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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
INTERNATIONAL MENU SOLUTIONS CORPORATION
(Name of small business issuer in its charter)
NEVADA 91-1849433
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Employer incorporation or organization)
350 Creditstone Road, Unit 202
Concord, Ontario, Canada L4K 3Z2
(Address of principal executive offices) (Zip Code)
(416) 366-6368
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
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TABLE OF CONTENTS
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PART ITEM ITEM DESCRIPTION PAGE
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PART I.............................................................................................. 1
ITEM 1. DESCRIPTION OF BUSINESS................................................... 1
Corporate History............................................... 1
Business Objectives............................................. 2
Acquisitions by IMSI prior to the Amalgamation.................. 3
Acquisitions by the Company after the Amalgamation.............. 3
Recent Developments............................................. 7
Business........................................................ 8
Patents and Trademarks.......................................... 11
Governmental Regulation......................................... 11
Employees and Labor Contracts................................... 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS...................................... 12
Results of Operations........................................... 13
Liquidity and Capital Resources................................. 17
Year 2000....................................................... 21
Factors That May Affect Future Results of Operation............. 21
Cautionary Statement Involving Forward Looking Statements....... 21
ITEM 3. DESCRIPTION OF PROPERTY................................................... 22
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 23
Security Ownership of the Company............................... 23
Security Ownership of IMSI...................................... 25
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.............. 26
Directors and Executive Officers of the Company................. 26
Significant Employees of the Company's Subsidiaries............. 27
ITEM 6. EXECUTIVE COMPENSATION.................................................... 27
Compensation of Directors....................................... 29
Employment Agreement............................................ 29
Stock Option Plan............................................... 29
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 30
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES.................................... 30
Securities of the Company....................................... 30
Securities of IMSI.............................................. 32
Registration Rights............................................. 37
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Right of First Refusal.......................................... 37
PART II............................................................................................. 38
ITEM 1. MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS............. 38
ITEM 2. LEGAL PROCEEDINGS......................................................... 38
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............................. 38
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES................................... 38
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS................................. 41
PART F/S............................................................................................ 40
ITEM 1. FINANCIAL STATEMENTS...................................................... 40
PART III............................................................................................ 42
ITEM 1. INDEX TO EXHIBITS......................................................... 42
INDEX TO FINANCIAL STATEMENTS....................................................................... 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CORPORATE HISTORY
International Menu Solutions Corporation (the "Company") is a holding
company with subsidiaries engaged in the development, production and marketing
of a series of specialty food products for sale to large retail and specialty
food chains throughout North America.
The Company was incorporated under the laws of the State of Nevada on
June 24, 1997 as ANM Holdings Corporation. The Company was originally authorized
to issue an aggregate of 25,000 shares of common stock without nominal or par
value. On June 27, 1997 the Company filed a Certificate of Amendment to increase
the authorized common stock to 25,000,000 shares with a par value of $0.001 per
share. The Company further amended the Articles of Incorporation by a
Certificate of Amendment filed on July 15, 1998 whereby the authorized capital
of the corporation was amended to include 10,000,000 Class N shares with a par
value of $0.001 per share of which all Class N shares were non-equity
participating and are entitled to one vote per class N share voting together as
one class together with the common stock.
Originally, the Company's mission was to offer quality clinical
research facilities providing its customers with a cost effective and efficient
method for conducting clinical research. At the same time, the Company
endeavored to create value and long term benefits for its shareholders,
employees and customers. The Company became inactive after ANM Holding
Corporation was unable to achieve these goals.
The Company changed its name to International Menu Solutions
Corporation on July 15, 1998. On July 16, 1998, the Company, through its wholly
owned subsidiary 1308864 Ontario, Inc., a corporation incorporated under the
laws of the Province of Ontario, amalgamated pursuant to the Business
Corporations Act (Ontario) with International Menu Solutions Inc., a corporation
incorporated under the laws of the Province of Ontario on September 26, 1997. At
the time of the amalgamation, International Menu Solutions Inc. had a wholly
owned subsidiary called Prime Foods Processing Inc. The surviving company of the
amalgamation is called International Menu Solutions Inc. ("IMSI"). As a result
of the amalgamation, the holders of the outstanding 4,000,000 shares of common
stock of pre-amalgamation IMSI received 4,000,000 Class X shares of the
post-amalgamation IMSI and 4,000,000 Class N shares of the Company. The above
transactions allowed the Company to carry out its new strategy of becoming a
producer of home meal replacement products. Prior to the amalgamation, the
Company was in the preliminary stages of organizing its former business but had
carried on no operations.
The following are wholly owned subsidiaries of IMSI:
- Prime Foods Processing Inc., a corporation incorporated under the laws of
the Province of Ontario on March 27, 1990;
- Transcontinental Gourmet Foods Inc., a corporation incorporated under the
laws of the Province of Ontario on January 27, 1983;
- Tasty Selections Inc., a corporation incorporated under the laws of the
Province of Ontario on July 8, 1996 as 1188980 Ontario Ltd. (doing business
as Tasty Batters), which was amalgamated (1) on September 30, 1999 with
Norbakco Ltd., a corporation incorporated under the laws of the Province of
Ontario on August 25, 1995;
- 1005549 Ontario Inc., a corporation incorporated under the laws of the
Province of Ontario on December 21, 1992;
- D.C. Food Processing Inc., a corporation incorporated under the laws of the
Province of Ontario on December 2, 1994;
(1) An amalgamation of two companies in the Province of Ontario pursuant to the
Business Corporations Act (Ontario) is similar to a merger of two companies
in the United States.
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- The Ultimate Cookie Co. Ltd./L'Ultime Biscuit Cie Inc., a corporation
incorporated under the laws of Canada on March 1, 1990; and
The following is a wholly owned subsidiary of the Company:
- Huxtable's Kitchens Inc., a corporation organized under the laws of the
State of Delaware on October 29, 1999. Huxtable's Kitchens Inc. was
originally incorporated under the name International Menu Solutions USA Inc.
As a holding company, the Company is a legal entity separate and
distinct from its subsidiaries. Accordingly, the right of the Company, and thus
the right of the Company's creditors (including holders of its debt securities
and other obligations, if any) and stockholders, to participate in any
distribution of the assets or earnings of any subsidiary is subject to the
claims of creditors of the subsidiary, except to the extent that claims of the
Company itself as a creditor may be recognized, in which event the Company's
claims may in certain circumstances be subordinate to certain claims of others.
In addition, as a holding company, a principal source of the Company's
unconsolidated revenues and funds is dividends and other payments from its
subsidiaries. The Company's principal subsidiaries currently require the consent
of its banker, the Bank of Nova Scotia, to pay cash dividends or to make other
withdrawals or advances to individual shareholders, but are permitted to pay
dividends and advances to the Company. See "Management's Discussion and Analysis
- Liquidity and Capital Resources."
As of March 31, 2000, there were 10,476,048 shares of common stock of
the Company, par value $0.001 per share, and 3,110,795 Class N shares, par value
$0.001 per share, of the Company outstanding. The Class N shares have a
corresponding number of Class X shares in the Company's IMSI subsidiary, which
together may be exchanged for common shares of the Company. In addition, there
are currently various classes of equity securities of IMSI outstanding which can
be exchanged for common stock of the Company. The Company estimates that the
exchange of these shares will result in the issuance of approximately 6,273,000
shares of common stock of the Company. However, management's estimate of such
number of shares could change in the future because such number is based on a
number of factors, including the future financial performance of various
subsidiaries of the Company and the future trading prices of the shares of
common stock of the Company. In addition, the Company may be required to issue
additional shares of common stock in the future in connection with the
acquisition of the assets of Huxtable's Kitchens L.L.P. and shares of common
stock in connection with the conversion of debt obligations and the exercise of
options and warrants. See "Item 8 -- Description of Registrants Securities."
The Company's principal executive offices are located at 350
Creditstone Rd., Unit 202, Concord, Ontario.
BUSINESS OBJECTIVES
The Company's overall mission is to be a leading marketer and seller of
Home Meal Replacement ("HMR") products throughout North America. The Company's
HMR products are high quality, quickly prepared and cost effective replacements
to home cooked meals for time starved consumers. The Company's business strategy
is to acquire businesses in strategic product categories and geographic
locations that will enable the Company to complement its existing product lines,
capitalize on the brand and customer equity, production distribution channels,
and production capacity inherent in the acquired companies. The Company believes
that by combining strategically complementary businesses and adding a level of
management, marketing, sales, product development, and logistic expertise, the
overall synergies will result in significantly enhanced operating efficiencies
and market penetration of the acquired companies. A major component of this
strategy is to co-brand the Company's "Selections" Brand with the acquired
brands to create a national brand out of a consolidation of regional brands and
focus on bringing the brands into markets that would not otherwise be available
to the acquired companies.
The Company continues to pursue the strategy of expanding its business
through acquisitions, and in furtherance thereof explore other possible
acquisitions in fields related to our principal operating divisions. Although no
assurance can be given as to whether or when any acquisitions will be
consummated, if an agreement with respect to any acquisitions were to be
reached, the Company might finance such acquisitions by the issuance of
additional debt or equity securities. The additional debt from any acquisitions,
if consummated, would increase our
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debt-to-equity ratio and the issuance of additional or equity securities might,
at least in the near term, have a dilutive effect on earnings per share and the
equity holdings of existing shareholders.
Pursuant to this strategy, the Company completed four acquisitions in 1999 and
three acquisitions in 1998. A description of these acquisition follows below.
With reference to the acquisitions below and throughout this document,
the Company makes frequent references to "EBITDA". EBITDA is defined as
operating earnings before interest revenue and expense, income taxes (current
and deferred), depreciation of capital assets, and amortization of intangible
assets. From a management perspective, EBITDA is the primary measure upon which
resources are allocated to operations within the corporate group, the basis upon
which acquisitions are valued and to determine the ultimate purchase prices of
certain acquisitions. EBITDA is a non-GAAP measure of profitability and cash
earnings and therefore is not presented in the Company's external financial
statements.
ACQUISITIONS BY IMSI PRIOR TO THE AMALGAMATION
ACQUISITION OF PRIME FOODS PROCESSING INC. Prior to IMSI being acquired
by the Company, on November 5, 1997, IMSI acquired all of the outstanding shares
of Prime Foods Processing Inc. ("Prime Foods") for cash consideration of
$374,000(2). In addition IMSI made payments for professional fees and premises
and equipment improvements totaling $291,547.
ACQUISITIONS BY THE COMPANY AFTER THE AMALGAMATION
ACQUISITION OF PASTA KITCHEN. On October 9, 1998, the Company, through Prime
Foods, acquired the business carried on by 1218951 Ontario Inc. under the trade
name of "Pasta Kitchen." The Company purchased all of the assets of Pasta
Kitchen for cash consideration of $372,212 paid on closing and an additional
contingent amount of $340,000, subject to certain downward adjustments related
to revenues generated by Pasta Kitchens, in cash or common stock of the Company
at the Company's discretion payable on or after October 31, 1999. At October 31,
1999 Pasta Kitchen had met the conditions necessary to receive the entire amount
of the $340,000 without adjustment. In December 1999, the Company made a cash
payment of $100,000 and will issue approximately 55,000 shares of the common
stock of the Company to satisfy the balance of the purchase price in 2000. Pasta
Kitchen now operates as a division of Prime Foods. The purchase of Pasta Kitchen
has given the Company the ability to offer several of Canada's leading
supermarket chains with a full line of fresh pasta-based heat-and-serve meal
solutions that are fully prepared and packaged in single and multi-serve
portions.
ACQUISITION OF TRANSCONTINENTAL GOURMET FOODS INC. AND NORBAKCO, LTD. On
November 30, 1998, the Company acquired, through IMSI, all the issued and
outstanding shares of Transcontinental Gourmet Foods Inc. ("Transcontinental")
and 59% of the shares of Norbakco Ltd., a sister corporation of Transcontinental
("Norbakco"). These acquisitions added fillo pastry hors d'oeuvres and desserts
to the product line of meal solutions offered by the Company. We purchased all
of the issued and outstanding shares of Transcontinental and the 59% interest in
Norbakco for a cash consideration of $1,000,000 at closing and an additional
cash payment after February 28, 1999. The additional cash payment after February
28, 1999 was $499,881, of which $470,000 was paid in December 1999. The balance
was paid in January 2000. The amount of $499,881 was determined based on the net
book value of Transcontinental in excess of $1,000,000 as at February 28, 1999.
Of the $1,000,000 consideration paid at closing, $860,000 was allocated to
Transcontinental and $140,000 was used to purchase notes payable to the former
shareholders of Norbakco. The balance of the purchase price was satisfied by the
issue to the selling shareholders of three classes of shares of stock of IMSI:
300,000 Class B shares, 100,000 Class C shares and 59,000 Class D shares, all of
which were issued on December 1, 1998. Such shares are exchangeable for shares
of the common stock of the Company in accordance with formulas contained in the
share attributes for the Class B shares, the Class C shares and
(2) All dollar amounts are in the functional currency of the Company's financial
statements (Canadian dollars) except where otherwise indicated. Where a
conversion from Canadian dollars to US dollars is made, a conversion rate at
March 31, 2000 was used, this rate was $0.6895.
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the Class D shares, respectively. Please see Item 8: "Description of
Registrant's Securities" section for a detailed explanation of the conversion
formulas in the Class B, Class C and Class D shares.
The Company has a current obligation to issue 2,258,718 shares of
common stock of the Company in exchange for the Class B shares based on the
performance of the Transcontinental during the year ended February 28, 1999 as
provided in the share purchase agreement. The shares of commons stock of the
Company have not yet been issued; they are to be issued upon request for
exchange by the holders of the Class B shares.
On May 17, 1999, the Company acquired, through IMSI, the remaining 41%
equity interest in Norbakco. The consideration paid for the purchased shares was
53,000 Class X shares of IMSI and 53,000 Class N shares of the Company, and the
purchase by IMSI of shareholder loans made to Norbakco in the aggregate amount
of $180,000. As part of the issue of the 53,000 Class X shares and the 53,000
Class N shares, IMSI and the Transcontinental shareholders agreed to reduce the
number of shares of common stock of the Company that the 300,000 Class B shares
may be exchanged for by 53,000 shares. On September 30, 1999 Norbakco Ltd. was
amalgamated with Tasty Selections Inc.
ACQUISITION OF TASTY SELECTIONS INC. On April 15, 1999, the Company
purchased through IMSI all of the issued and outstanding shares of Tasty
Selections Inc., a manufacturer of muffin and cookie batters ("Tasty
Selections"). IMSI acquired Tasty Selections for cash consideration of
$1,000,000, 442,750 Class X shares of IMSI and an equal number of Class N
shares. On September 30, 1999 Tasty Selections Inc. was amalgamated with
Norbakco Ltd. Contemporaneous with the purchase of the shares of Tasty
Selections, IMSI, Tasty Selections and the Company entered into a
non-competition and confidentiality agreement with Allan Greenspoon
("Greenspoon"), the president of Tasty Selections, to ensure that the goodwill
of Tasty Selections is not impaired by the actions of Greenspoon. In
consideration of the covenants of Greenspoon, the Company and IMSI agreed to
issue to Greenspoon a number of shares of common stock of the Company
determined, at the option of Greenspoon, as an amount that is either,
(i) 4 times the EBITDA for IMSI's Canadian bakery operations for
the year ended December 31, 2001 less $2,160,000, or
(ii) 3 times the EBITDA for IMSI's Canadian bakery operations for
the year ended December 31, 2002 less $2,160,000,
in each case divided by the weighted average closing price for the shares of
common stock of the Company for the twenty (20) trading days prior to the last
day for which the foregoing amount is selected on the OTC Bulletin Board, or
exchange upon which the shares of the common stock of the Company are traded.
In the event of the termination of the employment of Greenspoon for other than
death, permanent disability or cause, the same consideration as set forth above
shall continue to apply. In the event of termination of his employment for
death, permanent disability or cause prior to December 31, 2001, then the number
of shares shall be the number obtained by using the following formula: (4 times
the EBITDA for the twelve month period preceding the date of termination minus
$2,160,000) divided by the weighted average closing price for the shares of
common stock of the Company for the twenty (20) trading days prior to the last
day of the twelve month period. The term "EBITDA" means earnings before
interest, income taxes, depreciation and amortization, as calculated in
accordance with Canadian generally accepted accounting principles.
ACQUISITION OF 1005549 ONTARIO LIMITED. On May 10, 1999, the Company,
through IMSI, purchased all of the issued and outstanding shares of 1005549
Ontario Limited ("1005549"), the parent company of the wholly owned subsidiary
D.C. Foods Processing Inc. ("D.C. Foods"), a manufacturer of value-added breaded
and battered meat and dairy products, for a purchase price equal to the sum of
the following components:
(a) $6,345,000;
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(b) an amount equal to the Adjusted EBITDA of 1005549 (as defined
in the share purchase agreement) on a consolidated basis for
the period December 7, 1998 to December 31, 1999, but not less
than zero; and
(c) an amount equal to four times the Adjusted EBITDA of 1005549
on a consolidated basis for the one year period ending March
31, 2002 or December 31, 2002 (such period to be selected by
the selling shareholders), minus (i) $6,000,000, and minus
(ii) the amount paid under component (b) above.
Component (a) of the purchase price paid by IMSI to the selling
shareholders of 1005549 was satisfied as follows: (i) $4,000,000 in cash; (ii)
$500,000 through the issue to the selling shareholders of 190,476 Class X shares
of IMSI and an equal number Class N shares, and (iii) $1,845,000 by the issue of
702,857 Class X shares of IMSI and an equal number of Class N shares. Component
(b) of the purchase price was satisfied by the issue of 250,000 Class E Series 1
shares and 250,000 Class E Series 2 shares. Component (c) of the purchase price
was satisfied by the issue of 250,000 Class E Series 3 shares, and 250,000 Class
E Series 4 shares. The Class E shares were issued by IMSI on May 10, 1999 and
are exchangeable for shares of common stock of the Company based upon the
Adjusted EBITDA of 1005549. See "Item 8: Description of Registrant's Securities
- Securities of IMSI."
The Company has estimated that the Class E Series 1 and 2
shares of IMSI shall entitle the holders thereof to exchange the Class E Series
1 and 2 shares for a total of approximately 418,000 shares of common stock of
the Company under the terms of the Company's May 1999 acquisition of D.C. Foods
and 1005549 Ontario Limited based on the performance of the division during the
period to December 31, 1999 as provided in the share purchase agreement. The
Company is currently in the process of verifying the number of shares of common
stock of the Company that the Class E Series 1 and 2 shares may be exchanged
for, however management does not expect the amount to be materially different
from the amount stated above. The share exchange calculations are subject to the
approval by the selling shareholders of D.C. Foods and must be approved by the
Company's Board.
