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NAME AND INCORPORATION
Delicious Alternative Desserts Ltd. (the “Corporation”) was incorporated on April 5, 1994 under the Business Corporations Act (Alberta) as 605864 Alberta Inc. On April 19, 1994, the name of the Corporation was changed to Pacific 88 Investment Corp. and on November 4, 1994, the name was changed to Ricochet Industries Inc. The Corporation was classified as a junior capital pool corporation until November 2, 1994 when it completed its major transaction, the acquisition of 100% of the issued and outstanding shares of Ricochet Products in consideration of the issuance of 500,000 Common Shares of the Corporation (see “Business of the Corporation - History of the Corporation”).
Pursuant to an agreement dated November 1, 1996, the Corporation sold all of the issued and outstanding shares of Ricochet Products effective January 1, 1997. On July 21, 1997, the Corporation changed its name to Delicious Alternative Desserts Ltd. and on September 30, 1997, the Corporation acquired all of the issued and outstanding shares of Delicious Alternative Desserts Inc. (“DAD”) and consolidated its Common Shares on a five to one basis on August 14, 1997. The Corporation has three subsidiaries including DAD, which are described further in the “Business of the Corporation - Subsidiaries of the Corporation”.
The registered office of the Corporation are located at Suite 1250, 639 - 5th Avenue S.W., Calgary, Alberta T2P 0M9 and the principal place of business is located 135 King Street East, Stoney Creek, Ontario L8G 1L4.
BUSINESS OF THE CORPORATION
Overview of the Business of the Corporation
The business strategy of the Corporation is to capitalize on opportunities in the frozen food sector primarily in the premium and super premium ice cream markets. The first step in this strategy was completed with the acquisition of Stoney Creek Dairies Limited (“Stoney Creek”), an existing ice cream manufacturer, and the addition of innovative management, experience and marketing. It is the Corporation's objective to build on this core operating asset through a systematic and phased expansion of its distribution channels and product offerings to a national level and thereafter internationally. Part of these expansion plans involve obtaining licensing rights to manufacture and distribute brand name premium and super premium ice cream and other products. The Corporation has obtained several of these licenses as detailed further below.
History of the Corporation
Following the major transaction of the Corporation on November 2, 1994, the Corporation was engaged in the business of developing and manufacturing a protective plastic film. This business was unprofitable and on November 1, 1996 the Corporation entered into a purchase and sale agreement between the Corporation and Active Life Marketing Ltd. (the “Sale Agreement”) for the sale to Active Life Marketing Ltd. of all the issued and outstanding shares of Ricochet Products Inc. The then president of the Corporation, Glenn Rogers, is the principal shareholder of Active Life Marketing Ltd. and under the Sale Agreement agreed to purchase all of the shares of Ricochet Products Inc. for the purchase price of $217,000, payable by the cancellation of 301,114 shares of the Corporation subject to a performance escrow and the assumption of the net debts of the Corporation (accounts payable over accounts receivable) of approximately $61,000. As the Sale Agreement was with an insider of the Corporation, it was subject to the approval of The Alberta Stock Exchange and the majority of the arms length shareholders of the Corporation. Directors of the Corporation other than Glenn Rogers recommended the acceptance of the Sale Agreement.
On the same date the Corporation agreed to sell Ricochet Products Inc., it entered into an agreement with DAD and certain of its shareholders to acquire all the issued and outstanding shares of DAD (the “Acquisition Agreement”). DAD is a Canadian controlled private corporation engaged in the manufacture, sale and distribution of premium and super premium ice cream and frozen desserts. Its wholly-owned subsidiary, Stoney Creek, has been operating for over sixty years. The aggregate consideration for shares of DAD was the issuance of 2.20 Common Shares of the Corporation for each issued and outstanding share of DAD. The exchange ratio was determined on the basis that the Corporation's net value after taking into account the Sale Agreement was $237,500 and DAD was valued on the net basis at $2,542,250. There were 9,096,232 shares of DAD outstanding which resulted in the issuance of 20,011,704 shares by the Corporation.
