CoolBrands International Inc.

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CoolBrands International Inc.

8300 Woodbine Avenue, 5th Floor
Markham, Ontario L3R 9Y7
Canada
Telephone: (905) 479-8762
Fax: (905) 479-5235
Web site: http://www.yogenfruz.com

Public Company
Incorporated: 1986
Employees: 421
Sales: $75.6 million (1999)
Stock Exchanges: Toronto
Ticker Symbol: YFa.TO
NAIC: 72213 Snack and Non-Alcoholic Beverage Bars; 31152 Ice Cream and Frozen Dessert Manufacturing

Through nearly 5,000 franchises, CoolBrands International Inc., formerly known as Yogen Fruz World-Wide, Inc. sells frozen yogurt and ice cream in Canada, the United States, and 80 other countries worldwide. The company’s brands include I Can’t Believe It’s Yogurt, Bresler’s Ice Cream & Yogurt Shops, Heidi’s Frozen Yogurt, Swensen’s Ice Cream, Steve’s Ice Cream, Larry’s Ice Cream & Yogurt Parlors, and its proprietary frozen yogurt brand, Yogen Fruz. The company also franchises Java Coast Fine Coffees. Through licensing agreements, CoolBrands also produces and distributes frozen desserts for retail at grocery stores under the following brands: Tropicana, Yoplait, Trix, Lucky Charms, Yoo Hoo, Colombo, and Betty Crocker. In 2000, CoolBrands announced plans to acquire the U.S.-based Eskimo Pie Corp., an agreement reached only after a takeover attempt that occupied the company for much of 1999.

1980s Origins

The company that would become CoolBrands was founded in 1985 by brothers Aaron and Michael Serruya. Aaron Serruya had witnessed the success of frozen yogurt dessert shops in the United States, while he was operating a bagel shop with an uncle in Miami. With such businesses as The Country’s Best Yogurt (TCBY) and I Can’t Believe It’s Yogurt (ICBIY) as models, the Serruya brothers decided to open a frozen yogurt franchise in Canada. They first approached several U.S.-based yogurt businesses, hoping to establish an American franchise in Canada, but for a variety of reasons were rejected. So Aaron, then age 19, and Michael, then age 20, put their resources together, including a loan from their father, and proceeded to develop their own franchise concept. Aaron worked with a food technician to develop the frozen yogurt flavors, while Michael consulted with a Canadian design firm on the brand concept, named Yogen Fruz.

With Michael as CEO and Aaron as executive vice-president, Yogen Fruz opened its prototype store at a suburban Toronto shopping mall in August 1986. Offering frozen yogurt in cups or cones, as well as in frozen shakes mixed with fresh fruit, made to order, the shop flourished. The brothers repaid the loan from their father within six months, and within a year the first of many franchises opened in London, Ontario. The frozen yogurt dessert shops were soon opening in shopping malls across Canada, and in 1989 Yogen Fruz franchised its 100th store. A younger brother, Simon, joined the company in 1989 at age 18, while their father sold his typesetting business to oversee offices in Europe.

As franchisers, the Serruya brothers could grow the company without large capital outlays or the need for heavy debt. Under the franchise agreements, the franchisee was required to buy equipment and supplies from Yogen Fruz. Equipment included yogurt dispensing machines, display counters, and neon signs; supplies included yogurt, fresh fruit, cups, cones, napkins, and spoons. Canadian franchisees also paid a six percent royalty.

Master franchise agreements for international expansion involved the same conditions, but charged a two percent royalty. International agreements covered an entire country as franchi-sees obtained the rights to open stores either through direct ownership or through the sale of franchise licenses to others. Local investors in foreign countries paid up to $500,000 for such rights and agreed to open a set number of stores. The Serruya brothers sought expansion overseas rather than compete in the United States, because frozen yogurt dessert shops had already neared market saturation in the United States.

A nontraditional method of expansion employed by Yogen Fruz involved co-branding, which provided for the mingling of Yogen Fruz products with other known food services by way of Yogen Fruz mini-counters in established stores. Cobranding cost about 25 percent less than a full-size store, offering a limited selection of three to four yogurt flavors in standard cups only. The company franchised Yogen Fruz mini-counters to Kentucky Fried Chicken, Pizza Hut, and Dunkin Donuts franchisees overseas.

Yogen Fruz also cobranded with Canadian franchises, such as the Country Style Donuts chain. There, consumers could order their coffee and donuts in the morning and arrive later in the day for Yogen Fruz. This boosted sales for the donut chain by extending its sales day. It did likewise for the Country Style Donut kiosks already established at Canadian Tire stores; customers waiting for the completion of work on their cars could get donuts in the morning and frozen yogurt throughout the day. In early 1995 Yogen Fruz franchisees operated 170 outlets in Canada, which comprised an impressive 80 percent of the frozen yogurt food service market in Canada. In total the company had 250 outlets in 30 countries, including Taiwan, Venezuela, United Arab Emirates, Thailand, and Panama.