ACQUISITION OF THE ULTIMATE COOKIE CO. INC. On October 18, 1999, the
Company, through IMSI, purchased all of the issued and outstanding shares of The
Ultimate Cookie Co. Inc. ("Ultimate"), a Montreal-based bakery for consideration
of cash and stock for a purchase price equal to the sum of the following
components:
(a) an amount equal to 4 times the Adjusted EBITDA of Ultimate for
the one year period ending April 30, 2000 (the "April
Amount"); and
(b) an amount being the greater of (i) 25% of the Year 2002 Amount
(as defined in the share purchase agreement) minus the April
Amount, and (ii) zero, and
(c) the actual amount of any approved Scientific Research Tax
Credits for the period ended April 30, 2000.
Component (a) of the purchase price paid by IMSI to the selling
shareholders of Ultimate was satisfied as follows: (i) $175,000 in cash; and
(ii) by the issue of 250,000 Class E Series 5 shares. The (b) and (c) components
of the purchase price were satisfied by the issuance of 250,000 Class E Series 6
shares. The Class E shares were issued by IMSI to the selling shareholders of
Ultimate on October 18, 1999 which are exchangeable for shares of common stock
of the Company. See "Item 8: Description of Registrant's Securities - Securities
of IMSI."
ACQUISITION OF HUXTABLE'S FOODS, L.L.C. On November 12, 1999, the
Company, through its recently created wholly-owned subsidiary Huxtable's
Kitchens Inc. ("Huxtable's Kitchens"), purchased substantially all of the
operating assets of Huxtable's Foods, L.L.C., a Delaware limited liability
company ("Huxtable's") located in Vernon, California, including the brand
"Huxtable's Kitchen". Huxtable's is a provider of a wide range of fresh and
frozen entrees in the Southern California market. The purchase price paid for
such assets is equal to the sum of the following components:
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(a) US$3,080,000 (CDN$4,466,000), plus
(b) the earnout payments as determined as follows:
(i) an amount not to exceed 4 times the year 1999
Adjusted EBITDA for the period commencing on November
1, 1999 to and including December 31, 1999 (the "Stub
Payment"), the multiple to be determined by
Huxtable's (the "Stub Payment"); and
(ii) an amount equal to one (1) times the year 2000
Adjusted EBITDA (the "First Year Payment").
Huxtable's has the right to elect to have the final
payment based upon the year 2001 Adjusted EBITDA or
the year 2002 Adjusted EBITDA. If Huxtable's elects
to have the final payment based upon the year 2002
Adjusted EBITDA, then Huxtable's shall receive a
payment based upon the year 2001 Adjusted EBITDA as
follows:
(iii) an amount equal to one times the year 2001 Adjusted
EBITDA (the "Second Year Payment").
In the event that Huxtable's elects to have the final
payment based upon the year 2001 Adjusted EBITDA,
then Huxtable's shall not receive the Second Year
Payment but will instead receive the following:
(iv) an amount equal to
(1) 5 times the year 2001 Adjusted EBITDA; less
(2) the Stub Payment to the extent that such
deduction would not reduce the year 2001
Final Payment determined in (iv)(1) above,
below US$7,500,000 (CDN$10,875,000); less
(3) the First Year Payment.
Such amount may be reduced below US$7,500,000 by
deduction of the First Year Payment.
In the event that Huxtable's elects to have the final
payment based upon the year 2002 Adjusted EBITDA,
then Huxtable's shall not receive the payment in (iv)
above but shall receive instead
(v) an amount equal to:
(1) 5 times the year 2002 Adjusted EBITDA; less
(2) the Stub Payment to the extent that the such
deduction would not reduce the amount
determined in (v)(1) above, below
US$7,500,000 (CDN$10,875,000); less
(3) (A) the First Year Payment plus (B) the
Second Year Payment.
Such amount may be reduced below US$7,500,000
(CDN$10,875,000) by deduction of the First Year
Payment and the Second Year Payment.
In the event that the aggregate amount paid to Huxtable's under clauses
(i) through (v) above is not equal to or greater than 80% of the Gross Margin
(as defined in the asset purchase agreement), in the final payment year, plus
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2 times the Adjusted EBITDA for the Final Payment Year, then Huxtable's Kitchens
shall pay to Huxtable's an additional amount equal to the difference.
The term "Adjusted EBITDA" means the consolidated earnings before
interest, income taxes, depreciation, amortization, and scientific research tax
credits for Huxtable's Kitchens Inc., as calculated, in accordance with GAAP
consistently applied and past practice and based upon financial information
taken from audited financial statements of Huxtable's Kitchens. For the purpose
of the Adjusted EBITDA calculations, certain items relating to the acquisition
of Huxtable's shall be excluded.
Component (a) of the purchase price paid by IMSI to Huxtable's was
satisfied (i) by a cash payment paid to Huxtable's of US$2,880,000
(CDN$4,176,000), and (ii) by a cash payment of US$200,000 (CDN$290,000) paid
into escrow pending the adjustment of certain expenses of Huxtable's during the
period November 1, 1999 to November 12, 1999 and to provide for the payment of
one-half of the California sales taxes exigible upon purchase of the assets, and
the balance of the said amount shall be paid to Huxtable's. The escrow funds
were released to the Huxtable's following completion of the analysis with
sufficient funds withheld to cover sales taxes and other agreed upon charges.
Component (b) of the purchase price will be paid in either cash or
shares of the common stock of the Company based upon the terms and conditions of
the asset purchase agreement.
The Company has an obligation to issue 956,183 Common shares of the
Company under the terms of the Company's November 1999 acquisition of the assets
of Huxtables Kitchens LLC based on the performance of the division during the
period to December 31, 1999 as defined in the purchase agreement. These shares
have not yet been issued. The issue of said shares is subject to the approval of
the Company's Board.
INTERNALLY ESTABLISHED DIVISION. In October 1998, the Company
established its Seafood Selections division as a division of Prime Foods. The
division's mandate was to develop and sell seafood based products consistent
with the Company's overall product and brand strategy. The division has, since
it was established, developed a line of seafood based pastas and hors d'oeuvres.
The division had its first sales in March 1999. After the division was
established, Prime Foods entered into consulting agreements with the two
managers of the division which included a right of first refusal to purchase the
division in the event the Company decides to sell the division as well as
certain profit sharing and/or royalty arrangements.
RECENT DEVELOPMENTS
On January 10, 2000 the Company announced that it had entered into a
strategic manufacturing alliance with Otter Valley Foods Inc. which provides for
the sharing of strategic manufacturing and product development facilities and
related matters.
On January 27, 2000 the Company announced that it had entered into a
non-binding letter of intent to acquire Great American Barbecue Company of St.
Louis Missouri. The Company continues to negotiate to settle the definitive
terms to purchase the operating assets and assume liabilities of the Great
American Barbecue Company.
On May 12, 2000, certain shareholders exchanged 295,166 Class X shares
of IMSI with a corresponding number of Class N shares of the Company for 295,166
shares of common stock of the Company.
On June, 8, 2000 the Company announced it had completed a $4.5 million
short-term subordinated debt facility with current investors, Southbridge
Investment Partnership No. 1, First Ontario Fund Sponsored Investment
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Fund Ltd., and Bank of Montreal Capital Corporation. Details are provided in the
Management Discussion and Analysis -- Liquidity and Capital Resources section.
BUSINESS
We develop, market and produce a series of specialty food products for
sale to large retail food chains and specialty food chains. Our product lines
target consumers who desire restaurant quality meals that can be conveniently
prepared for home consumption, the basis for Home Meal Replacement ("HMR"). The
National Restaurant Association estimates that by the year 2005, the average
consumer will allocate greater than 50% of his/her food budget towards prepared
meals purchased outside the home.
The HMR market has developed to address the competing pressures to
provide well balanced home cooked meals and the time pressures of the evolving
dual income family. HMR products have evolved from frozen TV dinners in the
1970's and 1980's to frozen microwaveable dishes and freshly prepared meals that
are "ready to heat and eat" in the 1990's.
PRINCIPLE PRODUCTS AND SERVICES. The products we offer include
restaurant quality meals and meal components as well as food service related
products. Many of our products are the types of meals found on restaurant menus.
The Company identifies food service and restaurant eating trends and develops
these foods into a retail format. The products are sold in supermarkets as fresh
and frozen entrees. The frozen products have a shelf life of six to eight months
and the fresh products have a shelf life of approximately 21 days. The frozen
meals are displayed in freezers located in the HMR areas of supermarkets. The
fresh meals are available in open self-serve refrigeration units in the
delicatessen section of supermarkets as both self-serve items and through over
the counter deli hot plate programs.
Management believes that the market for HMR products is rapidly
expanding. Historically, consumers have purchased for some time "ready to heat
and eat" food items. Our marketing strategy is to enhance the presentation,
taste and packaging of component items that comprise an HMR. In addition, these
meal components can be mixed and matched by consumers to create an international
or ethnic line of restaurant quality complete meals. A complete meal provides
all of the necessary starch, vegetable and center-of-the-plate items in one
package. The Company then cross merchandises these products with its other
products, including hors d'oeuvres and specialty desserts.
PRODUCT DEVELOPMENT STRATEGY. Our products are developed in response to
consumer demands and according to our own nutrition and preparation
specifications. Often, retail clients will request that we manufacture products
tailored to certain specifications demanded by the consumer. For example, we
work with retailers' design teams to create lines of food products to be sold
under our label or the retailers' labels. Otherwise, our meals are manufactured
and sold directly to retailers and organizations selling directly to retailers.
Our complete meal products are developed in component parts that, when
packaged together, form a complete "meal solution." A meal solution program is
developed for each retailer client. We sell approximately one-half of our
products under the retailers' private labels through a sub-branding approach or
under alliances with owners of other known brands. This is known as co-branding.
We believe that selling our products under private labels or known brands, which
are more recognizable by consumers, will create brand awareness of our products
since our name appears on the label of the known brand. It has become generally
accepted that supermarkets, specialty gourmet stores and big boxed meat stores
sell complete meals and meal components. To date, we have manufactured our
products under major private labels belonging to supermarkets, club stores, big
boxed meat stores, convenience store chains and non-traditional food retailers.
We offer three primary branding programs to retailers depending on the
size, strategic direction, and needs of the retailer:
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<PAGE> 12
- "Retailer branding": The retailer owns the brand and we provide
co-packing services;
- "Co-Branding": We use the retailer name/brands or locally recognizable
brands in conjunction with our own brand/label;
- "Control Branding": We provide complete meal solution programs under
our Company brand to small retailers who do not have the expertise or
market share to own their own brand.
We may also sell directly to the retailer under its own label(s) in
accordance with the retailer's needs without reference to a branding program.
Our long-term product development objective is to respond to popular
culinary trends. Our meals are developed under various local and international
theme canopies and are derived from restaurant menus. We currently focus on the
following food service theme canopies:
- Grill/American Grille
- Trattoria
- Mediterranean Taverna
- Bistro/New American Bistro
- Southwestern Cantina
- Asian Cafe
PRODUCT MARKETING STRATEGY. We market a variety of brands of meals and
meal components through IMSI's wholly owned subsidiaries. These brands include:
(i) "Royal Selection", a line of frozen meal entrees; (ii) "International
Selection", a line of frozen meal entrees; (iii) the "Pasta Kitchen" label; (iv)
"Thornhill Bakery", "Meli's Bakery", and "Margies Sweets", a line of fresh and
frozen desserts; (v) "Jonathon T's" and "TGF" frozen hors d'oeuvres; (vi)
"Huxtable's Kitchen", a line of fresh and frozen entrees and complete meals; and
(vii) "The Ultimate Cookie", a line of frozen cookie dough.
In addition to the brands referred to above, we are marketing
internationally labeled food categories known as the "Selections" line. Our
strategy is to generate a series of international and ethnic-based meal
solutions that will be sold by retail clients directly or under a branding
program as described above. Our primary Company brand of complete meals is
"International Selections. We also re-brand products acquired on acquisitions of
new divisions or change or merge acquired brands to add the "Selections" name,
such as "Seafood Selections" or "Fresh Selections", etc. As a result, we
anticipate that these retailers will be able to choose various menu components
which parallel restaurant menus.
We utilize our own direct sales force in our target markets to our
target customers, supermarkets, specialty gourmet stores and club stores. Our
sales representatives convey to new and existing customers our belief that we
offer competitively priced, nutritious, restaurant quality meals because we
control product development and production in our wholly-owned facilities.
Through the efforts of our sales representatives, we seek to maintain a broad
base of customers in order to minimize the possibility of one major customer
dictating non-competitive terms to the Company. In certain cases, the Company,
through its subsidiaries, may utilize brokers to provide selling and
merchandising services.
Our long-term marketing objective is to reach retail consumers in
several areas of the supermarkets and stores that carry our products,
particularly in the delicatessen and frozen food sections.
AMOUNT SPENT ON RESEARCH AND DEVELOPMENT. The amount spent on product
research and development for the nine months ended September 30, 1999 and the
period ended December 31, 1998 was $371,228, and $425,542 respectively. Although
research and development is not directly borne by the customer, it is a factor
in the determination of the pricing of our products.
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<PAGE> 13
PRODUCT DISTRIBUTION STRATEGY. We distribute our products in various
ways to our customers. Our products are distributed directly to major retailers
as either private label or co-branded products through both our own delivery
vehicles or third party vehicles. The products are also distributed directly to
major club stores under our own label. We distribute our products indirectly to
major club stores and retailers under co-packing agreements or to various
distributors under our own label.
DEPENDENCE ON MAJOR CUSTOMERS. We currently have one major customer,
Price Costco. Based on pro forma sales for the year-ended December 31, 1998 of
$53,727,000, this customer represented 19.5% of such sales. Management believes
it has a good relationship with Price Costco and anticipates that the Company
will expand its business with this customer, however, we have no long-term
commitments with them. In addition, on November 23, 1999, we announced that
Prime Foods, our frozen meal division, entered into an agreement to supply
frozen meal entrees to selected Wal-Mart Super Centers beginning in December of
1999. The initial program launch will be distributed to over 300 U.S.-based
Wal-Mart Super Center locations, and will include 16 restaurant-branded meal
solutions developed in cooperation with Brand Specialist, LLC of Dallas, Texas.
While the actual sales impact cannot be determined at this time, management
estimates that this arrangement could increase the Company's total sales for the
year 2000 by as much as 10%. The loss of either of these customers could have a
material adverse effect on our revenues and financial position.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND PRINCIPAL SUPPLIERS. The
raw materials required to manufacture our meals are commodities such as meat,
seafood, vegetables, flour, cheese and sugar which are readily available in the
marketplace. We have no major principal suppliers. Furthermore, we believe that
the markets for these commodities are stable and no change in their supply is
imminent.
COMPETITION. The specialty food industry is highly competitive. Our
products compete with traditional supermarket HMRs (frozen dinners, gourmet deli
counters, etc.) and with food service operators including restaurants, fast food
outlets and large food processors. Many of our competitors have far greater
financial, operational and marketing resources than we do. Furthermore, the
specialty food industry is characterized by rapid changes, including changes in
consumer tastes and preferences, which may result in product obsolescence or
short product life cycles. As a result, competitors may be developing products
which may be similar or superior to our products. Accordingly, there is no
assurance that we will be able to compete successfully or that our competitors
or future competitors will not develop products that render our products less
marketable.
Our products compete primarily in the fresh and frozen specialty food
industry. The principal competitive factors include brand recognition, price and
price promotion, retail space management, service to the retail trade, new
product introductions, packaging changes, distribution methods and advertising.
Management believes that few of our competitors in the specialty food industry
manufacture the wide range of entrees or bundled meal components in the unique
restaurant style theme canopies that we offer. We penetrate this market and
expand our market share by producing unique culinary entrees, bundled meals and
meal kits at competitive prices. We believe that our flexibility and innovation
in developing and implementing new methods of marketing and distributing our
product will permit us to compete effectively with our competitors. In addition,
when we acquire new businesses, we leverage off of existing brands and brand
equity and co-brand these brands with the "Selections" name to build national
brand presence. Our larger competitors typically develop a national strategy
which requires significantly more planning and coordination across diverse
geographic/cultural regions. We can quickly develop regionally specific
strategies as we minimize the necessity for larger cross-geographic/cultural
considerations and specifically address the taste, price and buying habits of
these smaller regions.
Our direct competitors include Stouffers, Kraft Foods and Maple Leaf
Foods. Several of these well-known brands have recently introduced lines of
component meals. However, we believe we will remain competitive in this industry
because of the depth and breadth of our product lines, our ability to develop
customer driven programs and our ability to adapt to rapidly changing culinary
trends.
We also believe that ownership of our manufacturing facilities provides
us with an advantage over many of our competitors. Many private label marketers
and food brokers provide primarily co-packed entrees to their customers and do
not own manufacturing facilities. Management believes that ownership of
manufacturing facilities allows us to maintain high quality control while
maintaining affordable product prices, and to respond quickly to the
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<PAGE> 14
changing needs of our customers. Our component approach to meal assembly allows
us to develop and introduce new products in as little as four to six months
because we can combine meal components developed through our research to meet
our customer's needs.
The Company may have difficulty competing with large brand name
manufacturers for retail shelf space. Retailers, particularly supermarkets,
command high prices to display products on strategically located shelves.
However, we have obtained and secured strategically located shelves at a lower
cost by sub-branding our products under private labels belonging to retailers.
In addition, by acquiring existing brands through the acquisition of businesses,
the Company can leverage off of the acquired businesses' existing relationships
with retailers to add new or redesigned products and avoid slotting fees that it
might otherwise have to pay if it were to introduce the same products without
such relationships.
Management believes that the Company's capability to offer products
that are fresh, nutritious, economical and aesthetically appealing to the
consumer makes the Company a viable competitor in the HMR industry. Our products
will be differentiated from those of our competitors on the basis of taste,
appearance and quality at competitive price points.
PATENTS AND TRADEMARKS
The Company owns registered trademarks and service marks under the
names "Poppa Jimis(R)", "Poppa Jimis Deli & Design(R)", "Royal Selections &
Design(R)", "Pasta Kitchen(R)", "Transcontinental Gourmet Foods Inc.(R)",
"Jonathan T(R)", "Huxtable's Kitchen(R)" "The Ultimate Cookie(R)", and
"International Selections"(TM). We will apply for United States and
International trademarks in connection with certain products when deemed
appropriate. In addition, we use several other trade names for our products and
services, many of which we believe are common law trademarks. We will review
additional trade names for which we will seek formal trademark registration at a
later date. We also keep confidential various recipes, formulation
specifications and production specifications. Management is not aware that the
Company is infringing any patents or trademarks of third parties.
All trademarks or service marks appearing herein that do not relate to
our products are the property of their respective holders.
GOVERNMENTAL REGULATION
The production, distribution and sale of our products are subject to
various federal, state and local laws promulgated in the United States and
Canada.
The Food Safety and Inspection Service (FSIS) in the United States
requires that all federally inspected meat and poultry plants producing in the
US or importing into the US adopt Hazard Analysis and Critical Control Points
(HACCP) systems to ensure that they have in place science-based process controls
to prevent and reduce the significant food safety hazards that may arise in
their particular processes and products.