The effect of the Sale Agreement and the Acquisition Agreement was to create a reverse take-over of the Corporation by the shareholders of DAD. Consequently, the Acquisition Agreement was subject to the approval of The Alberta Stock Exchange and to majority approval of the existing shareholders of the Corporation. The Alberta Stock Exchange approval of the transaction was received on May 30, 1997, subject to additional working capital being raised by DAD and placing some of the shares to be issued to some of the insiders of DAD (directors and officers) under escrow (see “Escrowed Securities”). Approximately 65.2% of the shares issued under the Acquisition Agreement were issued to directors and officers of DAD.
The Sale Agreement and the Acquisition Agreement were approved by the shareholders of the Corporation on June 30, 1997. At that time the shareholders also agreed to change the name of the Corporation to Delicious Alternative Desserts Ltd.
A key element in the Corporation's business strategy has been to attract a highly experienced executive with proven marketing and sales capabilities to the operation. Coincident with the Stoney Creek acquisition, Mr. Robert C. Harrison assumed the position of President and Chief Executive Officer and was appointed a director of DAD. Mr. Harrison has extensive experience in marketing and brand management and is the former Senior Vice-President and General Manager of the dairy and ice cream division of Wm. Neilson Limited. Upon completion of the reverse take-over, Mr. Harrison became President and C.E.O. of the Corporation (see “Management of the Corporation”).
Subsidiaries of the Corporation
The Corporation has a series of wholly-owned subsidiaries. The shareholdings of the Corporation and its subsidiaries may be represented as follows:
Delicious Alternative Desserts Ltd.
(the “Corporation”)
100% of Shares
Delicious Alternative Desserts Inc.
(“DAD”)
100% of Shares
Stoney Creek Dairies Limited
(“Stoney Creek”)
100% of Shares
Frozen Cargo Distributers Ltd.
(“Frozen Cargo”)
The Corporation conducts its marketing and licensing activities through DAD and its manufacturing and distribution activities directly and indirectly through Stoney Creek. Prior to its acquisition of Stoney Creek on October 11, 1996 DAD had no commercial operations. It acquired 100% of the outstanding shares of Stoney Creek in consideration of the payment of $1,200,000. The purchase price was comprised of $300,000 in promissory notes and the issuance of 1,800,000 Common Shares of DAD, valued at $900,000. Subsequent to DAD's acquisition of Stoney Creek, Stoney Creek acquired all of the outstanding Common Shares of Frozen Cargo for $110. Frozen Cargo distributes the products of Stoney Creek and third parties. It is anticipated that the Corporation will consolidate its corporate structure in the near future by participating in a short form vertical amalgamation with DAD and amalgamating Stoney Creek and Frozen Cargo. At the end of this process there will be only two entities remaining, the Corporation and Stoney Creek. These will remain separate corporate entities as the Corporation desires to keep its marketing and licensing activities separate from its manufacturing and distribution functions.
Overview of the Ice Cream and Frozen Dessert Industry
The ice cream market is divided into four separate segments: economy, regular, premium, and super premium. Premium and super premium ice cream types usually contain a minimum 10% milk fat, with some including as much as 20%. Super premium ice creams are usually packaged in small containers and offer unusual and exotic flavors. Premium ice creams contain less milk fat than super premiums and are generally packaged in 2 litre containers. Regular brands account for the majority of supermarket brands because of their attractive pricing. The economy ice creams are usually store-branded or regional labels.
The premium and super premium ice cream market segments have experienced phenomenal growth. Appealing mostly to adults, these high-end ice creams have attracted a broad and loyal following among customers seeking the satisfaction of a high-quality indulgence. In the U.S. brands such as “Ben & Jerry's”TM and “Haagen-Dazs”TM dominate the super premium market, while “Breyers”TM and “Marble Classics”TM lead the premium segment. The Canadian market is similar in profile to the U.S. market although it is not as well developed nor as diverse in product range as that of the U.S. market.
During the latter half of the 1980's and in the early 1990's, the U.S. market for ice cream and frozen desserts experienced strong and steady growth. This trend is expected to continue throughout the latter-half 1990's and into the next decade. The market has prospered as a result of the popularity of ice cream novelties and from increased demand for higher-priced premium products.
In the early 1990's growth in the industry was fueled by the proliferation of new products. The increasing segmentation of the market intensified competition and forced manufacturers to become more quality-conscious. Changes in consumption patterns altered the composition of the types of products being introduced. A growing number of health-conscious consumers were demanding reduced-calorie, reduced-fat products, while others were seeking premium and super premium quality ice cream products as an occasional indulgence. Consumer preferences are expected to continue to shift more toward low-calorie, reduced-fat products while still emphasizing quality. The emergence of fat substitutes indicates that ice milk and other frozen desserts will be more desirable among health-conscious consumers.
