - $16,299) 41 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement plans A subsidiary of the Company, Eskimo Pie Corporation, had maintained two defined benefit pension plans covering substantially all salaried and executive employees. Upon the acquisition of Eskimo Pie Corporation by the Company, all future participation and all benefits under the plans were frozen. These plans provide retirement benefits based primarily on employee compensation and years of service up to the acquisition of Eskimo Pie Corporation by the Company. The above mentioned plans are referred to as the "Pension Benefits". 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 post retirement health and life insurance benefits for employees who retired subsequent to April 1992. This indemnity agreement is referred to as the "Other Benefits". The following table reconciles the changes in benefit obligations and plan assets in 2005 and 2004, and reconciles the funded status to accrued benefit cost at August 31, 2005 and August 31, 2004: Pension benefits Other benefits ---------------- -------------- Benefit obligation Beginning balance at August 31, 2003 $ 2,088 $ 1,637 Interest cost 135 166 Actuarial loss 94 Benefit payments (78) (200) ------------------------------ Balance at August 31, 2004 2,239 1,603 Interest cost 139 200 Actuarial loss 277 Benefit payments (85) ------------------------------ Ending balance at August 31, 2005 $ 2,570 $ 1,803 ============================== Plan assets - Basic value Beginning balance at August 31, 2003 $ 1,925 Actual return on plan assets 219 Contributions 20 Benefit payments (78) --------- Balance at August 31, 2004 2,086 Actual return on plan assets 338 Contributions 20 Benefit payments (85) --------- Ending balance at August 31, 2005 $ 2,359 ========= The funded status for the post retirement health and life insurance benefits is as follows: Other benefits -------------- Benefit obligations in excess of plan assets $ 1,803 ========= Accrued benefit cost $ 1,803 ========= The accrued benefit cost of $1,803 is included in other liabilities at August 31, 2005. 42 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement plans (cont'd) The following table provides the components of the net periodic benefit cost: Pension benefits Other benefits ---------------- -------------- Interest cost $ 139 $ 200 Expected return on plan assets (337) Recognized net actuarial gain 187 --------------------------------- Net period benefit cost (income) $ (11) $ 200 ================================= The assumptions used in the measurement of the Eskimo Pie Corporation's benefit obligations are as follows: Pension benefits Other benefits ---------------- -------------- Benefit obligation, beginning of year 6.00% 7.75% Expected return on plan assets, during the year 8.00% The weighted average annual assumed rate of increase in the per capita cost of covered benefits for the Other Benefits Plan (i.e., health care cost trend rate) is 5% for 2005 and is assumed to remain at that level thereafter. A one percentage point increase or decrease in the assumed health care cost trend rate would change the accumulated post retirement benefit obligation by approximately $177 and the net periodic post retirement benefit cost by approximately $18. The Company's allocation of Pension benefit assets at August 31, 2005 and 2004, target allocations for fiscal 2006 and expected long-term rate of return by asset category are as follows:
- -------------------------------------------------------------------------------------------------- Weighted-average Target expected long-term rate allocation Percentage of plan assets of return - -------------------------------------------------------------------------------------------------- Fiscal Year 2006 2005 2004 2006 - -------------------------------------------------------------------------------------------------- Asset category Large capitalization equities 35.0 35.8 36.9 2.8 Mid capitalization equities 15.0 13.0 10.4 1.8 Small capitalization equities 9.0 7.1 8.6 1.8 International equities 25.0 27.3 28.0 .6 Fixed income bonds 12.0 12.0 12.4 2.0 Cash and cash equivalents 4.0 4.8 3.7 - ---------------------------------------------------------------- 100% 100% 100% 9% ----------------------------------------------------------------