The HACCP approach is a system of process controls that is widely
recognized by scientific authorities and international organizations and is used
extensively in the food industry to produce products in compliance with health
and safety requirements. Under HACCP, plants identify critical control points
during their processes where hazards such as microbial contamination can occur,
establish controls to prevent or reduce those hazards, and maintain records
documenting that the controls are working as intended. Implementation of the
HACCP certification is mandatory for all Federally registered establishments in
Canada exporting to USA. The deadline for being HACCP certified or in the
process of being so certified is January 25, 2000.
The Company's Prime Foods and Huxtable's Kitchens divisions are
currently HACCP certified, while DC Foods is currently in the process of being
certified.
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<PAGE> 15
(a) United States: We are subject to regulation by federal, state and
local governmental laws in the United States. These include: the Environmental
Protection Act; the Occupational Safety and Health Act; the Federal Food, Drug
and Cosmetic Act; United States Department of Agriculture and state and local
building codes. Our operations are subject to a variety of other federal, state
and local laws such as labor, insurance, transportation and wage regulations.
Compliance with all such regulations may be time-consuming and expensive. To the
best of management's knowledge, we comply with state and federal laws necessary
to distribute food products in the United States.
(b) Canada: We are subject to regulation by federal, provincial and
local governmental laws in Canada. These include: Canada Agricultural Products
Act, Consumer Packaging and Labeling Act, Fish Inspection Act, and the Food and
Drug Act. In addition, the Company is subject to other federal, provincial and
local labor, transport and environmental regulations.
The Canadian Federal Government must approve all processed food and
food processing facilities. All plants processing meat, poultry, fish and
seafood are regulated and monitored by government inspectors. Plants producing
meat and poultry items must be a federally registered establishment having there
own inspection legend. Seafood inspection is covered under the Quality
Management Program (QMP) which is an enhanced inspection program which requires
registered fish processing plants to develop and implement an in-plant quality
management program. The program provides added assurance that fish products
produced in Canada comply with regulatory requirements. The program enables the
fish processing industry to monitor its own compliance with regulations and to
identify and quickly deal with processing problems or issues. Meat, poultry and
seafood inspectors visit as often as daily to monitor systems, ingredients,
processes and production. All inspections are the responsibility of the Canadian
Food Inspection Agency ("CFIA"). All of the inspectors have the authority to
close down a production facility if the plant does not meet established
manufacturing requirements.
Government regulation requires that correct ingredients and nutritional
information be clearly stated on the package for retail fresh or frozen food. An
accredited laboratory using calibrated analyzing equipment must also do
nutritional analysis. CFIA may, at any time, independently monitor and test
ingredients to ensure that all values listed on the packages are accurate and
correct.
We are also subject to laws and regulations which impose limitations on
the discharge of pollutants into the air and water and establish standards for
the treatment, storage and disposal of solid wastes. We cannot predict with any
certainty our future capital expenditure requirements for environmental
compliance because of constantly changing standards and technology. In addition,
we may incur liabilities in the future to regulatory agencies or private
individuals for alleged environmental damage associated with waste disposal or
waste material handling practices in the operation of our business. Management
believes that its current environmental insurance coverage is adequate.
We cannot predict the impact of possible changes that may be required
in response to future legislation, rules or inquiries made from time to time by
governmental agencies. Government regulations may, in certain circumstances,
affect our ability, as well as others in the industry, to develop and market new
products. However, we do not presently believe that existing applicable
legislative and administrative rules and regulations will have a significant
impact on operations.
EMPLOYEES AND LABOR CONTRACTS
As at March 31, 2000 the Company had a total of approximately 486
employees, all of whom work full-time.
Tasty Selections has a collective bargaining agreement with the
Confectionery and Tobacco Workers' International Union, Local 264. We believe
that our relationship with the union and our employees is good. Tasty Selections
currently has 6 unionized employees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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<PAGE> 16
GENERAL
For accounting purposes, the following information reflects the result
of operations of the Company as the surviving corporation pursuant to the
reverse acquisition described in Note 2 of the Company's audited consolidated
financial statements (see page F-6).
All amounts presented in this MD&A and elsewhere in this document are
presented in Canadian dollars, the functional currency of the Company. The
relevant exchange rate for conversion of Canadian dollars to US dollars
associated with the balance sheets, statements of operation, and pro forma
statements are as follows:
<TABLE>
<CAPTION>
Period or date Closing High Low Average
-------------- ------- ---- --- -------
<S> <C> <C> <C> <C>
September 26, 1997 to December 31, 1997 0.6988 0.7293 0.6951 0.7106
January 1 to September 30, 1998 0.6552 0.7107 0.6327 0.6838
January 1 to December 31, 1998 0.6511 0.7107 0.6327 0.6747
January 1 to September 30, 1999 0.6805 0.6883 0.6511 0.6712
March 31, 2000 (recent rate) 0.6895 - - -
</TABLE>
The Company has completed several acquisitions since inception.
Accordingly, a pro forma balance sheet as of September 30, 1999 and pro forma
statements of operations for the year ended December 31, 1998 and for the
nine-month periods ended September 30, 1999 and 1998 have been prepared by
management to reflect acquisitions that have occurred during fiscal 1998 and
1999. The pro forma financial statements should be read in conjunction with
'Results of Operations' and the audited consolidated financial statements of the
Company and notes thereto included elsewhere in this Form 10-SB. The pro forma
balance sheet assumes that all acquisitions and related transactions since
January 1, 1999 occurred on the balance sheet date presented. The pro forma
statement of operations assumes that such transactions occurred at the beginning
of the various periods presented. Results of operations of acquired companies
are included in the Company's audited financial statements from the date of
acquisition. See Note 2 of the Company's audited consolidated financial
statements (page F-6) for further information regarding accounting policies used
to prepare financial information contained in this Form 10-SB.
Following discussions with the SEC staff, the Company has restated its
September 30, 1999 and December 31, 1998 balance sheets and statements of
operations and proforma balance sheets and statements of operations related to
the accounting treatment of exchangeable shares issued by IMSI in certain
acquisitions made by IMSI. As a result of the above accounting changes amounts
related to goodwill from acquired businesses and goodwill amortization charges
have been restated. In addition, minority interest and any allocation of loss
thereto has been eliminated. See Note 2b to the Company's December 31, 1998
financial statements, and Note 3 to the Company's September 30, 1999 financial
statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUE. Revenue for the nine months ended September 30, 1999 increased
$19,510,000 or 900% to $21,680,000 from $2,170,000 during the same period in
1998. The growth in revenue can be attributed to the acquisitions made in late
1998 (Pasta Kitchens, Transcontinental, and Norbakco) and those completed in
April and May 1999 (Tasty Selections and DC Foods). In addition, the Company's
Seafood Selections division, established in late 1998, had its first sales in
March of 1999.
COST OF GOODS SOLD/GROSS MARGIN. Cost of goods sold for the nine months
ended September 30, 1999 increased to $18,783,000 up $16,850,000 or 872% from
$1,933,000 for the same period last year. As a percentage of revenue, cost of
goods sold represented 86.6% of revenue for the nine months then ended compared
to 89.1%, for the same period in 1998. The change in absolute dollars is
attributed to previously mentioned acquisitions and
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<PAGE> 17
establishment of the Seafood Selections division. The reduced cost as a
percentage of revenue can be attributed to a more diverse group of products with
better margins. Cost of goods sold includes the costs of direct labor,
materials, shipping and change in inventories.
The sales cycle for some of the Company's divisions' products reflect
lower sales during the first three quarters of a year. Therefore, during this
period margins are typically lower than the overall percentage for the year. In
addition, a larger percentage of the Company's revenues during this period are
related to the sales by DC Foods, which is characterized by larger sales volume
at a lower margin than the remainder of the divisions. Further, during the third
quarter the Company combined its Tasty Selections operations into the expanded
Norbakco facilities and Transcontinental moved into the space vacated by Tasty
Selections resulting in increased lease costs and repairs and maintenance costs
as the Company refurbished and relocated some of its production equipment to
improve production efficiencies. The Company expects to benefit from these
expanded facilities and production efficiencies in the fourth quarter and future
periods.
SELLING EXPENSES. Selling expenses increased $1,196,000 to $1,328,000
(6.1% of revenue) for the nine months ended September 30, 1999 compared to
$132,000 (6.1% of revenue) for the same period ended September 30, 1998. The
increase in the year-to-date amount is primarily attributable to 1998 and 1999
acquisitions. In 1999, the Company's selling expenses increased beyond those of
the combined costs of the existing and acquired manufacturing divisions as a
result of the corporate involvement in the promotion of each division's products
and the Company's Selections line, the introduction of its new products to the
market, and the establishment of a western corporate sales office.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$268,000 to $371,000 (1.7% of revenue) for the nine months ended September 30,
1999 compared to $103,000 (4.7% of revenue) for the same period last year. The
increase is primarily due to continued product development efforts in the 1999
period associated with new meal components and meal kits being developed in
conjunction with new retail customers/products for launch in the fourth quarter,
including the Company's new Salmon Wellington product.
ADMINISTRATIVE EXPENSES. Administrative expenses increased $3,289,000
to $3,611,000 (16.7% of revenue) for the nine months ended September 30, 1999.
The increase in absolute dollars is due to the acquisitions that were completed
during 1998 and 1999. In addition, the Company has continued to incur increased
costs at the corporate level associated with building management infrastructure
and information systems, corporate governance and reporting obligations, seeking
out strategic acquisitions and investor relations. During the third quarter the
Company established a sales office in Calgary, and hired sales managers in
Maryland and California, which contributed to the increased cost as a percent of
revenue.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
intangibles increased to $391,000 (1.8% of revenues) for the nine months ended
September 30, 1999 compared to $10,000 (0.5% of revenue) for the same period in
1998. The growth of $381,000 in the expense for intangibles amortization is a
result of increased purchased goodwill and intangibles associated with acquired
businesses and the amortization of expenditures on packaging and artwork in
conjunction with the launch of products with new customers and the branding of
existing products in accordance with the Company's strategy for better brand
recognition through uniformity in the quality of product presentation.
LOSS FROM OPERATIONS. The Company's loss from operations increased
$2,474,000 to $2,804,000 (12.9% of revenues) for the nine months ended September
30, 1999 over the same period in 1998. The increase in the loss is primarily due
to significant increases in product development efforts and new administrative
costs incurred to assist the growth of the Company. In addition, certain of the
Company's sales initiatives which were expected to result in sales in the second
and third quarter of 1999 will not result in sales until at least fourth quarter
of 1999. Transcontinental and Prime sales tend to be cyclical with relatively
low sales during the first three quarters of a year and higher sales in the
fourth quarter. The Seafood Division incurred losses during the second and third
quarter as it continued its sales efforts aimed at producing sales in the in
fourth quarter.
FINANCING COSTS. Net interest expense increased $497,000 to $543,000
for the nine months ended September 30, 1999 compared to $46,000 for the same
period last year end. The increase is due primarily to the
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<PAGE> 18
acquisitions, and to interest charges with respect to long-term debt, including
the Company's convertible debt and capital lease obligations associated with and
new capital equipment acquired during 1998 and 1999.
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1999 (OR "PRO FORMA SEPTEMBER 1999")
COMPARED TO PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1998 (OR "PRO FORMA 1998")
REVENUE. Revenue increased $10,126,000 or 32.2% to $41,599,000 in pro
forma September 1999 up from $31,473,000 for pro forma September 1998. The
growth in revenue can be attributed in part to the sales related to the Seafood
Selections division which did not exist in the pro forma September 1998 period.
Its sales began in March, 1999, with sales for the pro forma September 1999
period being $1,650,000. Revenue also includes a full nine month's sales of
Norbakco compared to four months in 1998 as the division was established in June
1998. The resulting sales increase was approximately $1,500,000 over the same
period in 1998. The balance of the increase is due to organic growth in sales of
other divisions, primarily Transcontinental and Tasty selections, increases of
approximately $1,000,000 each; and DC Foods with an increase of approximately
$2,000,000.
COST OF GOODS SOLD/GROSS REVENUE. Cost of goods sold increased to
$35,112,000 in pro forma September 1999, up $9,300,000 or 36.0% from $25,812,000
for pro forma September 1998. As a percentage of revenue, cost of goods sold
represented 84.4% of revenue for pro forma September 1999 compared to 82.0% for
pro forma September 1998. The change in absolute dollars is attributed primarily
to the increase in sales and certain higher manufacturing costs. The change in
cost of goods sold as a percentage of revenue is in part related to the lower
than expected sales during this period in the Company's Prime Foods division
resulting in certain underabsorbed fixed manufacturing overheads; and increased
costs of outside storage primarily in the Prime Foods, Seafood and
Transcontinental divisions who held large inventories which are being
significantly reduced in the fourth quarter.
SELLING EXPENSES. Selling expenses increased $841,000 to $2,903,000
(7.0% of revenue) in pro forma September 1999 compared to $2,062,000 (6.6% of
revenue) for the pro forma nine-month period ended September 1998. The increase
is largely attributable to additional costs of IMSI in sales and marketing
activities and selling expenses of the Company's Seafood division which did not
exist in 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$249,000 to $685,000 (1.6% of revenue) in pro forma September 1999 compared to
$436,000 (1.4% of revenue) for pro forma September 1998. The increase is
primarily due to continued product development efforts of IMSI associated with
new meal components and the development of the Company's Salmon Wellington line.
Research in the Company's Huxtable's division is unchanged from the previous
year.
ADMINISTRATIVE EXPENSES. Administrative expenses increased $2,149,000
to $5,661,000 (13.6% of revenue) in pro forma September 1999 compared to
$3,512,000 (11.2% of revenue) for pro forma September 1998. The increase is due
primarily due to the increased costs associated with building management
infrastructure and information systems, corporate governance and reporting
obligations, seeking out strategic acquisitions, investor relations and
obtaining new banking facilities. In addition, approximately $400,000 of the
aggregate administrative expenses were incurred by the Seafood division which
did not exist in 1998.
AMORTIZATION OF INTANGIBLES. Amortization of Intangibles increased from
$454,000 (1.4% of revenue) to $623,000 (1.5% of revenue) primarily as a result
of increase amortization of Artwork costs incurred in the fourth quarter of 1998
and into 1999 as the Company increased its spending on Artwork in the
implementation of its branding strategies.
LOSS FROM OPERATIONS. The Company's loss from operations increased
$2,582,000 to $3,385,000 (8.1% of revenue) in pro forma September 1998 compared
to a loss of $803,000 (2.6% of revenue) for pro forma September 1998. The
increase in the loss is primarily due to a significant increase in the product
development cost, new administration costs incurred to assist in the growth of
the Company, an increased loss for the period for Huxtable's, and losses in the
Seafood division for the period. Huxtable's sales and those of the Seafood and
Transcontinental divisions are skewed to the fourth quarter where much, or all,
of these losses are mitigated.
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<PAGE> 19
INTEREST REVENUE AND EXPENSE. Net interest expense increased $223,000
to $854,000 in pro forma September 1999 compared to $631,000 for the nine-month
period ended pro forma September 1998. The increase is due primarily to interest
charges with respect to long-term debt, and capital lease obligations associated
with companies and new capital equipment acquired during 1998.
NET LOSS. The Company's loss for pro forma September 1999, increased to
$4,265,000 from $1,639,000 (an increase of $2,626,000). The primary reason for
increase is the inclusion of overheads resulting from IMSI, additional
manufacturing overheads and finance charges and the loss associated with the
Company's Seafood division.
PRO FORMA YEAR ENDED DECEMBER 31, 1998 (OR "PRO FORMA 1998") COMPARED TO YEAR
ENDED DECEMBER 31, 1998 (OR "FISCAL 1998")
REVENUE. Pro forma 1998 revenue increased $47,631,000, or 781% to
$53,727,000 compared to $6,096,000 in fiscal 1998. The growth in revenue can be
primarily attributed the effect of the Tasty Selections, D.C. Foods, and
Huxtable's Kitchens acquisitions which had combined revenues of $41,408,000 in
1998. In addition, pro forma 1998 results include a full year's revenue
associated with the Transcontinental, Norbakco.
COST OF GOODS SOLD/GROSS REVENUE. Cost of goods sold increased to
$44,712,000 for pro forma 1998, up $39,982,000 (or 845.3%) compared to the
fiscal 1998 figure of $4,730,000. As a percentage of revenue, cost of goods sold
represented 83.2% of revenue compared to 77.6% of revenue for fiscal 1998. The
change in absolute dollars is attributed to the inclusion of the cost of goods
sold for Tasty Selections, D.C. Foods, and Huxtable's Kitchens and a full years
cost of goods sold for Transcontinental, Norbakco and Pasta Kitchen. The
increase in cost of sales as a percentage of revenues is primarily a result of
the acquisition of D.C. Foods whose margins are somewhat lower than other
subsidiaries in the group because the products produced are high value and lower
margin. In addition, Fiscal 1998 included only one month of the results of
Transcontinental, whose gross margins are higher in December of each year due to
the high demand and inherent gross margin for hors d'oeuvres and pastries during
the holiday season.
SELLING EXPENSES. Selling expenses increased $1,947,000 (319.2%) to
$2,557,000 (4.8% of revenue) for pro forma 1998 compared to $610,000 (10.0% of
revenue) in fiscal 1998. The pro forma 1998 increase is largely attributable to
the selling expenses totaling $1,876,000 incurred by Transcontinental, Tasty
Selections, and Huxtable's in 1998 which were not included in fiscal 1998
results.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by $450,000 compared to fiscal 1998 as result of R&D activities undertaken by
Huxtable's during the year.
ADMINISTRATIVE EXPENSES. Administrative expenses increased $4,269,000
(558%) from $765,000 (12.5% of revenue) in fiscal 1998 to $5,034,000 (9.4% of
revenue) for pro forma 1998. The increase in absolute dollars is attributed to
the inclusion of the administrative expenses for Tasty Selections, D.C. Foods,
and Huxtable's and a full year's administrative expenses for Transcontinental,
Norbakco and Pasta Kitchen. The decrease in such costs as a percentage of
revenues is due primarily to the acquisition of D.C. Foods, whose administrative
expenses represent only 3.2% of revenues due to the significant volume of
product turnover in the D.C. Foods operation. The Company expects that
administrative expenses will decline as a percentage of revenue as recent
acquisitions are integrated, synergies are realized and revenue growth
expectations are fulfilled.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles increased to
$638,000 (1.2% of revenue) for pro forma 1998 compared to $47,000 (0.7% of
revenue) in fiscal 1998. The increase of $591,000 in intangibles amortization
charges is a result of a full year's amortization on intangibles associated with
all acquisitions completed to-date. Fiscal 1998 included only one month's
intangibles goodwill amortization on the Transcontinental and Norbakco
acquisitions and three months' goodwill amortization with respect to Pasta
Kitchen.
LOSS FROM OPERATIONS. The Company incurred a loss from operations of
$482,000 (7.9% of revenue) in fiscal 1998 compared to a loss from operations of
$90,000 (0.2% of revenue) for pro forma 1998. The acquisitions
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<PAGE> 20
of D.C. Foods and Tasty Selections contributed over $1,446,000 in operating
income to pro forma 1998 results. However, the operating income contributed by
D.C. Foods and Tasty Selections was offset by increases in goodwill amortization
and losses from Huxtable's. The Company expects that profitability will improve
as recent acquisitions are integrated and economies of scale take effect.