The International Ice Cream Association estimates that total retail sales of ice cream and related frozen desserts increased more than 2% during 1994 and exceeded U.S. $10.5 billion. The Canadian market is approximately $1.0 billion in total sales. The growth in dollar sales for the industry in the U.S. was fairly evenly split between at home and away from home consumption. Dollar value of total frozen dessert sales for at home consumption rose to approximately U.S. $5.5 billion during 1994, while away from home sales increased to U.S. $5.0 billion. The Canadian market was split $600 million in home sales consumption and $400 million away from home sales.
The dramatic market shifts that frozen desserts had experienced over the past few years began to settle down somewhat during 1994 as the number of consumers returned to higher premium and super premium high-fat desserts while markets for new lower fat products continued to grow, but began to show signs of reaching maturity.
Non-fat frozen desserts have continued their expansion throughout 1994 and into 1995. Demand has continued to increase for super premium products and for low-fat, non-fat products, which has left a shrinking market for the mid-range products that provide neither rich, good taste nor health and diet benefits. This mid-range market is presently dominated by the national and multinational companies and it is not an area that the Corporation is pursuing.
The Canadian market is not as mature as the U.S. market and the trends in the U.S. are generally a strong indicator of shifts in consumer demands. The Corporation expects the strong growth in the premium, super premium, low-fat and non-fat market segment in the U.S., to be reflected in the Canadian market.
Ice cream and frozen dessert products are produced principally by the major dairies across Canada such as Dairyworld NestleTM, Unilever / BeatriceTM, Ault NestleTM, LucerneTM & ScotsburnTM. Traditional methods of distribution are through the dairies themselves, retail supermarket wholesalers and food service distributors. They in turn, deliver to the supermarkets, convenience stores, restaurants, kiosks, hospitals and other institutions.
Market studies indicate that supermarket and grocery stores account for approximately 56% of ice cream and frozen dessert sales. The food service and hospitality industry account for approximately 36% with the remainder being represented by institutional sales accounts.
Licensing Activities
The evolving marketplace has been characterized by three general trends. First, the marketplace has been increasingly segmented into a number of niche markets. Second, concurrently with the development of these niche markets, the importance of brand names has increased as ice cream manufacturers seek to distinguish their products from those of competitors and as consumers seek to find products that reflect their specific tastes. Nearly all of these brand name ice creams have arisen originally in the United States. In a Canadian context, this has created difficulties as the dairy industry has recently consolidated and Canadian import laws restrict the importation of dairy products from outside the country. Consequently, U.S. firms wishing to sell ice cream brands in Canada are often forced to license the ice cream brands to Canadian dairy companies. This has led to difficulties as brands are licensed to Canadian companies that not only sell competitive brands but, in some cases, are owned by multinational corporations which own the competitive brands and which sell those brands in competition with the licensing company throughout the rest of the world.
The Corporation intends to capitalize on these trends by providing international owners of brand name products a frozen dessert manufacturing and marketing facility and a distribution network in Canada that is independent of these owner's competitors and which will not sell competitive products. The Corporation has entered into agreements with four ice cream and frozen dessert manufacturers.
The Corporation entered into a legally binding letter of intent with the H.J. Heinz Company of Canada Ltd. dated October 14, 1997. Under this agreement the Corporation has been appointed the exclusive licensee for the distribution of Weight Watchers® frozen dairy desserts in the ten Canadian provinces. The agreement sets out the prices the products will be sold at in the various provinces and has a term of five years with an option for a further five years if the Corporation achieves certain sales levels. The Corporation is purchasing products from the manufacturer, an independent Canadian dairy, and selling them at a mark-up into the Canadian marketplace.
The Corporation has entered into an agreement with Mr. Cookie Face, Inc. dated November 1, 1997 which grants the Corporation an exclusive license to manufacture and distribute throughout Canada a handmade ice cream sandwich distributed and sold under the trade name “Mr. Cookie Face®”. The license is conditional upon the Corporation manufacturing the product in certain escalating quantities. The term of the agreement is for five years with an option to renew for additional five years. The Corporation is required under the agreement to acquire the sandwich wafers from a third party supplier. The purchase price for these wafers includes a royalty to Mr. Cookie Face, Inc. The Corporation is currently distributing Mr. Cookie Face in Ontario and Quebec.