U.S. Expansion in the Mid-1990s

When the time came for the Serruya brothers to tackle the U.S. market, they decided to expand through acquisition and sought capital through a public offering of stock. Yogen Fruz became a publicly traded company with a listing on the Toronto Stock Exchange in 1995, selling at C$.50 per share. Having raised the needed capital, Yogen Fruz first approached Bresler’s Ice Cream and Yogurt Shops of Des Plaines, Illinois, with an offer to purchase. The sale was completed in June 1995, and the acquisition of Bresler’s provided Yogen Fruz with a means of expansion into U.S. markets as well as with valuable new brands. Bresler’s had recently acquired 40 Larry’s Ice Cream & Yogurt Parlors, located in Florida, and 12 Pro*Portion Cafes in Long Island, New York. With 413 stores, including 15 international outlets and four Cafe Bresler’s quick-service restaurants, Bresler’s recorded 1994 sales of $45 million. The Serruya brothers planned to add Yogen Fruz mini-counters to 158 stores in the United States within 18 months. The addition of sales from Bresler’s nearly doubled company-wide sales at Yogen Fruz, reported at approximately $50 million in 1994.

A private offering of stock through warrants provided capital for the company’s second large acquisition. In March 1996 Yogen Fruz completed the acquisition of ICBIY and Brice Foods Ltd. from The Brice Group for $14 million. The acquisition involved 1,344 frozen dessert shops, including 520 units in Europe, a 35,000 square-foot manufacturing plant in Dallas, and the Java Coast coffee brand with 368 points of sale. The acquisition more than doubled Yogen Fruz’s share of the yogurt shop market in the United States and raised the count of the company’s units to well over 2,400 in 67 countries. Michael Serruya became co-president and co-CEO of ICBIY.

Master Franchise Agreements and cobranding remained the Yogen Fruz business strategy. Cobranding agreements involved the Canadian chains Taco Time International, Bagel Boy, and Amigos, as well as the sale of hard-pack frozen yogurt cups at 60 Pizza Hut outlets in Canada. Also, some Yogen Fruz and Bresler’s stores began offering Mrs. Fields cookies, while Mrs. Fields outlets began offering the Yogen Fruz and Bresler’s brands at select locations in the United States. Cobranding accounted for 20 to 30 percent of growth at this time.

Mater Franchise Agreements for Yogen Fruz outlets involved local investors in Australia, Kuwait, China, Korea, Malta, and Lebanon. In October 1996 the company signed an agreement to franchise the Bresler’s Ice Cream brand in Israel, Jordon, Egypt, Lebanon, and the West Bank and Gaza Strip territories. The agreement involved opening 65 new stores over ten years. Other agreements added ICBIY franchises in South Africa and Yogen Fruz franchises in Ukraine, Malaysia, and the former Yugoslav republics. Artal Pakistan Ltd., a KFC franchisee, purchased the rights to open Bresler’s and Yogen Fruz franchises in Pakistan.

Acquisitions at Yogen Fruz continued without accumulation of debt. During this time, the company acquired Greater Pacific Food Holdings, Inc., maker of the Honey Hill Farms brand of premium nonfat frozen yogurt. Based in Monterey, California, that company annually produced more than a million gallons of frozen yogurt which sold in California grocery stores. The acquisition involved production facilities only and allowed Yogen Fruz to maximize production capacity at its Dallas facility. Yogen Fruz did not acquire the Honey Hill Farms brand itself until later, in 1999. In November 1996 Yogen Fruz acquired the trademark and franchise rights of Paradise Frozen Yogurt and Juice Bar, including 15 outlets in the Toronto area. This was followed in 1997 by the Golden Swirl chain of 71 frozen-yogurt shops and wholesale operations for $5.2 million, which included Golden Swirl’s “smoothie” concept, a blend of frozen yogurt and customer selected ingredients, Nature’s Own Blend.

Key Dates:

1987:: First Yogen Fruz franchise outlet opens.
1990:: One hundredth franchise opens.
1995:: Company acquires Bresler’s Ice Cream & Yogurt Shops.
1996:: The I Can’t Believe It’s Yogurt chain is acquired.
1997:: Serruya brothers are named Canada’s Young Entrepreneur of the Year.
1999:: Yogen Fruz is first on Entrepreneur’s Franchise 500.
2000:: Company announces name change to CoolBrands International and enters a merger agreement with Eskimo Pie Corp.