INTEREST REVENUE AND EXPENSE. Net interest expense increased by
$865,000 (1184.9%) to $938,000 (1.7% of revenue) for pro forma 1998 compared to
$73,000 (1.2% of revenue) in fiscal 1998. The change is attributable to a full
year's interest expense in connection with D.C. Foods, Tasty Selections,
Huxtable's and Transcontinental, which totaled approximately $571,000. In
addition, the Company issued $4,000,000 in convertible debentures which bear
interest at 7% and accordingly, $280,000 in interest expense was charged to pro
forma 1998 results.
NET LOSS. The Company's loss for pro forma 1998, increased to
$1,367,000 from $555,000 (an increase of $812,000). The primary reason for
increase is the inclusion of the loss for Huxtable's ($864,000). The losses in
Huxtable's occurring in 1998 occurred as the then new management team continued
to reorganize operations and rationalize it product grouping. The company's
performance continued to improve operations in the following year. The increased
amortization costs offset the income it the Transcontinental, Tasty and D.C.
Foods divisions.
DATE OF INCORPORATION, SEPTEMBER 26, 1997 TO DECEMBER 31, 1997
The following discussion relates to the Company's first period of operations,
therefore no comparatives to similar previous periods are available. Accounting
for a reverse take over dictates that the historical financial statements are
for those of the acquirer, in this case International Menu Solutions Inc.
REVENUE. Revenue for the period ended December 31, 1997 was $442,000
and represents the revenue billed by the Company through its only acquired
business at that time, Prime Foods, for the sale of frozen food products and
salads. The division was acquired on November 5, 1997.
COST OF GOODS SOLD/GROSS MARGIN. Cost of goods sold for period ended
December 31, 1997 was $365,000 or 82.5% of Revenue. Cost of goods sold includes
the costs of direct labor, materials, shipping and change in inventories, and
depreciation on production equipment.
SELLING EXPENSES. Selling expenses for the period ended December 31,
1997 were $12,000 or 2.8% of Revenue. Prime Foods had nominal selling expenses
as the division served mainly as a co-packer at the time with the sales being
part of the function of the division President and, therefore, not accounted for
separately. The division did not engage in significant marketing activities.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$6,000, or 1.2% of sales and consisted of the direct costs of product
development expended during the period.
ADMINISTRATIVE EXPENSES. Administrative expenses were $92,000 or 20.8%
of sales consisting primarily of the administrative costs of managing the
division and administrative costs for IMSI including consulting and professional
fees, office operation supplies and expenses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
intangibles was $6,000 or 1.2% of sales and represents the goodwill amortized
for the period on the purchase of Prime Foods.
LOSS FROM OPERATIONS. The Company's loss from operations was $39,000 or
8.8% of sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased from $1,865,000 at
December 31,1998 to $4,262,000 at September 30, 1999. Of these funds $4,200,000
represent funds required to be maintained by the Company as part of its banking
facilities agreement. Bank credit facilities utilized at September 30, 1999
totaled approximately
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<PAGE> 21
$7,800,000 under the operating facility and $1,155,000 under the revolving term
facility. Total credit facilities available at September 30, 1999 were
$10,000,000 under the operating facility and $3,500,000 under the revolving term
facility. The Company increased its operating facility by $6,770,000 from
December 31, 1998 to September 30, 1999. During the nine month period ended
September 30, 1999, the Company received approximately $10,500,000 from the
issuance of common stock, convertible debt and other securities of IMSI. The
funds were used primarily to complete the acquisitions of D.C. Foods and Tasty
Selections during the year, and to fund investments in working capital and
capital equipment.
In October 1999, the Company completed a CDN$7,000,000 (US$4,700,000)
private placement of special warrants in the Company's IMSI subsidiary to be
used to settle certain payment obligations on previous acquisitions and to fund
future acquisitions of the Company.
Historically, our business cycle involves a significant investment in
working capital during the first nine months of 1999 in anticipation of its late
third quarter and fourth quarter sales. The Company has also made investments in
new capital equipment and leasehold improvements during 1999. The leasehold
improvements are financed out of cash flows. During the first three quarters the
Company continued to build or maintain high levels of inventories in its
Transcontinental Gourmet Food, Prime Foods and Seafood Selections divisions. For
each of these divisions, inventories usually begin to decline in October as
retailers begin to purchase product for the fall/winter seasons and hors
d'oeuvres for the holiday season. This year's build up of the Company's
inventory of hors d'oeuvres is greater than historically in anticipation of the
expected increased demand for millennium celebrations. In addition, the Company
has continued to incur increased product development costs and costs associated
with building management infrastructure and information systems, corporate
governance and reporting obligations, seeking out strategic acquisitions,
investor relations and obtaining new sources of financing.
Cash flows from operations were approximately $8,257,000 for the
nine-month period ended September 30, 1999. Cash flows from operations for the
same period last year were approximately $536,000. The operations of Tasty
Selections and D.C. Foods had positive cash flows from operations during this
period which funded the operations costs in IMSI.
On July 22, 1999, IMSI finalized arrangements with respect to the
provision of credit facilities by The Bank of Nova Scotia. The financing
consists of the following facilities:
(1) an operating line in the maximum authorized amount of $10,000,000. The
operating line may be utilized by way of direct advances or bankers' acceptances
and bears interest on direct advances ranging from The Bank of Nova Scotia's
Prime to Prime plus 1/2%. The operating line is repayable on demand. As security
for the operating line, IMSI provided to The Bank of Nova Scotia cash collateral
of $4,000,000 as well as the general security referred to below; and
(2) a revolving term facility to purchase equipment in the maximum authorized
amount of $3,500,000. The term facility may be utilized by way of term
promissory notes with a maximum term of 5 years or equipment leases, each
bearing interest at The Bank of Nova Scotia's Prime plus 1 1/4%. As security for
the term facility, IMSI is to provide appropriate lease and/or conditional sales
contracts and maintain certain insurance coverage on the assets financed. In
addition, the general security referred to below is security for the term
facility.
As general security for the credit facilities, IMSI provided a general
assignment of all of the assets of IMSI, a general assignment of book debts and
life insurance on the life of Michael Steele. Each of Prime, Transcontinental,
Tasty Selections, 1005549 Ontario Limited and D.C. Foods provided unlimited
guarantees of the indebtedness of IMSI to The Bank of Nova Scotia supported by
general assignments of all of the assets of such subsidiaries. In addition, the
Company provided to The Bank of Nova Scotia a postponement and assignment of any
amounts owing to it from time to time by IMSI.
As of September 30, 1999, the Company and its subsidiaries have
utilized an aggregate of $7,800,000 of authorized lines of credit totaling
$10,000,000. The lines of credit bear interest ranging from Prime to Prime plus
1/2%.
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<PAGE> 22
Southbridge Investment Partnership No. 1, First Ontario Labour Sponsored
Investment Fund Ltd, and Bank of Montreal Capital Corporation - Loan: On June 5,
2000, the Company and IMSI entered into a loan agreement with Southbridge
Investment Partnership No. 1, First Ontario Labour Sponsored Investment Fund
Ltd, and Bank of Montreal Capital Corporation as lenders pursuant to which IMSI
has borrowed the principal amount of $4,500,000 . Interest is payable monthly in
arrears at a rate of 12% per annum for the period from the date of advance to
August 31, 2000, at a rate of 24% per annum for the period from September 1,
2000 to and including November 30, 2000, and at the rate of 36% per annum for
the period from December 1, 2000 to and including February 28, 2001, payable
monthly. The loan is subordinated to the Bank of Nova Scotia, and other lenders
having first charge on assets.. The loan is secured by the assets of the Company
and its subsidiary, and of IMSI and its subsidiaries. The loan will result in
the Company receiving approximately $4,000,000 after deduction of fees and
commissions. The loan matures on February 28, 2001.
Business Development Bank of Canada - Mortgage: In November 1997, we
received a mortgage from the Business Development Bank of Canada ("BDC") in the
amount of $550,000. The mortgage is repayable in monthly installments of $3,200
plus interest. Interest is calculated based on the BDC's floating base rate plus
1%. The mortgage matures on June 23, 2012. The loan is secured by a first charge
on the land and building of Prime Foods and a second charge on inventory and
accounts receivable of Prime Foods, a $100,000 guarantee by an officer of the
Company, a guarantee by the Company for the full amount of the loan and an
assignment of shareholders' loans owed by Prime Foods to IMSI. This mortgage was
outstanding as follows:
Date Amount Outstanding
---- ------------------
September 30, 1999 $518,400
Business Development Bank of Canada - Equipment Loan: In December 1997,
we received a loan of $660,000 extended by the BDC. In December of 1998 we
received an additional $400,000 from the BDC. The loan is repayable in two
principal installments at December and January of each year for a 5-year term.
Interest is payable monthly at 1.25% above the BDC's daily floating base rate.
The loan is secured by a first charge on all personal property of
Transcontinental. This loan was outstanding as follows:
Date Amount Outstanding
---- ------------------
September 30, 1999 $736,000
Royal Bank of Canada - Mortgage: In September 1996, 1005549 received a
mortgage from Royal Bank of Canada ("RBC") with a note for $700,000. The note is
repayable in monthly installments of $6,500 and matures at October 2010.
Interest is payable monthly at 7.52%. The loan is secured by the general
security granted to the Royal Bank of Canada as referred to below. The mortgage
was outstanding as follows:
Date Amount Outstanding
---- ------------------
September 30, 1999 $612,243
Royal Bank of Canada - Loan: In September 1996, D.C. Foods received a
loan of $200,000 extended by the RBC. The loan is repayable in monthly
installments of $4,010 and is due in October 2001. Interest is payable monthly
at RBC's Prime rate plus 1%. The loan is secured by the general security granted
to the Royal Bank of Canada as referred to below. The loan was outstanding as
follows:
Date Amount Outstanding
---- ------------------
September 30, 1999 $86,409
As general security for the loans by Royal Bank of Canada to D.C.
Foods, $200,000.00 of cash security was granted to Royal Bank of Canada, a
mortgage of the real property municipally known as 35 Northland Road,
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<PAGE> 23
Waterloo in the principal amount of $900,000.00 and a mortgage of the real
property municipally known as 35 Northland Road, Waterloo, in the principal
amount of $150,000.00 was granted by 1005549 Ontario Limited to Royal Bank of
Canada, a guarantee and postponement of claim in the principal amount of
$500,000.00 was granted by D.C. Foods to Royal Bank of Canada and a guarantee
and postponement of claim in the principal amount of $500,000.00 was granted by
IMSI to Royal Bank of Canada.
Roynat Inc. - Loan: In August 1996, Tasty Selections received a loan of
$280,000 from Roynat Inc. ("Roynat"). The loan is repayable in monthly
installments of $5,000 for a 5- year term. Interest is payable monthly at
Roynat's floating base rate plus 3.5%. The loan is secured by (i) a first charge
on all fixed assets of Tasty Selections; (ii) a first floating charge on all
other assets of Tasty Selections; (iii) postponement for the period of financing
of the landlord's interest in our assets; and (iv) a priorities agreement.
Date Amount Outstanding
---- ------------------
September 30, 1999 $135,000
This loan was fully repaid in October, 1999.
Roynat - Loan: In August 1996, Tasty Selections received a loan of
$400,000 from Roynat. The principal amount of the loan is to repaid annually for
a 5-year term, calculated at 20% of net after tax profit. Interest is payable
monthly at the Roynat's floating base rate plus 3.5%. At our option, we may pay
annually additional interest calculated at 10% of pre-tax profits with a minimum
of $20,000 and a maximum of $50,000 due each year. The loan is secured by (i) a
first charge on all fixed assets of Tasty Selections; (ii) a first floating
charge on all other assets of Tasty Selections; (iii) postponement for the
period of financing of the landlord's interest in our assets; and (iv) a
priorities agreement.
Date Amount Outstanding
---- ------------------
September 30, 1999 $356,299
This loan was fully repaid in October, 1999.
Toronto Dominion Bank - Loan: On August 1996, Tasty Selections received
a loan of $250,000 from the Toronto Dominion Bank ("TDB"). The loan is repayable
in monthly installments of $4,166 for a period of 60 months. Interest is payable
at TDB's Prime rate plus 3%.
Date Amount Outstanding
---- ------------------
September 30, 1999 $111,483
This loan was fully repaid in October, 1999
As a result of the recent loan transaction with Southbridge, et, al, the Company
is in compliance with financial covenants related to its banking facilities.
Management continues to explore additional financing opportunities through
either debt or equity to fund the operations of the Company and further
acquisitions and capital expansion. To this end, in October, the Company's
subsidiary, IMSI engaged Scotia Capital Inc., a division of Scotiabank & Scotia
McLeod Canada, to act as its financial advisor for capital raising projects to
fund certain of the Company's acquisition strategy and infrastructure expansion
and production integration plans. The Company has also recently approached
several other financial services companies to assist the raising of debt or
equity financing to fund acquisitions and working capital. However, there can be
no assurance that the Company or IMSI will be able to raise additional capital
or whether such capital will be sufficient to meet its business plan or other
ongoing needs.
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<PAGE> 24
With respect to future payments related to on acquisitions, the
Company's strategy is to perfect the purchase with the issuance of shares from
treasury rather than cash. As previously mentioned, the Company currently has an
obligation to issue shares typically on a formula based on EBITDA for a given
period or periods to Transcontinental, DC Foods, Ultimate Cookie, and Huxtables
Kitchens. The vendors of the acquired assets of Huxtables Kitchens acquisition
have the option to choose a cash payment in settlement of certain interim or
final payment amounts. The first such potential payment is related to earnings
contingencies associated with the year ended December 31, 2000. The vendors
shall have the option to chose a cash payment if certain conditions related to
the Company's exchange listings, share trading volume, and market capitalization
are not met. In certain circumstances, the Company has the option to make the
payment in cash. The first potential cash payment would be due approximately
April 2001. Management estimates that such cash amount, if chosen by the Vendor
would be in the range of CDN$1.5million (US$1.034million) to CDN$1.7million
(US$1.172million). Should the Company be required to make this payment in cash,
a certain portion may come from working capital of the Company; however,
management estimates that the Company will require additional capital to meet
this payment.
YEAR 2000
The "Year 2000" problem is the result of computer programs being
written using two digits, rather than four, to define the applicable year.
Computer programs and microprocessors that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000, or not
recognize the date at all. This could result in major system failures or
miscalculations causing disruptions in operations, including among other things,
a temporary inability to process transactions, send invoices, access internal
financial information or engage in normal business activities. Year 2000
problems experienced by our suppliers, or us, could adversely impact our ability
to meet the demands of, or service our customers, or otherwise carry on our
business.
The Company did not experience any significant or material Year 2000
related problems and does not foresee any future expenditures on such issues.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATION
The Company believes that in the future its results of operations could
be affected by factors such as market acceptance of new products, and the
success of the Company's marketing and product development programs. Similarly,
future earnings may be adversely effected by changes in the costs of product
marketing, raw materials, distribution channels and labor. Additionally, where
the Company continues to expand its business internationally, fluctuations in
the foreign currency or general economic conditions in any of the countries in
which the Company does business could adversely effect future results of
operations.
The Company's recent acquisitions and growth strategy to continue to
acquire other food processing companies also may effect future results of
operations. Our operating results could be adversely effected if we fail to
successfully integrate or manage acquired companies or if we are not able to
obtain the cost savings which we anticipate. Furthermore, the Company's results
of operations could suffer if the acquired companies do not perform as we
expect.
Due to the factors noted above and elsewhere in the Management's
Discussion and Analysis, the Company's future earnings and stock price may be
subject to significant volatility. Past financial performance should not be
considered as a reliable indicator of future performance and investors should
not use historical results to anticipate trends in future periods.
CAUTIONARY STATEMENT INVOLVING FORWARD LOOKING STATEMENTS
Some of the information contained herein may constitute forward-looking
statements which are subject to various risks and uncertainties. Such statements
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "plan," or other similar
words. These statements
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<PAGE> 25
discuss future expectations, contain projections of results of operations or of
financial conditions or state other "forward-looking" information. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to:
competitive factors and pricing pressures; relationships with manufacturers,
bank, and distributors; legal and regulatory requirements; general economic
conditions; and other risk factors. We do not promise to update forward-looking
information to reflect actual results or changes in assumptions or other factors
that could affect those statements. In addition, when considering such
forward-looking statements, the reader should keep in mind the factors described
in other cautionary statements appearing elsewhere herein. Such statements
describe circumstances which could cause actual results to differ materially
from those contained in any forward looking statement.
Statistical data or the disclosure of trends regarding the food
processing industry may also be contained herein. This data may have been
obtained from industry publications and reports which we believe to be reliable
sources. We have not independently verified such data nor sought the consent of
any organizations to refer to their reports herein.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 350 Creditstone Rd., Unit
202, Concord, Ontario. The Company believes that the approximately 4,000 square
feet space is in good condition. The Company has entered into a three year lease
which commenced on March 1, 1999 and which terminates on February 28, 2002, at a
gross rental rate for the initial year of $4,100 per month with increases for
subsequent years during the term based on the increased costs of utilities,
maintenance and taxes. In April, the Company acquired an additional 4,500 square
feet at 350 Creditstone at a gross rental rate of $3,700 per month commencing
March 1, 2000. The lease terminates on February 28, 2002.
Prime Foods: Prime Foods' 15,000 square foot frozen food facility is
situated on a 1 acre lot located at 620 Colby Drive, Waterloo, Ontario. Prime
Foods owns the property. The building is a stand alone structure of brick and
concrete with a large paved parking lot on one side of the building and a
smaller paved parking lot in the front of the building. Management believes that
the building is in good repair. In December of 1997, Prime Foods began to
operate this frozen food facility to produce frozen entrees, bundled meals and
stir fry kits for the HMR Market in the United States and Canada. The production
facility is equipped with mixers, filling and wrapping units, cooking ovens,
cutting units, conveyer system and a new individually quick frozen cryogenic
freezing line. Management believes that the equipment is maintained in good
working order. Prime Foods Processing Facility: On February 4, 1999, we
announced the expansion of the Prime Foods processing facility, however, in view
of the recent addition of D.C. Foods, we have temporarily suspended expansion of
the Prime Foods facility so that management can evaluate how to make the best
use of all our facilities.
Pasta Kitchen: Pasta Kitchen's fresh commissary style kitchen is a
10,000 square foot facility located at 26 Milford Avenue, Toronto, Ontario. The
monthly rental payment is $3,060. Management believes that the building is in
good condition. This lease expires in May 2000. In January 2000, the division,
with Tasty Selections leased additional production facilities at 350
Creditstone, Unit 103 to expand its production capabilities. The 23,000 square
feet facility carries a monthly lease cost of 15,972 and the lease expires in
February 2005. Management believes the building is in good condition.
Transcontinental: In September 1999 Transcontinental expanded its
operations into the facilities vacated by Tasty Selections. Transcontinental
currently operates out of its 39,000 square foot facility located at 610 Oster
Lane, Concord, Ontario. The monthly rental payment is $23,600. Management
believes that the building is in good condition. The lease expires in December
2002.