The Corporation has entered into a License Agreement with Ben & Jerry's Homemade, Inc. (“Ben & Jerry's”) dated May 26, 1998 which grants the Corporation the right to manufacture and distribute Ben & Jerry's ice cream and frozen yogurt products in Canada. Under the License Agreement, Ben & Jerry's reserves its right to maintain its current Canadian ice cream quota by importing into Canada finished product from the United States. However, Ben & Jerry's has agreed to license manufacturing and distributing rights for Canada only to the Corporation and not to any other third party during the term of the License Agreement. In exchange for the license, the Corporation paid Ben & Jerry's a licensing fee of $200,000 (U.S. funds) and 4,000,000 Common Shares. In addition, the Corporation is responsible for paying royalty fees and meeting certain minimum royalty amounts, $100,000 was paid to Ballantrae by the Corporation for its services in negotiating the terms of the License (see “Material Contracts”). The term of the agreement is five years with an option to renew for an additional five year term if certain conditions are met, including the payment of a renewal fee of $800,000 (U.S. funds). The Corporation entered into additional agreements with Ben & Jerry's arising from the shares issued to Ben & Jerry's (see “Material Contracts”). The Corporation will introduce Ben & Jerry's products into the Canadian marketplace in the fall of 1998.
Finally, the Corporation has entered into a Manufacturing and Trade-Mark Sub-Licensing Agreement with Cadbury Chocolate Canada Inc. dated January 1, 1998 for the exclusive right to manufacture and market ice cream products flavoured to resemble the taste of certain Cadbury and Neilson chocolate bars and bearing the names of those chocolate bars. The agreement has a term of six years and may be renewed for an additional term of six years. The agreement is subject to certain royalty targets being reached. The Cadbury products will be introduced in Canada in the spring of 1999.
The Corporation's licensing strategy revolves around providing international brand owners with a Canadian partner independent of the brand owner's competitors. The products for which licensing agreements are currently being pursued or have been obtained by the Corporation do not compete with one another as they are sold in different segments of the frozen dessert industry. These segments are determined by quality of product and retail price points. All of the licensing agreements contain non-competition provisions within their market segments. Stoney Creek's existing product lines will be continued to be sold by the Corporation as those products do not compete in the same market segments as the licensed brands being pursued. Competition concerns set a limit to the number of brands that may be licensed by the Corporation. However, the Corporation's long term plans are to include non-dairy products using the licensed brand strategy and so expand the niches into which it sells its products.
Some of the licensing agreements are conditional on the Corporation effecting an expansion of its manufacturing facilities (see “Risk Factors”).
Expansion and Renovation of Manufacturing Facilities
The Corporation's renovations to its Manufacturing Facilities in Stoney Creek, Ontario are expected to be concluded on November 15, 1998. Approximately 35,000 square feet of existing building have been gutted and the equipment stripped out. The changes made to the physical facilities and the entirely new equipment purchased for the facilities are intended to increase the volume, quality and efficiency of the plant. The new facility will be able to produce 10,000,000 litres of product per annum up from approximately 6,600,000 litres per annum prior to the renovations. In addition, the plant has been built to allow for further increases production volume through the addition of more equipment without significant renovations or changes being made to the plant.
The licensing agreements mean that the Corporation will be selling a number of new products. Equipment has been purchased to enable it to manufacture these products such as the Mr. Cookie Face sandwiches. The new equipment is also intended to increase the flexibility of the plant allowing the plant to switch between products efficiently and to be cost effective even when performing short production runs of a particular product.
The new plant has been designed to maintain state of the art quality control in the production of ice cream and frozen desserts. These quality control changes range from facilities allowing the Corporation to heat treat both dairy materials on receiving and then again after they have been pasturized, building positive air flows into certain areas of the facility to prevent contamination of a product, and the implementation of an advanced statistical process control system. The intention in expanding the quality control measures of the Corporation is to meet the Corporation's quality obligations under current licensing agreements and to give future Licensors confidence that their brands will be adequately protected.
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