In October 1997 Yogen Fruz merged with Integrated Brands, Inc. of Ronkonkoma, New York, in a stock transaction. To accommodate the process, Yogen Fruz restructured its stock into two share classes, subordinated and multivoting. The merger caused the company’s stock value to double to $C8 per share. One of the principals of Integrated Brands, Richard Smith, became co-chair and co-chief executive of the new concern, along with Michael Serruya. Integrated Brands’ 400 frozen dessert outlets included Swensen’s Ice Cream, Steve’s Ice Cream, Heidi’s Frozen Yogurt, and other brands. Yogen Fruz gained the retail distribution rights for some frozen products under name brands, including Tropicana, Yoplait, Colombo, Betty Crocker, Lucky Charms, and Trix. Distribution of Tropicana frozen fruit juice-based dessert bars began in 1997. For three years afterward it was the fastest growing brand product in that category, reaching second place in the market.

In the midst of this rapid growth, the Serruya brothers gained recognition as Canada’s Young Entrepreneur of the Year for international franchising. Opening 150 to 300 new units per quarter, the company’s 4,000th franchise opened in December 1997. Under various brands Yogen Fruz frozen dessert shops operated in 82 countries, while revenues reached C$45.9 million, up from C$30 million the year before. Profits were also healthy, standing at C$9.9 million. By this time, half of the company’s revenues were generated at its U.S. outlets, while 31 percent came from international outlets and 12 percent originated from units in Canada. In 1999 Entrepreneur magazine rated Yogen Fruz number one on its Franchise 500, a list of the fastest growing franchisors worldwide.

The next project was to establish Yogen Fruz products at larger mass-merchandise retail environments. In February 1998 Yogen Fruz signed an agreement to distribute Bresler’s Premium Frozen Yogurt to all 440 Sam’ Club stores in the United States. An agreement with National Amusements expanded Yogen Fruz outlets to 16 movie theaters in the United Kingdom, while KLM Airlines began to offer the ICBIY brand as part of its flight meals.

1999 and Beyond

The year 1999 presented some challenges for the Serruya brothers and Yogen Fruz. Early in the year, profits for the first quarter were lower than expected, and then certain accounting procedures at the company were publicly questioned. As a result, the company saw a decline in its stock value. Michael Serruya attributed the decrease in earnings to lower franchising income, a $250,000 foreign exchange loss, and the rising cost of butterfat; and the accounting issues were soon clarified, in favor of Yogen Fruz. However, the company’s stock dropped to C$3.40 per share. Shortly after the merger with Integrated Brands, Yogen Fruz’s stock value had peaked at more than C$14.

Nevertheless, growth strategies continued, as Yogen Fruz signed several Master Franchise Agreements in 1999. YF Posadas SRL of Argentina and Julie ‘N Superstores of Barbados involved more than 60 new frozen dessert shops, with possible agreements for other Caribbean countries. A May 1999 agreement involved development of 500 stores in Germany over three years. In August 1999 South Pole Foods Company, a franchisee in Taiwan, obtained the rights to develop 390 brand locations in China and Hong Kong. Fruzco South Africa entered into an agreement to open 37 units, beginning in Johannesburg. In February 2000 the company realized further expansion into the United Kingdom as North Pole Investments, Ltd. obtained master franchise rights to 82 outlets under the Yogen Fruz, Bresler’s, ICBIY, and Java Coast brands. The company planned to open the first two outlets in Stratford and London.

Financial performance at Yogen Fruz in 1999 sparked tense discussions at the company’s 2000 shareholder meeting. While revenues had increased from C$89 million in 1998 to C$112.6 million in 1999, profits had decreased from C$12.9 million to C$3.2 million, causing another decline in the company’s stock value, to $1.25 per share. Michael Serruya surprised shareholders and executives when he resigned his position as co-CEO, of his own volition, to focus on new acquisitions and maximizing shareholder value as co-chair of the board. The board then named David Stein, a principal of Integrated Brands, as CEO, while Aaron Serruya remained executive vice-president. In early 2000 the company announced its intention to adopt a new name, CoolBrands International, to better reflect the company’s interests.

During this time, the company had attempted to acquire the U.S.-based frozen dessert veteran Eskimo Pie Corp. Eskimo Pie, which had gone public in 1992, had run into financial trouble soon thereafter in the face of increased competition and shrinking profit margins. Its brand name recognition was solid, but sales faltered. CoolBrands approached Eskimo Pie with an offer to buy, but that offer was rejected as Eskimo Pie management hoped to turn the company around on their own. Eventually, late in 1999, the shareholders agreed to the takeover by CoolBrands, and in May 2000, the companies announced their intent to merge. When completed, the new holding would effectively double CoolBrands U.S. operations. Stein regarded Eskimo Pie as “a perfect match with our core consumer products…. In addition, our financial and strategic resources will be used to enhance the success of the Eskimo Pie brand name.”

Principal Subsidiaries

Yogen Fruz Canada, Inc.; Bresler’s Industries, Inc. (United States); I Can’t Believe It’s Yogurt, Ltd.; Integrated Brands, Inc.; Kay la Foods, Inc.; Eskimo Pie Corp. (United States).