Tasty Selections/Norbakco: In September 1999, Tasty Selections moved
its operations into the former Norbakco's 34,000 square foot facility located at
350 Creditstone, Unit D Concord, Ontario and acquired an additional 9,100 square
feet for a total of 42,100 square feet. The monthly rental payment is $17,500.
Management believes that the building is in good condition. The lease expires in
February 2005.
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<PAGE> 26
D.C. Foods: D.C. Foods' 25,500 square foot facility is located at 35
Northland Road, Waterloo, Ontario. The facility contains approximately 20,500
square feet of production space and 5,000 square feet of office space. The
building is owned by 1005549 Ontario Limited. The building is equipped with
three dock loading doors and two drive-in doors. Management believes that the
building is in good condition.
Huxtable's Kitchen: Huxtable's Kitchen's 54,000 square foot facility is
located at 2100 E 49th Street, Vernon, California. The Facility contains
approximately 50,000 square feet of production space and 4,000 square feet of
office space. The monthly rental payment is US$30,100. Management believes that
the building is in good condition. The lease expires on October 31, 2004.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF THE COMPANY
The following table sets forth the beneficial ownership of shares of
voting stock of the Company, as of March 31, 2000, of (i) each person known by
the Company to beneficially own 5% or more of such shares; (ii) each of the
Company's directors and its executive officers named in the Summary Compensation
Table included below; and (iii) all of the Company's executive officers and
directors as a group. Except as otherwise indicated, all shares are beneficially
owned, and the persons named as owners hold investment and voting power. The
address of each of the persons in this table is as follows: 350 Creditstone Rd.,
Unit 202, Concord, Ontario. The shares of common stock of the Company differ
from the Class N shares of the Company; both have the right to one vote per
share, however the Class N shares of the Company are non-equity participating
shares. The Class N shares provide the right to vote at meetings of shareholders
of the Company for certain classes of shares of IMSI that may be exchanged for
shares of common stock of the Company.
<TABLE>
<CAPTION>
Name of Amount and Nature
Beneficial Owner of Shares Beneficially Owned Percentage Owned (1)
Common Shares Class N Total
<S> <C> <C> <C> <C>
Michael Steele (2) 250,000 1,513,712 1,763,712 7.7 %
G.E. Creber (3) 260,000 - 260,000 1.1 %
Len Shiffman (4)(5)(6) 70,000 451,743 521,743 2.3 %
Larry Hoffman(5)(6) 195,000 451,743 646,743 2.8 %
Victor Fradkin (5)(6) 430,000 903,486 1,333,486 5.8 %
Southbridge Partnership 3,790,477 0 3,790,477 16.6 %
No. 1 (7)(8)
All Executive Officers 775,000 2417198 3,192,198 13.8 %
and Directors as a Group
</TABLE>
1. The percentage calculations are based on 22,881,400 shares on a fully
diluted basis as of the date of filing and includes all shares of common
stock of the Company currently outstanding; all vested options/warrants for
the issue of common stock, or options and warrants that will vest in the 60
day period following the date of this filing; all Class N shares currently
outstanding; all Class N shares that management reasonably estimates that
the holders of Class B, C, D and E shares of IMSI (the "Exchangeable
Shares") have the right to acquire based upon the exchange rights of the
Exchangeable Shares for shares of common stock of the Company, and the
exercise or conversion of certain convertible debt and special warrants.
The current issued and outstanding Class N shares are held by the holders
of Class X shares in IMSI. The Class X shares may be exchanged on the basis
of one Class X share plus one Class N share for one share of common stock
of the Company. The other Exchangeable Shares provide the holders with a
right to acquire Class N shares
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<PAGE> 27
equal to the number of shares of common stock of the Company for which the
Exchangeable Shares may be exchanged based on a formula contained in the
Exchangeable Share attributes.
Upon determination of the entitlement of the Exchangeable Shares to be
exchanged for shares of common stock of the Company, the holders of the
Exchangeable Shares are entitled to acquire for nominal consideration a
number of Class N shares equal to the number of shares of common stock of
the Company for which the Exchangeable Share may be exchanged. To exchange
an Exchangeable Share for common stock of the Company, the holder must
exchange the Exchangeable Shares and surrender the number of Class N shares
equal to such number of shares of common stock of the Company for which the
Exchangeable Share may be exchanged.
The calculation of the 22,881,400 shares is based upon the following
assumptions:
i) The issue of 2,258,718 Class N shares of the Company pursuant to the
rights of the holders of the 300,000 Class B shares of IMSI;
ii) the issue of 1,555,556 shares of common stock of the Company. As a
result of the IMSI not satisfying certain conditions of the warrants at
March 31, 2000, The 1,555,556 special warrants issued by IMSI on
October 22, 1999 may now be exercised for 1,555,556 shares of common
stock of the Company.
iii) the issue of an additional 311,111 shares of common stock of the
Company. These shares are issuable in connection with the special
warrants identified in ii), above and carry the same attributes. The
warrant holder is entitled to these additional shares as a result of
the Company and IMSI not being able to satisfy certain conditions on or
before March 31, 2000, accordingly, the 1,555,556 warrants many now be
exercised for a total of 1,866,667 shares of common stock of the
Company;
iv) the issue of 55,000 shares of the common stock of the Company to the
vendor of Pasta Kitchens as payment of the balance of the contingent
part of the purchase price consideration at December 31, 1999;
v) the granting of an estimated 250,000 options to the vendors of
Transcontinental granted as part of the consideration provided in the
share purchase agreement based upon the financial results to of the
division for the year ended December 31, 1999.
vi) the issue of 956,183 shares of the common stock of the Company to the
former owners of Huxtable's Kitchens as provided in the asset purchase
agreement based upon the financial results of the division from
November 1, 1999 to December 31, 1999
vii) the issue of an estimated 418,000 Class N shares to the holders of the
500,000 Class Class E Series 1 and 2 shares held by the selling
shareholders of DC Foods based upon the financial results of the
division from December 8, 1998 to December 31, 1999 which will permit
the said Class E shares to be exchanged for 418,000 shares of the
common stock of the Company.
2. The number of shares beneficially owned by Michael Steele include
250,000 shares of common stock of the Company which he has the option
to purchase at an option price of US$0.70 per share. Such option vested
on August 10, 1999.
3. The number of shares beneficially owned by G.E. Creber includes 20,000
shares of common stock of the Company which he has the option to
purchase at an option price of US$0.70 per share. Such option vested on
August 10, 1999.
4. The number of shares beneficially owned by Len Shiffman includes 20,000
shares of common stock of the Company which he has the option to
purchase at an option price of US$1.50 per share. Such option vested on
December 1, 1999.
5. Len Shiffman, Larry Hoffman and Victor Fradkin own 60,000, 60,000 and
120,000 of the Class B shares of IMSI, respectively and are entitled to
receive 451,743, 451,743, 903,487 Class N shares of the Company,
respectively.
6. Len Shiffman, Larry Hoffman and Victor Fradkin are entitled to receive
options for 50,000, 50,000 and 100,000, respectively, to purchase
shares of common stock of the Company as selling shareholders of
Transcontinental under the terms of the share purchase agreement.
24
<PAGE> 28
7. The number of shares beneficially owned by Southbridge Investment
Partnership No. 1 includes 1,866,667 shares of common stock of the
Company to be issued upon exercise of the special warrants issued by
IMSI on October 22, 1999. The address of Southbridge Investment
Partnership No. 1 is 150 Water Street, Cambridge, Ontario N1R 3E2.
8. The number of shares owned by Southbridge Investment Partnership No. 1
includes 400,000 warrants to purchase shares of common stock of the
Company pursuant to the share subscription agreement dated April 16,
1999.
9.
SECURITY OWNERSHIP OF IMSI
The following tables set forth the beneficial ownership of each class
of equity securities of IMSI, as of March 31, 2000, by (i) each of the Company's
directors and its executive officers named in the Summary Compensation Table
below; and (ii) all of the Company's executive officers and directors as a
group. Except as otherwise indicated, all shares are beneficially owned, and the
persons named as owners hold investment and voting power. The address of each of
the persons in these tables is as follows: 350 Creditstone Rd., Unit 202,
Concord, Ontario.
CLASS X SHARES
Name of Beneficial Owner Amount and nature of Percentage Owned(1)
shares Beneficially
owned
Michael Steele 1,513,712 23.2%
All executive officers and 1,513,712 23.2%
directors as a group
--------------------------------
(1) Based on an aggregate of 6,517,272 Class X shares outstanding as of March
31, 2000, including the assumed exchange by Southbridge Partnership. of
1,866,667 special warrants of IMSI for an equivalent number of Class X shares
(with and a corresponding number of Class N shares of the Company), and
1,523,810 assuming the conversion of the Company's convertible debt.
CLASS B SHARES
Name of Beneficial Owner Amount and nature of Percentage Owned(1)
shares Beneficially
owned
Larry Hoffman 60,000 20%
Len Shiffman 60,000 20%
All executive officers and 120,000 40%
directors as a group
----------------------------------
(1) Based on an aggregate of 300,000 Class B shares outstanding as of March 31,
2000.
CLASS C SHARES
Name of Beneficial Owner Amount and nature of Percentage Owned (1)
shares Beneficially
owned
Larry Hoffman 20,000 20%
Len Shiffman 20,000 20%
All executive officers and 40,000 40%
directors as a group
--------------------------------
(1) Based on an aggregate of 100,000 Class C shares outstanding as of March 31,
2000.
25
<PAGE> 29
CLASS D SHARES
Name of Beneficial Owner Amount and nature of Percentage Owned (1)
shares Beneficially
owned
Larry Hoffman 11,800 20%
Len Shiffman 11,800 20%
All executive officers and 23,600 40%
directors as a group
--------------------------------
(1) Based on an aggregate of 59,000 Class D shares outstanding as of March 31,
2000.
For a description of these securities, see "Item 8. Description of
Registrant's Securities - B. Securities of IMSI."
To the best of management's knowledge, there are no arrangements which
may result in a change of control of Company.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company's directors are elected at the annual meeting of
stockholders and hold office until their successors are elected and qualified.
The Company's officers are appointed annually by the Board of Directors and
serve at the pleasure of the Board. There are no family relationships between
any of the officers or directors of the Company or its wholly owned
subsidiaries.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions and Offices
<S> <C> <C>
Michael Steele 41 President and Chief Executive Officer, Director
G.E. Creber 68 Secretary, Director
Len Shiffman 41 Director
Larry Hoffman 54 Treasurer, Vice President and Chief Financial
</TABLE>
Michael Steele has served as the Company's President and Director since
July 16, 1998. He also served as the Company's Secretary from July 16, 1998 to
December 2, 1998. He also holds director and executive officer positions with
IMSI, Prime Foods, DC Foods, Tasty, International USA and Transcontinental.
Prior to joining the Company, from 1993 to 1995, Mr. Steele served as an officer
of Thermco Canada, an environmental technology company with offices in Canada,
Europe and the United States which he founded. In late 1994, Thermco Canada was
purchased by Halozone Technologies, a publicly traded environmental corporation.
From 1995 to 1997, Mr. Steele served as Senior Vice President of Cott
Corporation, a private food label. In late 1997, he left the Cott Corporation
and founded IMSI.
G.E. Creber has served as Director and Secretary of the Company since
December 2, 1998. Mr. Creber also serves as a Director of IMSI and as a director
and officer of other reporting companies. He is the President and Chief
Executive Officer of International Pursuit Corporation, Director and Secretary
of World Point Terminals Inc. and Director of CML Industries Ltd. Mr. Creber is
also a partner at Fogler, Rubinoff, Barristers and Solicitors. He has held these
positions since 1994.
Len Shiffman has served as Director of the Company since December 1,
1998. He also serves as a Director of IMSI. Mr. Shiffman is currently President
of Lauderdale Capital Inc., a private investment, capital venture company. From
1985 to 1996, Mr. Shiffman served as Vice President in the Real Estate Corporate
Finance Department of Citibank Canada.
26
<PAGE> 30
Larry Hoffman is the Treasurer, Vice President and Chief Financial
Officer of the Company. He has held these positions since December 1, 1998. He
also holds executive officer positions with IMSI and Transcontinental. Prior to
joining the Company, Mr. Hoffman served as Executive Vice President of
Transcontinental from January 1997 to November 1998. From October 1995 to
January 1997, he served as President of Prime Bakers, Inc., a producer of frozen
bakery products. From October 1994 to January 1997, he served as President of
Prime Pastries (1994) Inc., a producer of frozen non- baked products. Mr.
Hoffman is a Chartered Accountant.
SIGNIFICANT EMPLOYEES OF THE COMPANY'S SUBSIDIARIES
Victor Fradkin has served as a director of Transcontinental since the
company's inception in 1983. After founding Transcontinental, he developed
manufacturing practices to mass-produce Fillo Dough and Fillo Hors D'oeuvres
which has allowed Transcontinental to grow into a major producer of these
specialty products in Canada.
Allan Greenspoon has served as President of Tasty Selections since
1996. He is also serving as President and Director of Ultimate since October 18,
1999. Prior to joining Tasty Selections, from 1987 to 1995, Mr. Greenspoon
served as President of Circlet Foods, Inc. Mr. Greenspoon has 19 years of
experience in the food processing industry.
Donald Kilimnik has served as President of D.C. Foods since its
inception in 1991. Prior to co-founding D.C. Foods, from 1987 to 1991, he served
as General Manager for Stillmeadow Farm in Elora, Ontario. Mr. Kilimnik has over
15 years of experience in the food processing industry.
Robert Curik has served as Vice President of D.C. Foods since its
inception in 1991. Prior to co-founding D.C. Foods, from 1989 to 1991 he served
as Operations Manager at Stillmeadow Farms in Elora, Ontario. Mr. Curik has
nearly 20 years experience in the food processing industry.
Michael Eskenazi has served as Founder and President of Ultimate Cookie
Co Inc since 1991. Prior that he was President and Founder of F&N Cookie Ltd
since 1985. Mr. Eskenazi has approximately 15 years bakery experience.
Cliff Marquart has served as CEO of Huxtable's Foods, L.L.C. from 1996
to November 1999 and has served as president of Huxtables Kitchen Inc. from
November 1999. He has extensive experience in grocery brand marketing and
development, including Stokely, Bongrain's Fluere d'Lait Foods Company, and
Morning Star Group.
ITEM 6. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid or accrued by the
Company during the years ended December 31, 1998 and 1997 and the nine month
period ended September 30, 1999 to the Company's officers and directors. Only
one of the executive officers, Michael Steele, President of the Company, earned
over $US 100,000 ($CD 145,000) during the year ended December 31, 1998. None of
the other executive officers of the Company earned more than $US 100,000 ($CD
145,000) during the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Other Restricted
Annual Stock Securities LTIP
Name and Salary Bonus Compensation Awards Underlying Payout
Principal ------ ----- ------------ ------ Options/ ------
Position Year ($) ($) ($) ($) SARs (#) ($)
-------- ---- --- --- --- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Steele, 1999 240,000 75,000 0 0 0 0
</TABLE>
27
<PAGE> 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
President and 1998 150,000 0 0 0 625,000 0
Director 1997 0 0 0 0 0 0
G.E. Creber, 1999 0 0 0 0 0 0
Secretary and 1998 0 0 0 0 100,000 0
Director 1997 0 0 0 0 0 0
Len Shifman, 1999 0 0 0 0 0 0
Director 1998 0 36,000 0 100,000 0
1997 0 0 0 0 0 0
Larry Hoffman,
Treasurer, Vice 1999 125,000 0 0 0 0 0
President & Chief 1998 100,000 0 0 0 0 0
Executive Officer 1997 100,000 0 0 0 0 0
</TABLE>
Option / SAR Grants in Fiscal 1999
<TABLE>
<CAPTION>
% of Total Exercise
Name and Number of Securities Options/SARs or Base
Principal Underlying Options/ Employees Price
Position SARs (#) in Fiscal Year ($US/Share) Expiration Date
-------- -------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Michael Steele,
President and
Director 625,000 75.8% US$0.70 ($CD 1.02) August 2008
G.E. Creber,
Secretary and
Director 100,000 12.1% US$0.70 ($CD 1.02) August 2008
Len Shiffman,
Director 100,000 12.1% US$1.50 ($CD 2.19) December 2008
</TABLE>
28
<PAGE> 32
Aggregated Option / SAR Exercises in Fiscal 1999 and FY-End Option / SAR Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money Options
Underlying Unexercised /SAR's
Name and Shares Options/ SAR's at at FY-End ($)
Principal Acquired on FY-End (#) Exercisable/ Exercisable/
Position Exercise # Value Realized ($) Unexercisable Unexercisable
-------- ---------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Michael Steele, 0 0 250,000/375,000 807,500/1,212,250
President and
Director
G.E. Creber, Secretary 0 0 20,000/80,000 64,600/258,400
and Director
Len Shifman Director 0 0 20,000/80,000 441,600/166,400
</TABLE>
COMPENSATION OF DIRECTORS
The Company currently does not pay any cash compensation to its
non-employee directors. Directors who are also our employees also receive no
additional compensation for their services as directors.
EMPLOYMENT AGREEMENT
In August 1998, the Company entered into an employment agreement with
Michael Steele. Under this agreement, we agreed to employ Mr. Steele as our
president and chief executive officer at an annual salary of US$160,000 as well
as an annual bonus equal to five percent of our earnings before income taxes,
depreciation and amortization. If Mr. Steele's employment with us is terminated
for any reason other than cause, voluntary termination by Mr. Steele, we shall
be obligated to pay Mr. Steele the total of two years' salary, the bonus that
Mr. Steele would have received for the fiscal year that he is terminated, as
reasonably determined by us, had he continued with us and the present value of
all other employee benefits Mr. Steele would have received for twenty-four
months had his employment with us continued.
In December 1998, IMSI entered into an employment agreement with Larry
Hoffman. Under this agreement, we agreed to employ Mr. Hoffman as our
vice-president and chief financial officer at an annual salary of $125,000. If
Mr. Hoffman's employment with us is terminated for any reason other than cause,
voluntary termination by Mr. Hoffman or the expiration of the five year term of
the agreement, we shall be obligated to pay Mr. Hoffman the total of two years
salary or salary for the unexpired term which ever is less based on the salary
for the fiscal year in which he is terminated, and the all other employee
benefits Mr. Hoffman would have received for such period.
STOCK OPTION PLAN
On August 10, 1998, the Board of Directors of the Company approved a
stock option plan (the "Option Plan") applicable to the Company's officers and
directors and authorized the grant of options covering up to 2,500,000 shares of
common stock. Pursuant to the Option Plan, options are granted with an exercise
price equal to or greater than the then-current fair market value of the shares
of common stock. Options may generally be exercised in equal proportions during
the years following the first to fifth anniversary of the date of grant and
expire on the tenth anniversary or upon termination of employment. As of at
October, 1999, options covering 825,000 shares of common stock had been granted.