43 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 12. Retirement plans (cont'd) The Company's investment strategy is to obtain the highest possible return commensurate with the level of assumed risk. Investments are well diversified within each of the major asset categories. The expected long-term rate of return is figured by using the target allocation and expected returns for each asset class as in the table above. The actual historical returns are also relevant. Annualized returns for periods ending August 31, 2005 have been as follows: 16.7% for one year and 16.4% for three years. The Company expects that there will be no minimum regulatory funding requirements that will need to be made during the fiscal year ending August 31, 2006. Expected benefit payments are as follows over future years: Fiscal year Pension benefits Other benefits - ------------------------------------------------------------------------------- 2006 88 200 2007 96 200 2008 94 200 2009 97 200 2010 94 200 2011 - 2015 548 1,000 Note 13. Commitments The majority of distribution warehouse, store and office facility leases are under non-cancelable leases. Substantially all of the leases are net leases, which require the payment of property taxes, insurance and maintenance costs in addition to minimum rental payments. Certain store leases provide for additional rentals based on a percentage of sales and have renewal options for one or more periods from five to twenty years. At August 31, 2005 the future minimum lease payments under operating leases with rental terms of more than one year, net of sublease rents, amounted to: Fiscal year ending: 2006 $ 4,363 2007 3,004 2008 2,226 2009 1,360 2010 554 Later years 886 -------- Total minimum obligations $ 12,393 ======== Total rental expense relating to all operating leases (including those with terms less than one year) was $7,698 (2004 - $7,203). 44 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 14. Contingencies Legal matters The Company is a party to legal proceedings and disputes with franchisees, former franchisees and others, which arise in the ordinary course of business. In the opinion of the Company, it is unlikely that the liabilities, if any, arising from the legal proceedings and disputes will have a material adverse effect on the consolidated financial position of the Company or its operations. Subleases Several subsidiaries hold master store leases covering franchised locations. Such leases expire at varying dates to 2013. Where a subsidiary holds the master lease, these premises have been subleased to franchisees under terms and rental rates substantially the same as those in master leases. In a majority of these instances, franchisees make all lease payments directly to the landlords. The Company provides an estimated liability for lease terminations in the event of a default by a franchisee based on the expected costs of releasing or settlement with the landlord. The liability was $291at August 31, 2005. Aggregate minimum future rental payments under these leases approximated $6,074 at August 31, 2005 (2004 - $6,144). Note 15. Related party transactions and amounts Calip Dairies, Inc. ("Calip"), an ice cream distributor owned by an officer, director and shareholder of the Company, had a management agreement with Integrated Brands Inc., a subsidiary of the Company which the Company acquired in March 1998. This management agreement was terminated in January 2005 by the mutual agreement of the parties. Under the agreement, Calip provided management services to Integrated Brands for an annual fee of $1,300. Such management fees incurred for the year ended August 31, 2005 were $542 (2004 - $1,300). At August 31, 2005, the $620 (2004 - $850) balance of payables - affiliates represents payables to Calip. Integrated Brands Inc., also has a distribution agreement with Calip for distribution of the Company's products in the New York Metropolitan Area, Fairfield County in the state of Connecticut, and New Jersey. The distribution agreement continues until December 31, 2007 and thereafter shall automatically renew on December 31 of each year while the agreement is in effect for an additional one-year term, unless terminated under certain conditions. The distribution agreement is terminable by either party on sixty-days' notice. Sales of products to Calip were $9,781 for the year ending August 31, 2005 (2004 - - $9,482). At August 31, 2005, $1,840 of the receivables - affiliates represent receivables from Calip (2004 - $3,883). The transactions with Calip occur in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. 