29
<PAGE> 33
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 22, 1999, Southbridge Equities Inc., a corporation organized
under the laws of the Province of Ontario, Canada ("Southbridge Equities"),
subscribed for 1,555,556 special warrants of IMSI, for an aggregate
consideration of approximately US$4,700,000 (CDN$6,815,000). These warrants were
subsequently transferred to a related entity--Southbridge Investment Partnership
No. 1 Prior to this transaction, Southbridge, Inc. (a related company which was
wound up into Southbridge Equities Inc.) beneficially owned 1,923,810 shares of
common stock of the Company. Immediately following the purchase of the special
warrants, based upon the assumption that the special warrants had been
exercised, Southbridge Equities Inc. had an aggregate ownership of 15.2% of the
Company based upon 22,881,400 shares outstanding. On March 31, 2000, Southbridge
became eligible for an additional 311,111 Class X shares under the terms of the
special warrants. On March 31, 2000 special warrants became eligible for
exchange into shares of common stock of the Company. See "Item 8:
Description of Registrant's Securities."
ITEM 8. DESCRIPTION OF REGISTRANT'S SECURITIES
SECURITIES OF THE COMPANY
As previously mentioned, throughout this document, the Company makes
frequent references to "EBITDA". EBITDA is defined as operating earnings
earnings before interest revenue and expense, income taxes (current and
deferred), depreciation of capital assets, and amortization of intangible
assets. From a management perspective, EBITDA is the primary measure upon which
resources are allocated to operations within the corporate group, the basis upon
which acquisitions are valued and to determine the ultimate purchase prices of
certain acquisitions. EBITDA is a non-GAAP measure of profitability and cash
earnings and therefore is not presented in the Company's external financial
statements.
As of March 31, 2000, the Company's authorized capital stock consisted
of 25,000,000 shares of common stock with a par value of US$0.001 per share and
10,000,000 shares of Class N stock with a par value of US$0.001 per share
COMMON STOCK. As of March 31, 2000, there were 10,476,048 shares of
common stock outstanding which were held by 102 holders of record. All shares of
common stock issued and outstanding are validly issued, fully paid and
non-assessable.
Each share of common stock entitles the holder thereof to one
non-cumulative vote, either in person or by proxy, at meetings of shareholders.
Shareholders of our common stock do not have cumulative voting rights.
Therefore, shareholders of more than 50% of the issued and outstanding shares of
common stock and Class N shares can elect all of the directors of the Company.
CLASS N SHARES. As of March 31, 2000 there were a total of 3,110,795
Class N shares issued and outstanding. The Class N shares are non-equity
participating and are entitled to identical voting rights as shares of common
stock. The Class N shares are issued to shareholders of IMSI who have shares of
IMSI that are exchangeable into shares of common stock of the Company so that
such shareholders of IMSI have voting rights at meetings of the shareholders of
the Company. The holders of the Class N shares have no rights of participation
on a liquidation or winding up of the Company.
As of March 31, 2000 the Company had reserved 2,200,000 Class N shares
for issuance upon determination of the exchange rights of the Class B shares,
Class C shares, and Class D shares issued by IMSI. The Company will be required
to reserve an additional 960,000 Class N shares in connection with such
conversion based upon management's estimates that approximately 3,160,000 shares
of common stock of the Company will be issued to the former shareholders of
Transcontinental in exchange for all of the Class B shares, Class C shares and
Class D shares. The holders of the Class B shares, the Class C shares and the
Class D shares are entitled to receive a number of Class
30
<PAGE> 34
N shares based upon the number of shares of common stock of the Company for
which each of the Class B shares, the Class C shares and the Class D shares may
be exchanged as determined in accordance with the share attributes of each such
class. The holders of Class E shares of IMSI have the same right to receive a
number of Class N shares based upon the number of shares of common stock of the
Company for which each series of the Class E shares may be exchanged as
determined in accordance with the share attributes of each such series. See "-
Securities of IMSI." There is no publicly traded market for the Class N shares.
OPTIONS
OPTIONS GRANTED IN CONNECTION WITH ACQUISITION OF 1005549 AND TASTY
SELECTIONS: In connection with the acquisitions of 1005549 and Tasty Selections,
the Company committed to issue options pursuant to employment agreements with
certain selling shareholders of the companies acquired. In each case, the
exercise price of the options granted shall be the market price as determined by
reference to the principal exchange upon which shares of common stock of the
Company are listed on the date that the audited consolidated financial
statements of the Company are approved by the Board of Directors following the
period with respect to which the options relate. Each employee is granted a base
number (the "Base Number") of options for each fiscal period under the term of
the respective employment agreement. The terms of the employment agreements
range from four to five years. While the individual is employed with the
Company, the number of options granted following each fiscal period for each
employee is determined as follows:
(a) if less than 85% of the performance target for the employee is
achieved, then no options are granted to the employee.
(b) if between 85% and 100% of the performance target for the
employee is achieved, then the Base Number of options will be
granted to the employee for the relevant fiscal period.
(c) if greater than 100% of the performance target for the
employee is achieved, then the Base Number of options granted
shall be increased on a proportionate basis and such number
granted to the employee for the relevant fiscal period.
Assuming all of the employees achieve between 85% and 100% of their
respective performance targets for the fiscal period ending December 31, 1999,
the Company will be required to grant a total of 100,000 options at a Board of
Directors meeting in which the audited consolidated financial statements of the
Company for the year ending December 31, 1999 are approved.
The options shall vest in accordance with the terms of the individual
employment agreements. Generally, 20% of the options granted will vest on the
grant date, with the remaining options vesting equally at each anniversary of
the grant date.
Options to Brokton International, Ltd., Dover IX Investment Limited,
IPO International Ltd. and Tinamilu Holdings Inc.: In consideration of the
assistance provided in completing the financing undertaken by the Company in
July 1998, the Company granted options to purchase 250,000 shares of common
stock of the Company to each of Brokton International, Ltd., Dover IX Investment
Limited, IPO International Ltd. and Tinamilu Holdings Inc. The options were in
each case available for exercise during the period from and including February
1, 1999 to and including July 31, 1999 at an option price of $US 1.00 ($CD 1.46)
per optioned share. In May 1999, the Company granted to each of the optionees an
extension for the exercise of the said options whereby in each case, options for
100,000 of the optioned shares shall be available for exercise to and including
December 31, 1999 and the remaining options for 150,000 optioned shares shall be
available for exercise to and including June 30, 2000. As of March 31, 2000,
options for 400,000 shares of the Company have been exercised.
Options to Robert Caldwell Capital Corporation: In consideration of
financings completed by the Company and IMSI in April and May, 1999, pursuant to
an agency agreement dated April 10, 1999 between IMSI and Robert Caldwell
Capital Corporation ("Caldwell"), IMSI paid to Caldwell a commission of $380,000
and, in addition, granted to Caldwell options to purchase up to 144,762 shares
of common stock of the Company at an option price of
31
<PAGE> 35
$US 1.75 ($CD $2.55) per optioned share with the options being available for
exercise to and including April 17, 2000. In April 2000 the Company granted an
extension for exercising the above options to May 31, 2000.
Options to Baybak and Company, Inc.: In consideration of services
provided to the Company by Michael Baybak and Company, Inc. ("Baybak"), the
Company granted to Baybak options to purchase 125,000 shares of common stock of
the Company during the period to and including December 31, 2001. The option
price for 50,000 of the optioned shares is $US 0.90 ($CD 1.31) per common share
and the option price for the remaining 75,000 optioned shares is $US 1.50 ($CD
2.19) per optioned share.
Options to Barbara Druxerman: The Company has granted to Barbara
Druxerman, the Vice President of Development of Transcontinental, options to
purchase 3,000 shares of common stock of the Company which shall have an
exercise price of $US 2.00 ($CD 2.91) per common share and such options shall
vest as to 20% on the ninety-first day following the date of her commencement of
employment with Transcontinental and 20% each on the first, second, third and
fourth anniversaries of the date of Ms. Druxerman's commencement of employment.
Warrants to Southbridge Inc.: On April 16, 1999 Southbridge Inc.
subscribed for 1,523,810 shares of common stock of the Company at a subscription
price of $2.625 per common share. As part of the subscription the Company
granted to Southbridge 400,000 warrants which entitle Southbridge to purchase up
to 200,000 shares of common stock at the price of $2.25 per common share during
the period to April 16, 2001 and 200,000 shares of common stock at the price of
$2.625 per common share during the period to April 16, 2001. In December, 1999
Southbridge Inc.'s rights to the warrants were transferred to Southbridge
Investment Partnership No. 1, a related entity to Soutbridge Inc.
Options to the vendors of Transcontinental Gourmet Foods: The Company
granted options to the vendors of Transcontinental Gourmet Foods
("Transcontinental") (pro rata to their common shareholdings in
Transcontinental). The maximum number of common shares is to be determined as
follows: the amount of the Adjusted EBITDA (as defined in the Share Purchase
Agreement) in excess of $1,000,000 for the 12 months ending December 31, 1999
divided by the lesser of US$2.00 and the average closing share price for the ten
trading days prior to December 31, 1999. The Vendors must elect to purchase such
common shares during the one year period following determination of the number
of common shares available under the option formula. Management currently
estimates that the number of common shares available to be exercised by the
shareholders will be approximately 250,000 shares.
Options to Third Party Financial Advisors: On October 27, 1999, in
consideration for assistance in closing certain equity financing transactions,
the Company granted options to purchase 100,000 shares of common stock of the
Company. having a per share exercise price that is determined by calculating the
average of the trading price on the OTC Bulletin Board for 10 trading days
trading price prior to the date of grant (US$3.01 (CDN$4.36) per share). All
options must be exercised within 12 months of the date of grant.
Options to Cliff Marquart: On October 27, 1999, in consideration of
Cliff Marquart serving as President of Huxtable's Kitchens Inc. the Company
granted to him options for 50,000 shares of the common stock of the Company. The
options have a per share exercise price of US$3.00 (CDN$4.35) per share. The
options vest as to 10,000 shares on each of November 12, 1999 and each of the
four succeeding anniversaries of such date.
SECURITIES OF IMSI
The following securities of IMSI are issued and outstanding. There is
no public trading market for any of the following securities.
CLASS X STOCK. IMSI has issued and outstanding 3,110,795 Class X shares
which are exchangeable on the basis of one Class X share and one class N share
of the Company for one share of common stock of the Company. Class X shares are
non-participating and non-voting.
32
<PAGE> 36
CLASS B SHARES. IMSI has issued 300,000 Class B shares. Class B shares
are non-participating and non-voting except in respect of any future
modification or changes in the Class B share characteristics. The Class B shares
are exchangeable into such number of shares of common stock of the Company as
determined by calculating the earnings before income tax, depreciation and
amortization ("EBITDA") of Transcontinental for the twelve month period ended
February 28, 1999, and multiplying such amount by 5, less the adjusted book
value; then by dividing that amount by the Canadian dollar equivalent of $US
1.40 ($CD 2.04) at February 28, 1999 and subtracting from that amount 53,000. It
has been determined and agreed that the Class B shares may be exchanged for
2,258,718 shares of common shares of the Company.
The shareholders of the Class B shares are entitled to purchase for
nominal consideration a number of Class N shares equal to the number of shares
of common stock of the Company for which the Class B shares may be exchanged. In
the event that the shareholders acquire the Class N shares, then upon a Class B
share being exchanged for the number of shares of common stock of the Company
for which the Class B share may be exchanged, a number of Class N shares equal
to such number of shares of common stock of the Company shall be surrendered to
the Company.
CLASS C SHARES. IMSI has issued 100,000 Class C shares. Class C shares
are non-participating and non-voting except in respect of any future
modification or changes in the Class C share characteristics. The Class C shares
are exchangeable into a number of shares of common stock of the Company, such
number of shares to be determined by calculating the EBITDA of Transcontinental
for the twelve month period ended February 28, 2000; then by dividing that
amount by the Canadian dollar equivalent at February 28, 2000 of the lesser of
$US 2.00 ($CD 2.92) or the current market price of one share of common stock of
the Company determined at February 28, 2000.
The shareholders of the Class C shares are entitled to purchase for
nominal consideration a number of Class N shares equal to the number of shares
of common stock of the Company for which the Class C shares may be exchanged. In
the event that the shareholders acquire the Class N shares, then upon a Class C
share being exchanged for the number of shares of common stock of the Company
for which the Class C share may be exchanged, a number of Class N shares equal
to such number of shares of common stock of the Company shall be surrendered to
the Company.
CLASS D SHARES. IMSI has issued 59,000 Class D shares. Class D shares
are non-participating and non-voting except in respect of any future
modification or changes in the Class D share characteristics. The Class D shares
are exchangeable into a number of shares of common stock of the Company such
number of shares to be determined by calculating the EBITDA of Transcontinental
for the twelve month period ended February 28, 2001 minus the adjusted EBITDA of
Transcontinental for the twelve month period ended February 28, 2000; then by
dividing that amount by the Canadian dollar equivalent at February 28, 2001 of
the lesser of $US 2.00 ($CD 2.92) or the current market price of one share of
common stock of the Company determined at February 28, 2001.
The shareholders of the Class D shares are entitled to purchase for
nominal consideration a number of Class N shares equal to the number of shares
of common stock of the Company for which the Class D shares may be exchanged. In
the event that the shareholders acquire the Class N shares, then upon a Class D
share being exchanged for the number of shares of common stock of the Company
for which the Class D share may be exchanged, a number of Class N shares equal
to such number of shares of common stock of the Company shall be surrendered to
the Company.
CLASS E SERIES 1 AND 2 SHARES. IMSI has issued 250,000 Class E Series 1
shares and 250,000 Class E Series 2 shares. Class E Series 1 and 2 shares, are
non-participating and non-voting except in respect of any future modification or
changes in the Class E Series 1 and 2 shares.
The Class E Series 1 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined as follows:
the amount being 50% of the Adjusted EBITDA of 1005549 and DC Foods for the
period from and including December 7, 1998 to and including December 31, 1999,
or an earlier date at the election of the Series 1 shareholders in the event (a)
of the death, permanent disability or termination of employment, without cause,
of either Donald Kilimnik or Robert Curik, (b) Michael A. Steele is not the
Chief
33
<PAGE> 37
Executive Officer of the Company, or (c) that a take-over bid for IMSC results
in a single shareholder acquiring more than fifty percent of the issued and
outstanding shares of IMSC, divided by the current market price of one share of
common stock of the Company determined as at December 31, 1999, or such earlier
date. Class E Series 1 shares, are non-participating and non-voting except in
respect of any future modification or changes in the Class E Series 1 shares.
The Class E Series 2 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined by dividing
50% of the Adjusted EBITDA of 1005549 and DC Foods for the period from and
including December 7, 1998 to and including December 31, 1999, or an earlier
date at the election of the Series 2 shareholders in the event (a) of the death,
permanent disability or termination of employment, without cause, of either
Donald Kilimnik or Robert Curik, (b) Michael A. Steele is not the Chief
Executive Officer of the Company, or (c) that a take-over bid for IMSC results
in a single shareholder acquiring more than fifty percent of the issued and
outstanding shares of IMSC, divided by the current market price of one share of
common stock of the Company determined as at December 31, 1999, or such earlier
date. Class E Series 2 shares, are non-participating and non-voting except in
respect of any future modification or changes in the Class E Series 2 shares.
The shareholders of the Class Series 1 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 1 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 1 share being exchanged for the number of shares of
common stock of the Company for which the Class E Series 1 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
The shareholders of the Class Series 2 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 2 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 2 share being exchanged for the number of shares of
common stock of the Company for which the Class E Series 2 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
CLASS E SERIES 3 AND 4 SHARES. IMSI has issued 250,000 shares of Class
E Series 3 shares and 250,000 shares of Class E Series 4 shares. Class E Series
3 and 4 shares are non-participating and non-voting except in respect of any
future modification or changes in the Class E Series 3 and 4 share
characteristics.
Class E Series 3 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined as follows:
the amount being 50% of [four times the Adjusted EBITDA of 1005549 and DC Foods
for the period ending March 31, 2002 or December 31, 2002 (such period to be
selected by the Series 3 shareholders in their absolute discretion) or an
earlier date at the election of the Series 3 shareholders in the event (a) of
the death, permanent disability or termination of employment, without cause, of
either Donald Kilimnik or Robert Curik, (b) Michael A. Steele is not the Chief
Executive Officer of the Company, or (c) that a take-over bid for IMSC results
in a single shareholder acquiring more than fifty percent of the issued and
outstanding shares of IMSC, minus (A) $6,000,000 and (B) an amount equal to the
greater of (i) the Adjusted EBITDA of 1005549 and DC Foods for the period from
and including December 7, 1998 to and including December 31, 1999, and (ii)
zero], divided by the current market price of one share of common stock of the
Company determined as at March 31, 2002 or December 31, 2002, or such earlier
date.
Class E Series 4 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined as follows:
the amount being 50% of [four times the Adjusted EBITDA of 1005549 and DC Foods
for the period ending March 31, 2002 or December 31, 2002 (such period to be
selected by the Series 4 shareholders in their absolute discretion) or an
earlier date at the election of the Series 4 shareholders in the event (a) of
the death, permanent disability or termination of employment, without cause, of
either Donald Kilimnik or Robert Curik, (b) Michael A. Steele is not the Chief
Executive Officer of the Company, or (c) that a take-over bid for IMSC results
in a single shareholder acquiring more than fifty percent of the issued and
outstanding shares of IMSC, minus (A) $6,000,000 and (B) an amount equal to the
greater of (i) the Adjusted EBITDA of 1005549 and DC Foods for the period from
and including December 7, 1998 to and including December 31, 1999,
34
<PAGE> 38
and (ii) zero], divided by the current market price of one share of common stock
of the Company determined as at March 31, 2002 or December 31, 2002, or such
earlier date.
The shareholders of the Class Series 3 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 3 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 3 share being exchanged for the number of shares of
common stock of the Company for which the Class E Series 3 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
The shareholders of the Class Series 4 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 4 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 4 share being exchanged for the number of shares of
common stock of the Company for which the Class E Series 4 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
CLASS E SERIES 5 AND 6 SHARES. IMSI has issued 250,000 shares of Class
E Series 5 shares and 250,000 shares of Class E Series 6 shares. Class E Series
5 and 6 shares are non-participating and non-voting except in respect of any
future modification or changes in the Class E Series 5 and 6 share
characteristics.
Class E Series 5 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined as follows:
the amount being four times the Adjusted EBITDA of Ultimate for the one (1) year
period ending April 30, 2000, less the net book value of Ultimate at that date,
divided by the current market price of one share of common stock of the Company
determined as at April 30, 2000.
Class E Series 6 shares are exchangeable into a number of shares of
common stock of the Company such number of shares to be determined as follows:
the amount being 25% of the aggregate of: (i) net sales in the calendar year
2002 of cookie dough or cookies by Ultimate and Tasty Selections; (ii) the
amount of net sales in the year 2002 of any products under the trademarks of or
licensed to Ultimate ; and (iii) the amount of net sales in the year 2002 in the
Province of Quebec of Tasty Selections products; and (iv) the amount of net
sales in the year 2002 in the Province of Quebec that Michael Eskenazi or any
employee under his direct control is involved in developing or promoting; minus
the amount being four times Adjusted EBITDA of Ultimate for the one (1) year
period ending April 30, 2000; divided by the current market price of one share
of common stock of the Company determined as at December 31, 2002.
The shareholders of the Class Series 5 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 5 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 5 share being exchanged for the number of shares of
common stock of the Company for which the Class E Series 5 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
The shareholders of the Class Series 6 shares are entitled to purchase
for nominal consideration a number of Class N shares equal to the number of
shares of common stock of the Company for which the Class E Series 6 shares may
be exchanged. In the event that the shareholders acquire the Class N shares,
then upon a Class E Series 6 share being exchanged for the number of shares of
common stock of the Company for whichthe Class E Series 6 share may be
exchanged, a number of Class N shares equal to such number of shares of common
stock of the Company shall be surrendered to the Company.
OPTIONS. IMSI granted options to James Guinchard, the President and
Director of Prime Foods, to purchase 40,000 Class X shares of IMSI, 16,000 of
which have vested. The options for the remaining 24,000 Class X shares will vest
at an option price of $US 0.625 ($CD 0.91), of which 8,000 of the optioned
shares shall vest on November 3, 2000, a further 8,000 of the optioned shares
shall vest on November 3, 2001, and the remaining 8,000 optioned shares shall
vest on November 3, 2002.
35
<PAGE> 39
CONVERTIBLE LOAN: On May 10 , 1999, IMSI and the Company entered into a
loan agreement with First Ontario Fund ("First Ontario") and Bank of Montreal
Capital Corporation ("BMOCC") with respect to a $4 Million financing. The
funding was advanced as to $1.5 Million by BMOCC and as to $2.5 Million by First
Ontario. The financing was secured by general security granted by each of IMSI
and the Company, a guarantee and general security agreement from each of IMSI's
subsidiaries, a mortgage of the premises owned by Prime at 620 Colby Drive,
Waterloo, Ontario, and a share pledge agreement executed by the Company pursuant
to which it pledged its common shares in the capital of IMSI to First Ontario
and BMOCC.
The terms of the loan are as follows: (a) the interest rate for the period
ending April 15, 2000 is 7% per annum and thereafter until maturity on April 15,
2003 is 13% per annum; (b) the outstanding debt is convertible, at the option of
the holder, into Class X shares of IMSI at a price of $2.62 per share; (c) the
holder has the right to acquire a number of Class N shares equal to the number
of Class X shares received; (d) IMSI has the option to force conversion into
Class X and N shares at any time after July 1, 1999 provided that (i) the
Company's common stock trades on a major North American stock exchange approved
by the lenders, (ii) the Company's common stock has a cumulative trading volume
during a twenty day period of the greater of (1) 300,000 shares of common stock,
or (2) five percent of the number of issued shares of common stock that are not
subject to any escrow agreement or resale restrictions set out in the Ontario
Securities Act, and (iii) the weighted average trading price during such twenty
day period is not less than the United States Dollar equivalent of $CD 5.50.
Concurrently with the completion of such financing, the Company granted 156,250
warrants to First Ontario and 93,750 warrants to BMOCC to acquire shares of the
common stock of the Company with each such warrant entitling the holder to
purchase one share of the common stock of the Company at the following prices:
the 93,750 warrants held by First Ontario and 56,250 warrants held by BMOCC are
exercisable at a purchase price of $2.24 and 62,500 warrants held by First
Ontario and 37,500 warrants held by BMOCC are exercisable at a purchase price of
$2.62.
SPECIAL WARRANTS. On October 22, 1999, Southbridge Equities Inc., a corporation
organized under the laws of the Province of Ontario, Canada ("Southbridge
Equities"), subscribed for 1,555,556 special warrants ("Special Warrants") of
IMSI, for an aggregate consideration of approximately US$4.7 million
(CDN$6,815,000). Each Special Warrant entitles Southbridge Equities, upon
exercise thereof without any further consideration, to receive one Class X share
(an "Exchangeable Share") of IMSI. Such Special Warrants are immediately
exercisable and any Special Warrant not exercised by October 22, 2000 (or
earlier under certain circumstances) will be deemed to have been exercised as of
such date. The Special Warrants are subject to customary anti-dilution
adjustment provisions. In addition, each Special Warrant will be exercisable for
(i) 1.1 Exchangeable Shares in the event that IMSI does not receive a receipt
for a (final) prospectus issued by the Ontario Securities Commission by August
5, 2000, and (ii) 1.2 Exchangeable Shares in the event that IMSI is not able to
obtain additional financing of least US$7 million by March 30, 2000 or certain
trading volume and price targets for the Company's common stock are not met.
Also, in the event that IMSI is not able to obtain such additional financing by
March 30, 2000, the Special Warrants will be deemed to be amended to change all
references to Exchangeable Shares to refer to the common stock of the Company.
These securities were sold in an offshore transaction in reliance on Regulation
S under the Securities Act of 1933, as amended. In connection with such
subscription, the Company and its subsidiary entered into additional agreements
with Southbridge Equities which, among other thing, address registration rights.
The proceeds have been used to fund previously announced acquisitions and
expansion plans. On January 1, 2000 the shares and option rights of Southbridge
Inc. and the Special Warrants of Southbridge Equities Inc. were subsequently
transferred to a related entity--Southbridge Investment Partnership No. 1. The
condition to be satisfied on or before March 30, 2000 was not satisfied, and
accordingly the 1,555,556 special warrants when exerscised will entitle the
holder to 1,866,667 shares of common stock of the Company.
LIQUIDATION RIGHTS OF IMSI SECURITIES. None of the securities of IMSI
have the right to participate in a liquidation or winding up of the Company.
However, the Class X, Class B shares, the Class C shares, the Class D shares,
and the Class E Series 1, 2, 3, 4, 5, and 6 shares are exchangeable for common
shares of the Company. In the event that the liquidation event occurs prior to
the determination of the number of shares of commons stock of the Company that
Class B shares, Class C shares, Class D shares and Class E shares may be
exchanged for, the share provisions provide for an exchange rate that is based
on an estimate of the anticipated exchange rate. Class X share holders of IMSI
are entitled to receive one share of the common stock of the Company for each
Class X share held
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<PAGE> 40
by such shareholder. Upon such conversion, the former holders of IMSI securities
shall have the same right to participate in a liquidation or winding up of the
Company as all the other holders of the Company's common stock.
REGISTRATION RIGHTS
The Company entered into registration rights agreements with each of
Southbridge Inc., Southbridge Equities Inc.(the rights to which were
subsequently transferred to Southbridge Partnership No. 1) and certain persons
that acquired securities of the Company or IMSI (or rights to receive such
securities) in connection with the Company's acquisition of each of Huxtable's
Foods L.L.C., The Ultimate Cookie Co. Inc., D.C. Foods and Transcontinental. The
Loan Agreement with First Ontario and BMOCC entered into in April, 1999 includes
an obligation with respect to the registration of the shares of common stock of
the Company which would be available upon conversion of the loan or exercise of
related warrants. The Company was obligated to effect the registration of the
securities of certain of these registration rights holders under the Securities
Act of 1933, as amended, in the first instance at the Company's expense, subject
to conditions and limitations which apply in certain circumstances. The Company
has agreed with these shareholders to file a shelf registration statement by
August 31, 2000. Pursuant to the various registration rights agreements, if the
Company proposes to register shares of common stock under the Securities Act of
1933, as amended, these holders are entitled to notice of such registration and
are entitled to include their shares of common stock of the Company in the
registration, subject to conditions and limitations. The total number of shares
covered by these registration rights agreements cannot be finally determined
because such number is contingent on the future financial performance of certain
subsidiaries of the Company and other contingencies not currently knowable by
the Company. The Company may also elect to permit other holders of shares or
options to include their shares in the registration statement expected to be
filed by August 31, 2000.
RIGHT OF FIRST REFUSAL
In connection with the acquisitions of each of Transcontinental, Tasty
Selections, 1005549 and Ultimate, we have acquired a first right of refusal with
respect to the sale of shares of IMSI and the Company by the parties receiving
such shares as part of the consideration provided in the relevant share or asset
purchase agreement.
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<PAGE> 41
PART II
ITEM 1. MARKET PRICE OF COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Since July 20, 1998, the common stock of the Company has been traded
under the symbol "MENU" on the system of the National Association of Securities
Dealers, Inc. known as the OTC Bulletin Board (the "Bulletin Board"). Prior to
the amalgamation of IMSI with and into the Company, our common stock was traded
under the symbol "ANMH."
To the best of our knowledge, there are presently five market-makers
for our common stock. When stock is traded in the public market, characteristics
of depth, liquidity and orderliness of the market being made in the stock
depends on the existence of market-makers as well as the presence of willing
buyers and sellers. There can be no assurance that these market-makers will
continue to make a market for our common stock.
The principal market for our common stock is the Bulletin Board. The
range of high and low bids to purchase our common stock on the Bulletin Board
for the last seven quarters are as follows:
<TABLE>
<CAPTION>
Quarter Low Bid - US$ High Bid - US$
------- ------------- --------------
<S> <C> <C>
1998 (3rd Quarter) $11/16 $1 1/3
1998 (4th Quarter) $7/8 $1 5/8
1999 (1st Quarter) $1 3/16 $2 21/64
1999 (2nd Quarter) $1 51/64 $3 5/16
1999 (3rd Quarter) $2 3/4 $4
1999 (4th Quarter) $2 3/16 $3 17/64
2000 (1st Quarter) 1 3/4 3 1/64
</TABLE>
The closing price of the Common Stock on the Bulletin Board was US$2.50
on March 31, 2000 and $1.562 on June 15, 2000. The total number of issued and
outstanding shares of common stock of the Company that can be traded on the
Bulletin Board was 3,997,538 at March 31, 2000. There were approximately 102
record holders of the Company's common stock.
The Company has never paid cash dividends on its stock and does not
intend to do so for the foreseeable future. We currently intend to retain our
earnings for the operation and expansion of our business. Our continued need to
retain earnings for operations and expansion is likely to limit our ability to
pay dividends in the future.
ITEM 2. LEGAL PROCEEDINGS
Each of the Company and its wholly owned subsidiaries experiences
routine litigation in the normal conduct of its business. Neither the Company
nor its subsidiaries believes that any such pending litigation, will have,
individually or in the aggregate, a material adverse effect on their business or
financial condition.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements with our independent accountants over
any item involving the Company's financial statements. Our independent
accountants are Deloitte & Touche LLP, 55 King Street West, Suite 700,
Kitchener, Ontario N2G 4W1.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On December 31, 1999, certain option holders exercised options covering
227,698 shares of common stock of the Company at a per share exercise price of
US$1.00 (CDN$1.44), resulting in US$227,698 (CDN$330,162) being put into
treasury of the Company for general corporate purposes. These securities were
issued in an offshore transaction in reliance on Regulation S under the
Securities Act of 1933, as amended (the "Securities Act").
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<PAGE> 42
During the year ended December 31, 1999, certain shareholders exchanged a total
of 1,468,750 Class X shares of IMSI (and 1,468,750 Class N shares of the
Company) for the same number of shares of common stock of the Company. Other
than the surrender of such shares, there was no consideration accruing to the
Company for this share exchange.
On October 22, 1999, certain option holders exercised options covering
172,302 shares of common stock of the Company at a per share exercise price of
US$1.00 (CDN$1.46), resulting in US$172,302 (CDN$249,838) being put into
treasury of the Company for general corporate purposes. These securities were
issued in an offshore transaction in reliance on Regulation S under the
Securities Act of 1933, as amended (the "Securities Act").
In August, 1999 the Company sold 200,000 shares of common stock of the
Company at a price of US$3.00 (CDN$4.35) per share for total consideration of
the sale were US$558,000 ($CDN809,000) net of commissions an offering costs.
These securities were issued in an offshore transaction in reliance on
Regulation S of the Securities Act.
In May 1999, the Company issued shares of common stock of the Company
pursuant to the redemption of warrants on a November 1998, private placement of
units consisting of one shares of common stock and 1/2 redeemable stock
purchase warrant, pursuant to Regulation S of the Securities Act. Each warrant
entitled the registered holder to purchase one share of common stock of the
Company at US$1.40 per share. The company sold 998,650 shares for a total cash
consideration of $US1,384,110 (CDN$2,006,959).
On April 16, 1999 Southbridge Inc. subscribed for 1,523,810 shares of
common stock of the Company at a subscription price of $2.625 per common share,
pursuant to Regulation S of the Securities Act. As part of the subscription the
Company granted to Southbridge 400,000 warrants which entitle Southbridge to
purchase up to 200,000 shares of common stock at the price of $2.25 per share of
common stock of the Companyduring the period to April 16, 2000 and 200,000
shares of common stock of the Company at the price of $2.625 per share during
the period to April 16, 2001.
In November 1998, the Company offered 3,300,000 private placement units
consisting of 3,300,000 shares of common stock of the Company and 1,650,000
redeemable stock purchase warrants, pursuant to Regulation S of the Securities
Act. Each warrant entitles the registered holder to purchase one share of common
stock of the Company at US$1.40 per share. The Company sold 1,997,300 units for
US$0.90 each to ten investors for a total cash consideration of $US 1,666,124
(CDN$2,415,880)net of commission and offering costs. The units were issued as
follows:
<TABLE>
<CAPTION>
Purchaser Date of Purchase Shares of Common Stock
--------- ---------------- ----------------------
<S> <C> <C>
Christopher Smith 11/23/98 157,000
Larry Hoffman 11/23/98 110,000
Victor Fradkin 11/23/98 220,000
Thinomen Gronberg and William Gronberg 11/23/98 110,000
Dover IX Investments, Ltd. 11/23/98 575,300
Mario Girorgio in Trust 11/23/98 220,000
Canadian Food Fund Corp. 11/23/98 165,000
Bull International, Ltd. 11/23/98 110,000
Mark Johnson Holdings, Inc. 11/23/98 110,000
Britwirth Investments, Ltd. 11/23/98 220,000
</TABLE>
ALL SHARE ISSUANCES DESCRIBED IN THE FOLLOWING PARAGRAPHS WERE ISSUED BY THE
COMPANY, WHEN IT WAS KNOWN AS ANM HOLDING CORPORATION, PRIOR TO THE AMALGAMATION
DESCRIBED IN "DESCRIPTION OF BUSINESS".
39
<PAGE> 43
In July 1998, the Company issued a total of 1,400,000 shares of common
stock of the Company, pursuant to Rule 504 of Regulation D of the Securities
Act. All 1,400,000 shares were sold to six investors for a total cash
consideration of $US 925,000 ($CD1,341,250) net of commission and offering
costs. The shares were issued as follows:
<TABLE>
<CAPTION>
Purchaser Date of Purchase Shares of Common Stock
--------- ---------------- ----------------------
<S> <C> <C>
Tinamilu Holdings, Inc. 7/6/98 233,333
Brockton International 7/6/98 233,333
Wifsta Limited 7/6/98 233,333
Deevale Limited 7/6/98 233,333
Dover IX Investment Limited 7/6/98 233,335
IPO International, Ltd. 7/6/98 233,333
</TABLE>
In April 1998, we issued 400,000 shares of our common stock, pursuant
to Rule 504 of Regulation D of the Securities Act. All 400,000 shares were sold
to three investors for a total cash consideration of US$4,000 (CDN$5,800) net of
commission and offering costs. The shares were issued as follows:
<TABLE>
<CAPTION>
Purchaser Date of Purchase Shares of Common Stock
--------- ---------------- ----------------------
<S> <C> <C>
Tiger-Eye Investments (Cayman) Ltd. 4/9/98 150,000
Llewellyn Capital Trust Foundation 4/9/98 150,000
Luserna Stiftung 4/9/98 100,000
</TABLE>
In November 1997, the Company issued a total of 28,000 shares of common
stock of the Company, pursuant to Rule 504 of Regulation D of the Securities
Act. All 28,000 shares were sold to twenty-eight investors for a total cash
consideration of US$1,400 (CDN$2,030) net of commission and offering costs. The
shares were issued as follows:
<TABLE>
<CAPTION>
Purchaser Date of Purchase Shares of Common Stock
--------- ---------------- ----------------------
<S> <C> <C>
Earle Lewis 11/1/97 1,000
Pam Lewis 11/1/97 1,000
Melanie Lewis 11/1/97 1,000
Sherrye Sailes 11/1/97 1,000
Sheyne Almond 11/1/97 1,000
Sheyanne Almond 11/1/97 1,000
Rheece Metcalfe 11/1/97 1,000
Raelyn Metcalfe 11/1/97 1,000
Cathryn Newman 11/1/97 1,000
Gary Newman 11/1/97 1,000
Mitchell Newman 11/1/97 1,000
Nicholas Newman 11/1/97 1,000
Philip Fox 11/1/97 1,000
Carole Fox 11/1/97 1,000
David Shaw 11/1/97 1,000
Mary-Margaret Mackinnon 11/1/97 1,000
Thomas Shaw 11/1/97 1,000
Sandy Michie 11/1/97 1,000
Pat Michie 11/1/97 1,000
Dene Knight 11/1/97 1,000
Lorraine Knight 11/1/97 1,000
Doug Knight 11/1/97 1,000
Kathy Knight 11/1/97 1,000
Darcy Knight 11/1/97 1,000
</TABLE>
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<PAGE> 44
<TABLE>
<S> <C> <C>
Tyler Knight 11/1/97 1,000
Bill Roberts 11/1/97 1,000
Doug Harrington 11/1/97 1,000
Ed Smith 11/1/97 1,000
</TABLE>
In October 1997, the Company issued a total of 1,250,000 shares of
common stock of the Company, pursuant to Rule 504 of Regulation D of the
Securities Act. All 1,250,000 shares were sold to seven investors for a total
cash consideration of US$12,500 (CDN$18,125) net of commission and offering
costs. The shares were issued as follows:
<TABLE>
<CAPTION>
Purchaser Date of Purchase Shares of Common Stock
--------- ---------------- ----------------------
<S> <C> <C>
International Treasury & Investments 10/21/97 220,000
International Commerce Clearing Corporation 10/21/97 220,000
Norton International Holdings, Ltd. 10/21/97 220,000
Tiger Eye Investments (Cayman), Ltd. 10/21/97 220,000
Llewellyn Capital Trust Foundation 10/21/97 220,000
Knight Family Trust 10/21/97 40,000
Michie Family Trust 10/21/97 110,000
</TABLE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada General Corporation Law ("NGL"), permits a corporation to
indemnify any person who is, was, or is threatened to be made a party to any
action, suit or proceeding, whether civil, criminal, administrative, or
investigative, by reason of the fact that he or she is or was an officer,
director, employee, or agent of the corporation, against such person's costs and
expenses incurred in connection with such action, suit or proceeding so long as
he or she acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
in the case of a criminal action, he or she had no reasonable cause to believe
that his or her conduct was unlawful. Furthermore, the NGL requires the
corporation to indemnify any such person who is successful on the merits or in
the defense of such action, suit or proceeding against costs and expenses
actually and reasonably incurred in connection with such action, suit or
proceeding. The Company's By-laws provide for the indemnification of its
officers and directors to the fullest extent permitted by the NGL. In addition,
the Company's Articles of Incorporation provide that no director or officer of
the Company shall be personally liable to the Company or its stockholders for
damages for breach of fiduciary duty as a director or officer involving any act
or omission of any such director or officer, except for acts or omissions that
involve intentional misconduct, fraud, a knowing violation of law or the payment
of an improper dividend.