45 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information CoolBrands International's reportable segments are Frozen dessert, Yogurt, Foodservice, Dairy components and Franchising and licensing, including Company-owned stores. Revenues and profits in the Frozen dessert segment are generated from selling a variety of prepackaged frozen dessert products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. Revenues and profits in the Yogurt segment are generated from selling a variety of prepackaged Yogurt products to distributors and various retail establishments including supermarkets, grocery stores, club stores, gourmet shops, delicatessens and convenience stores. Revenues and profits in the Foodservice segment are generated from manufacturing and selling soft-serve yogurt and premium ice cream mixes to broad-line foodservice distributors, yogurt shops and other foodservice establishments which, in turn, sell soft-serve ice cream and yogurt products to consumers. Revenues and profits in the Dairy components segment are generated from the manufacturing and selling of various ingredients to the dairy industry and from the manufacturing and selling of flexible packaging, such as private label ice cream novelty wraps. Revenues and profits in the Franchising and licensing segment are generated by franchising activities, which generate initial and recurring revenues and the manufacture and sale of proprietary products to franchisees and licensees and from company-owned stores selling ice cream and soft-serve yogurt out of Company-owned stores and outlets. CoolBrands International Inc. evaluates the performance of its segments and allocates resources to them based on their operating contribution, which represents segment revenues, less direct costs of operation, excluding the allocation of corporate expenses. 46 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Industry segments: Year Ended August 31, 2005
Franchising Frozen Dairy and dessert Yogurt Foodservice components licensing Corporate Consolidated - -------------------------------------------------------------------------------------------------------------------------- Revenues $ 330,972 $ 44,007 $ 18,397 $ 22,589 $ 15,200 $ 280 $ 431,445 Interest income 797 303 132 1,232 Inter-segment revenues (43,665) (661) (3,051) (230) (47,607) ------------------------------------------------------------------------------------------ Net revenues 288,104 44,007 17,736 19,538 15,503 182 385,070 ------------------------------------------------------------------------------------------ Segment (loss) earnings (37,139) 2,376 2,142 2,593 (770) 182 (30,616) General corporate expenses (72) (72) Interest expense (1,687) (891) (8) (2,586) Asset impairment (50,102) (5,423) (55,525) Gain on sale of building 3,634 3,634 Minority interest 2,700 2,700 ------------------------------------------------------------------------------------------ (Loss) earnings before income taxes $ (82,594) $ 1,485 $ 2,142 $ 2,593 $ (6,201) $ 110 (82,465) =========================================================================== Recovery of income taxes (8,395) ------------ Net loss $ (74,070) ============ Assets $ 157,418 $ 69,877 $ 20,593 $ 33,556 $ 14,659 $ 1,742 $ 297,845 Capital expenditures 10,784 764 325 536 12,409 Depreciation and amortization 3,439 420 328 328 510 17 5,042
47 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Industry segments: Year Ended August 31, 2004
Franchising Dairy and Frozen dessert Foodservice components licensing Corporate Consolidated - ------------------------------------------------------------------------------------------------------------------ Revenues $ 462,842 $ 16,382 $ 29,516 $ 14,188 $ 219 $ 523,147 Interest income 261 162 108 531 Inter-segment revenues (66,533) (703) (6,332) (172) (73,740) ---------------------------------------------------------------------------------- Net revenues 396,570 15,679 23,184 14,350 155 449,938 ---------------------------------------------------------------------------------- Segment earnings 32,168 1,551 3,868 2,047 155 39,789 General corporate expenses (1,868) (1,868) Interest expense (1,491) (7) (1,498) Minority interest 958 958 ---------------------------------------------------------------------------------- Earnings (loss) before income taxes $ 31,635 $ 1,551 $ 3,868 $ 2,040 $ (1,713) 37,381 =================================================================== Provision for income taxes 13,869 ------------ Net earnings $ 23,512 ============ Assets $ 240,817 $ 17,375 $ 30,433 $ 16,425 $ 12,207 $ 317,257 Capital expenditures 13,009 110 146 98 13,363 Depreciation and amortization 5,850 335 322 807 7,314
48 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - -------------------------------------------------------------------------------- (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Geographic segments: Year Ended August 31, 2005
United Canada States International Consolidated - ------------------------------------------------------------------------------------------ Revenues $ 4,862 $ 422,946 $ 3,637 $ 431,445 Interest income 262 800 170 1,232 Inter-segment revenues (339) (47,268) (47,607) --------------------------------------------------- Net revenues 4,785 376,478 3,807 385,070 --------------------------------------------------- Segment (loss) earnings 849 (33,467) 2,002 (30,616) General corporate expenses (72) (72) Interest expense (2,586) (2,586) Asset impairment (55,024) (501) (55,525) Gain on sale of building 3,634 3,634 Minority interest 2,700 2,700 --------------------------------------------------- Earnings (loss) before income taxes $ 777 $ (84,743) $ 1,501 (82,465) ================================== Recovery of income taxes (8,395) ------------ Net (loss) $ (74,070) ============ Assets $ 8,526 $ 279,210 $ 10,109 $ 297,845 Capital expenditures 737 11,650 22 12,409 Depreciation and amortization 142 4,719 181 5,042
49 - -------------------------------------------------------------------------------- CoolBrands International Inc. Notes to Consolidated Financial Statements for the years ended August 31, 2005 and 2004 - ------------------------------------------------------------------------------ (Amounts are expressed in thousands of dollars) Note 16. Segment information (cont'd) Geographic segments: Year Ended August 31, 2004
United Canada States International Consolidated - ------------------------------------------------------------------------------------------ Revenues $ 4,119 $ 516,004 $ 3,024 $ 523,147 Interest income 216 264 51 531 Inter-segment revenues (172) (73,568) (73,740) --------------------------------------------------- Net revenues 4,163 442,700 3,075 449,938 --------------------------------------------------- Segment earnings 609 37,509 1,671 39,789 General corporate expenses (1,868) (1,868) Interest expense (1,498) (1,498) Minority interest 958 958 --------------------------------------------------- (Loss) earnings before income taxes $ (1,259) $ 36,969 $ 1,671 37,381 ==================================== Provision for income taxes 13,869 ------------ Net earnings $ 23,512 ============ Assets $ 19,061 $ 289,323 $ 8,873 $ 317,257 Capital expenditures 20 13,339 4 13,363 Depreciation and amortization 153 7,016 145 7,314
50 - -------------------------------------------------------------------------------- BOARD OF DIRECTORS AND OFFICERS DIRECTORS OFFICERS Michael Serruya Gary P. Stevens Co-Chairman & Director Chief Financial Officer David M. Smith Francis X. Orfanello Vice Chairman, Vice President Chief Operating Officer & Director Timothy Timm David J. Stein Vice President, President, Chief Executive Officer, Manufacturing and Quality Assurance Co-Chairman & Director John M. Kaczynski Robert E. Baker Senior Vice President, Lead Director Sales & Marketing Aaron Serruya J. Leo Glynn Director President, Eskimo Pie Frozen Distribution Inc. Romeo DeGasperis Director William J. Weiskopf President, Beth L. Bronner Value America Flavors and Ingredients Director Paul Samuel L. Joshua Sosland Vice President, Director Sam-Pak Flexible Packaging Arthur Waldbaum John R. LeSauvage Director Vice President, Operations * Scheduled to retire from the Board at 2006 Annual Meeting Matthew P. Smith Vice President, Marketing William R. McManaman * Proposed for election to the Board Stacy L. Pugh at 2006 Annual Meeting Senior Vice President Operations, Americana Foods Craig Hettrich President, Eskimo Pie Food Service Daniel C. Heschke Chief Information Officer 51 - -------------------------------------------------------------------------------- CORPORATE INFORMATION MANUFACTURING PLANTS Canadian Head Office 8300 Woodbine Avenue, 5th Floor Markham, Ontario L3R 9Y7 Canada Telephone: 905-479-8762 www.coolbrandsinc.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 American Legal Representation Blank Rome LLP The Chrysler Building 405 Lexington Avenue New York, New York 10174-0208 U.S.A. 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.SV.A" Canadian Legal Representation Stikeman Elliott LLP Commerce Court West, 53rd Floor Toronto, Ontario M5L 1B9 Canada Transfer Agent Equity Transfer Services Inc 120 Adelaide Street West, Suite 420 Toronto, Ontario M5H 3V1 Canada 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 CoolBrands Dairy Inc. 22 County Route 52 North Lawrence, NY 12967 U.S.A. Telephone: 315-389-5111 Annual Meeting The Annual Meeting of Shareholders will be held on Monday, February 27th, 2006 at 10:00a.m. Sheraton Parkway Toronto North, (Thornhill Room) 600 Highway 7 East Richmond Hill. Ontario L4B 1B2 52 - -------------------------------------------------------------------------------- EX-99 5 ex99-4.txt EXHIBIT 99.4 NOTICE OF CHANGE OF AUDITOR TO: BDO Dunwoody LLP, Chartered Accountants AND TO: BDO Seidman, LLP, Certified Public Accountants It is proposed that CoolBrands International Inc. (the "Corporation") will change its auditor from BDO Dunwoody LLP, Chartered Accountants, Toronto, Ontario, Canada (the "former auditor") to BDO Seidman, LLP, Certified Public Accountants, Melville, New York, U.S.A. (the "successor auditor"), effective as of the close of the Annual and Special Meeting of Shareholders of the Corporation scheduled to be held on February 27, 2006 (the "Annual and Special Meeting"). The Audit Committee's recommendation for the change of auditor to the Board of Directors was made as a result of several factors, including that in addition to a majority of the Corporation's business being located in the United States, during the past year the Corporation has changed its financial reporting from Canadian generally accepted accounting principles to United States generally accepted accounting principles and has divested itself of the franchise division, the only significant Canadian-based operation of the Corporation. The Corporation believes that BDO Seidman, LLP is therefore able to serve the Corporation more efficiently from its office in Melville, New York, U.S.A. than BDO Dunwoody LLP in Toronto, Canada. In accordance with National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102"), the Corporation reports that: 1. the former auditor has therefore been terminated as auditor of the Corporation effective the close of the Meeting; 2. the former auditor will not be proposed to shareholders at the Meeting for reappointment; 3. there were no reservations in the former auditor's reports in connection with the audits of the two most recently completed fiscal years and any period subsequent to the most recently completed fiscal year for which an audit report was issued and preceding the date of expiry of the former auditor's term of office; and 4. there are no "reportable events" as such term is defined in NI 51-102. The change of auditor and the recommendation to appoint the successor auditor was approved by the audit committee and the board of directors of the Corporation. DATED this 11th day of January, 2006. ON BEHALF OF THE BOARD OF DIRECTORS /s/ David Stein - ------------------------------ David Stein President and Chief Executive Officer [IBDO LOGO] BDO Seidman, LLP 330 Madison Avenue Accountants and Consultants New York, New York 10017 Telephone: (212) 885-8000 Fax: (212) 697-1299 January 11, 2006 Ontario Securities Commission British Columbia Securities Commission Alberta Securities Commission Saskatchewan Financial Services Commission Manitoba Securities Commission Autorite des marches financiers - L'Agence nationale d'encadrement du secteur financier Office of the Administrator, New Brunswick Nova Scotia Securities Commission Registrar of Securities, Prince Edward Island Securities Commission of Newfoundland and Labrador Dear Sirs/Mesdames: Re: CoolBrands International Inc. - Change of Auditor Pursuant to National Instrument 51-102 - Continuous Disclosure Obligations, we have reviewed the information contained in the Notice of Change of Auditor of CoolBrands International Inc. dated January 11, 2006 (the "Notice") and, based on our knowledge of such information at this time, we agree with the statements made in the Notice as it pertains to our being proposed as the new auditors effective as of the close of the Annual and Special Meeting of Shareholders, scheduled to be held on February 27, 2006. Yours very truly, /s/ BDO Seidman, LLP Certified Public Accountants Melville, New York [IBDO LOGO] BDO Dunwoody LLP Royal Bank Plaza Chartered Accountants P.O. Box 32 and Advisors Toronto Ontario Canada M5J 2J8 Telephone: (416) 865-0200 Telefax: (416) 865-0887 www.bdo.ca January 11, 2006 Ontario Securities Commission British Columbia Securities Commission Alberta Securities Commission Saskatchewan Financial Services Commission Manitoba Securities Commission Autorite des marches financiers - L'Agence nationale d'encadrement du secteur financier Office of the Administrator, New Brunswick Nova Scotia Securities Commission Registrar of Securities, Prince Edward Island Securities Commission of Newfoundland and Labrador Dear Sirs/Mesdames: Re: CoolBrands International Inc. - Change of Auditor Pursuant to National Instrument 51-102 - Continuous Disclosure Obligations, we have reviewed the information contained in the Notice of Change of Auditor of CoolBrands International Inc. dated January 11, 2006 (the "Notice") and, based on our knowledge of such information at this time, we agree with the statements made in the Notice. Yours very truly, /s/ BDO Dunwoody LLP Chartered Accountants Toronto, Ontario BDO Dunwoody LLP is a Limited Liability Partnership registered in Ontario -----END PRIVACY-ENHANCED MESSAGE-----