The NGL permits a corporation to maintain insurance on behalf of its
directors, officers, employees, and agents for liability asserted against, and
expenses incurred by, such persons, whether or not the corporation has the
authority to indemnify him or her against such liability and expenses. However,
because such liability insurance is only available at considerable cost and with
low dollar limits of coverage and broad policy exclusions, we do not currently
maintain a liability insurance policy for the benefit of our directors, although
we are presently seeking to secure such insurance. Also, due to the lack of such
directors liability insurance, we may be forced to bear a portion or all of the
cost of the director's claims for indemnification under the above-described
provisions, which could have a material adverse effect on our financial
condition.
PART F/S
ITEM 1. FINANCIAL STATEMENTS
For information regarding this item, reference is made to the "Index of
Financial Statements."
41
<PAGE> 45
PART III
ITEM 1. INDEX TO EXHIBITS
2.0* Share Purchase Agreement between 1218951 Ontario Limited and Prime
Foods, dated October 9, 1998.
2.1* Share Purchase Agreement by and among Victor Fradkin, Rhys Quin,
Lauderdale Capital Corp., Larry Hoffman, IMSI and the Company, dated
November 30, 1998.
2.2* Share Purchase Agreement by and among Alrae Investments Inc., Katherine
Kan, Roynat Inc., IMSI and the Company, dated April 15, 1999.
2.3* Exchange Agreement and Shareholder Loan Purchase Agreement between
Sania Shechtman and IMSI, dated April 19, 1999.
2.4* Exchange Agreement and Shareholder Loan Purchase Agreement between
1276396 Ontario Ltd. and IMSI, dated April 28, 1999.
2.5* Share Purchase Agreement by and among Donald Kilimnik, Deborah
Kilimnik, Robert Curik, Anjela Curik, IMSI and the Company dated May
10, 1999.
2.6* Exchange Agreement by and among Elililco Ltd., David Arosh, Margaret
Arosh, IMSI and the Company, dated May 17, 1999.
2.7+ Share Purchase Agreement by and among Michael Eskenazi, Gina Eskenazi,
Felix and Norton International Inc. and IMSI and the Company, dated
October 18, 1999.
2.8+ Asset Purchase Agreement by and among International Menu Solutions
USA, Inc., the Company and Huxtable's Foods, L.L.C., dated November 12,
1999, is incorporated herein by reference to Exhibit 2.1 to the Current
Report on Form 8-K of the Company dated November 26, 1999.
3.0* Articles of Incorporation of the Company.
3.1* Certificate of Amendment of Certificate of Incorporation of the
Company, dated July 15, 1998.
3.2* Certificate of Amendment of Certificate of Incorporation of IMSI
defining the rights of security holders, dated May 7, 1999.
3.3* Certificate of Amendment of Certificate of Incorporation of
International Menu defining the rights of security holders, dated May
10, 1999.
3.4* By-laws of the Company.
6.0+ Indenture between 1249462 Ontario Limited and IMSI, dated March 1,
1999.
6.1+ Standard Industrial Lease between Rreef West-VI, Inc. and Huxtable's
Combustibles, Inc., dated August 16, 1994.
6.2+ Lease Amending Agreement between 1117423 Ontario Limited and 1218951
Ontario Limited, dated October 8, 1998.
6.3+ Lease by and among Raffaele Cerundolo and Tony Taurasi T&R Construction
and Management Inc. and Transcontinental Gourmet Foods Inc., dated May
25, 1999.
42
<PAGE> 46
6.4+ Indenture by and among 1249462 Ontario Limited, Tasty Selections Inc.
and IMSI, dated June 15, 1999.
6.5+ Commitment Letter by and among The Bank of Nova Scotia, IMSI, Prime
Foods Processing, Inc., 1188908 Ontario, Inc. and D.C. Foods
Processing, Inc., dated April 16, 1999
10.0* Employment Agreement between the Company and Michael Steele, dated
August 1, 1998.
10.1+ Employment Agreement between Larry Hoffman and IMSI, dated December 1,
1998.
10.2* Agency Agreement between Robert Caldwell Capital Corporation and IMSI,
dated April 10, 1999.
10.3 Loan Agreement between International Menu Solutions Corporation,
International Menu Solutions Inc., Soutbridge Investment Partnership
No. 1, First Ontario Labour Sponsoured Investment Fund Ltd., and Bank
of Montreal Capital Corporation dated May 26, 2000.
21.0+ Subsidiaries of the Company:
* Exhibits were filed in the Company's 10SB-A filed July 16, 1999 and are
incorporated herein by reference thereto.
+ Exhibits were filed in the Company's 10SB-A2 filed January 19,2000 and are
incorporated herein by reference thereto.
43
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
The following documents are filed as part of this Registration Statement.
INTERNATIONAL MENU SOLUTIONS CORPORATION
ANNUAL FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditors' report. F-1
Audited consolidated balance sheets as of December 31, 1998 and 1997 F-2
Audited consolidated statements of operations for the year ended December 31, F-3
1998 and for the period from September 26, 1997 to December 31, 1997
Audited consolidated statement of stockholders' equity for the period from F-4
September 26, 1997 to December 31, 1998
Audited consolidated statements of cash flows for the year ended December 31, F-5
1998 and for the period from September 26, 1997 to December 31, 1997
Notes to consolidated financial statements. F-6 to F-25
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited consolidated balance sheets as of September 30, 1999 F-26
Unaudited consolidated statements of operations for the nine month period ended F-27
September 30, 1999 and 1998
Unaudited consolidated statements of cash flow for the nine month periods ended F-28
September 30, 1999 and 1998
Notes to unaudited consolidated financial statements F-29 to F-34
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF INTERNATIONAL MENU SOLUTIONS
CORPORATION
Unaudited pro forma consolidated balance sheet as of September 30, F-35
1999
Unaudited pro forma consolidated statement of operations for the nine F-36
months ended September 30, 1999
Unaudited pro forma consolidated statement of operations for the nine months F-37
ended September 30, 1998
Unaudited pro forma statement of operations for the year ended December 31, 1998. F-38
Footnotes to unaudited pro forma consolidated financial statements. F-39 to F-45
TRANSCONTINENTAL GOURMET FOODS INC.
Auditors' report. +
</TABLE>
44
<PAGE> 48
<TABLE>
<S> <C>
Audited balance sheets as at February 28, 1998 and 1997 and unaudited balance +
sheet as at November 30, 1998.
Audited statement of retained earnings for the years ended February 28, 1998 and +
1997 and unaudited statement of retained earnings for the nine month period
ended November 30, 1999
Audited statements of income for the years ended February 28, 1998 and 1997 and +
unaudited statement of income for the nine months ended November 30, 1998.
Audited statements of cash flow for the years ended February 28, 1998 and 1997 +
and unaudited statement of cash flow for the nine months ended November 30,
1998.
Notes to financial statements. +
1188980 ONTARIO LTD. (Operating as Tasty Batters) (the predecessor company to
Tasty Selections Inc.)
Auditors' report. +
Audited balance sheet as of June 30, 1998 and unaudited balance sheet as of March +
31, 1999.
Audited statement of income and retained earnings for the year ended June 30, +
1998 and unaudited statement of income and retained earnings for the nine months
ended March 31, 1999.
Audited statement of cash flow for the year ended June 30, 1998 and unaudited +
statement of cash flow for the nine months ended March 31, 1999.
Notes to financial statements. +
1005549 ONTARIO LIMITED (100% owner of D.C. Foods Processing Inc.)
Report of Independent Auditors. +
Audited consolidated balance sheets as of December 6, 1998 and December 7, 1997. +
Audited consolidated statements of earnings for the years ended December 6, 1998 +
and December 7, 1997.
Audited consolidated statements of stockholders' equity for the years ended +
December 6, 1998 and December 7, 1997.
Audited consolidated statements of cash flows for the years ended December 6, +
1998 and December 7, 1997.
Notes to consolidated financial statements. +
UNAUDITED INTERIM FINANCIAL STATEMENTS
</TABLE>
45
<PAGE> 49
<TABLE>
<S> <C>
Unaudited consolidated balance sheets as of March 7, 1999 and March 8, 1998 *
Unaudited consolidated statements of cash flow for the three month periods ended *
March 7, 1999 and March 8, 1998
Notes to unaudited consolidated financial statements *
HUXTABLE'S FOODS L.L.C.
Independent auditors' reports. +
Audited balance sheet as of December 31, 1998 +
Audited statements of operations for the year ended December 31, 1998 and 1997 +
Audited statement of members' capital for years ended December 31, 1998 and 1997 +
Audited statements of cash flows for the years ended December 31, 1998 and 1997 +
Notes to consolidated financial statements +
</TABLE>
+ Exhibits were filed in the Company's 10SB-A2 filed January 19,2000 and are
incorporated herein by reference thereto.
46
<PAGE> 50
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this Amendment No. 3 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date:
INTERNATIONAL MENU SOLUTIONS CORPORATION
By: /s/ Michael Steele,
----------------------------------------
President
47
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Stockholders of International Menu Solutions Corporation
We have audited the accompanying consolidated balance sheets of International
Menu Solutions Corporation and subsidiaries as of December 31, 1998 and December
31, 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows .for the year ended December 31, 1998 and for the period
from the date of incorporation, September 26, 1997 to December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about 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. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of International Menu Solutions
Corporation and subsidiaries as of December 31, 1998 and December 31, 1997 and
the results of their operations and their cash flows the for year ended December
31, 1998 and for the period from the date of incorporation, September 26, 1997
to December 31, 1997 in conformity with accounting principles generally accepted
accounting principles in the United States.
The financial statements for the year ended December 31, 1998 have been restated
as described in Note 2b).
DELOITTE & TOUCHE LLP
Chartered Accountants
Kitchener, Ontario
March 25, 1999, except as to
Note 19m) which is as
of October 20, 1999
F-1
<PAGE> 52
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
----------- -----------
Restated
(Note 2b)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,865,612 $ 299,274
Accounts receivable 2,270,251 269,466
Inventories 1,299,890 236,434
Prepaid expenses 100,633 16,766
------------------------------------------------------------------------------------------------------------------------------------
5,536,386 821,940
CAPITAL ASSETS, NET 3,617,196 905,475
INTANGIBLE ASSETS, NET 787,395 339,365
------------------------------------------------------------------------------------------------------------------------------------
$ 9,940,977 $ 2,066,780
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness $ 1,100,849 $ 40,000
Accounts payable 2,072,485 512,386
Accrued liabilities 477,940 53,220
Current portion of capital lease obligation 94,486 --
Current portion of long-term debt 279,044 31,600
------------------------------------------------------------------------------------------------------------------------------------
4,024,804 637,206
CAPITAL LEASE OBLIGATION 297,387 --
LONG-TERM DEBT 1,250,303 518,400
DEFERRED INCOME TAXES 93,000 --
------------------------------------------------------------------------------------------------------------------------------------
6,125,494 1,155,606
------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class A preferred stock - no par value; unlimited shares
authorized; 700,000 and Nil shares issued -- 280,320
Class N voting, non-participating stock - US$0.001 par value; 10,000,000
shares authorized; 3,190,462 and 4,000,000
shares issued 4,586 5,800
Common stock - US$0.001 par value; 25,000,000 shares
authorized; 5,884,838 and 1,678,000 shares issued 8,164 1,854
Additional paid-in capital 4,871,951 664,997
Deficit (609,218) (41,797)
------------------------------------------------------------------------------------------------------------------------------------
4,275,483 911,174
------------------------------------------------------------------------------------------------------------------------------------
$ 9,940,977 $ 2,066,780
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 53
INTERNATIONAL MENU SOLUTIONS CORPORATION
Consolidated Statements of Operations
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Period from
incorporation,
Year ended September 26,
December 31, 1997 to
1998 December 31, 1997
------------ -----------------
Restated
(Note 2b)
<S> <C> <C>
REVENUE $ 6,096,048 $ 442,493
------------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 4,729,806 365,385
Selling expenses 610,033 12,516
Research and development 425,542 5,663
Administrative expenses 765,089 92,143
Amortization of intangibles 47,148 5,728
------------------------------------------------------------------------------------------------------------------------------------
6,597,943 481,435
------------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (481,570) (38,942)
------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest revenue 24,763 1,268
Interest expense (98,066) (4,123)
------------------------------------------------------------------------------------------------------------------------------------
(73,303) (2,855)
------------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (554,873 (41,797)
INCOME TAXES -- --
------------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (554,873) $ (41,797)
------------------------------------------------------------------------------------------------------------------------------------
LOSS PER SHARE - BASIC AND DILUTED $ (0.09) $ (0.01)
------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 6,419,141 5,278,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 54
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Class A
Preferred Class N
Shares Amount Shares Amount
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balances, September 26, 1997 -- $ -- -- $ --
Issuance of common shares
Issuance of Class A
preferred shares 700,000 280,320
Effect of reverse acquisition 4,000,000 5,800
Net loss
------------------------------------------------------------------------------------------------
Balances, December 31, 1997 700,000 280,320 4,000,000 5,800
Issuance of common shares
Fair value of brokers'
options
Redemption of Class A
preferred shares (700,000) (280,320)
Share exchange (809,538) (1,214)
Net loss
------------------------------------------------------------------------------------------------
Balances, December 31, 1998
(restated; see Note 2b) $ -- $ -- 3,190,462 $ 4,586
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Additional Total
Common Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
--------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances, September 26, 1997 -- $ -- $ -- $ -- --
Issuance of common shares 4,000,000 672,651 672,651
Issuance of Class A
preferred shares 280,320
Effect of reverse acquisition (2,322,000) (670,797) 664,997 --
Net loss (41,797) (41,797)
--------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 1,678,000 1,854 664,997 (41,797) 911,174
Issuance of common shares 3,397,300 5,096 4,206,954 4,212,050
Fair value of brokers'
options (1,058,300) (1,058,300)
1,058,300 1,058,300
Redemption of Class A
preferred shares (12,548) (292,868)
Share exchange 809,538 1,214 --
Net loss (554,873) (554,873)
--------------------------------------------------------------------------------------------------------
Balances, December 31, 1998
(restated; see Note 2b) 5,884,838 $ 8,164 $ 4,871,951 $ (609,218) $ 4,275,483
--------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 55
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Period from
incorporation,
Year ended September 26, 1997
December 31, to December 31,
1998 1997
------------ ------------------
Restated
(Note 2b)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (554,873) $ (41,797)
Item not requiring cash
Depreciation and amortization 143,621 17,144
Changes in operating assets and liabilities
Accounts receivable (489,189) (75,067)
Inventories 408,787 (33,406)
Prepaid expenses (21,271) (4,216)
Accounts payable 7,568 80,026
Accrued liabilities -- 50,051
------------------------------------------------------------------------------------------------------------------------------------
(505,357) (7,265)
------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (216,397) (16,835)
Additions to intangible assets (14,332) (4,050)
Acquisitions, net of cash acquired in 1997 - $2,514; including
bank indebtedness assumed in 1998 - $1,126,779 (2,671,529) (665,547)
------------------------------------------------------------------------------------------------------------------------------------
(2,902,258) (686,432)
------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of shares 4,212,050 952,971
Bank loans 1,202,348 40,000
Payment of long-term debt and capital lease principal (147,577) --
Redemption of Class A preferred stock (292,868) --
------------------------------------------------------------------------------------------------------------------------------------
4,973,953 992,971
------------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,566,338 299,274
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 299,274 --
------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,865,612 $ 299,274
------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 98,066 $ 4,123
------------------------------------------------------------------------------------------------------------------------------------
Cash paid during the period for income taxes $ -- $ --
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 56
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
1 DESCRIPTION OF BUSINESS
The Company develops, markets and produces a series of specialty food
products for sale to large food retailer chains and specialty food
retailers.
2 SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States, the most
significant of which are as follows:
a) Basis of presentation
The consolidated financial statements include the accounts of the
International Menu Solutions Corporation (a Nevada corporation) (the
"Company" or "IMSC") and its wholly owned operating subsidiaries,
International Menu Solutions Inc. ("IMSI"), Prime Foods Processing Inc.
("PFPI"), Transcontinental Gourmet Foods Inc. ("TGF"), and Norbakco
Ltd. ("Norbakco") which is 59% owned by IMSI, (all are Ontario
corporations).
On July 16, 1998, the Company (which at the time was named ANM Holdings
Corporation, a Nevada Corporation ("ANM")) acquired all of the
outstanding common stock of IMSI. This transaction was treated as a
reverse acquisition of ANM as the former shareholders of the IMSI
retained the majority voting interest of the combined entity.
Accordingly, IMSI is deemed to be the accounting acquirer, whereby the
financial statements represent those of the IMSI and not the legal
acquirer, ANM. The historical financial statements are those of IMSI.
The entity's outstanding capital stock represents the historical
capital stock of ANM and the stock issued in the reverse acquisition.
b) Accounting for exchangeable shares issued by subsidiary
In connection with the acquisition of TGF/Norbakco (see Note 3), the
Corporation accounted for the issuance of exchangeable shares in
connection with acquisitions (see Note 11 - Exchangeable shares of
IMSI) by having an independent valuation performed and including the
value of the shares in the purchase price as of the acquisition date.
This method of accounting resulted in recognition of substantially all
of the purchase price (and related intangible assets) being recognized
at the date of acquisition and the presentation of the exchangeable
shares as minority interest on the consolidated balance sheet of the
Corporation. However, this method of accounting of the shares was
challenged by the staff of the Securities and Exchange Commission
("SEC") in connection with the Corporation's filings on Form 10-SB. In
the opinion of the staff of the SEC, the underlying nature of the
shares was that of contingent consideration since the shares are
exchangeable into common shares of the parent based on future earnings
of the business acquired. Consequently, the Company has restated the
consolidated balance sheet, statement of operations and stockholders'
equity for the year ended December 31, 1998 and used the principles of
contingent consideration accounting for such acquisitions as prescribed
by paragraphs 79 to 80 of APB No. 16, "Business Combinations".
F-6
<PAGE> 57
The effect of applying contingent consideration accounting was as
follows:
Effect on reported net loss for the year ended December 31, 1998:
<TABLE>
<S> <C> <C>
Net loss as previously reported: $ (549,198)
Reduction of amortization charges related to decreased
goodwill recorded at acquisition date
20,325
Non recognition of minority interest (26,000)
-------
Net effect of restatement on net loss and accumulated deficit (5,675)
--------------
Net loss as restated $ (554,873)
--------------
</TABLE>
Effect on selected reported balance sheet items as of December 31,
1998:
<TABLE>
<CAPTION>
Previously As
Reported Restated
------------ ------------
<S> <C> <C>
Intangible assets $ 4,627,070 $ 787,395
Total assets 13,780,652 9,940,977
Accrued liabilities 937,940 477,940
Minority interest 3,374,000 --
Accumulated deficit (603,543) (609,218)
Total liabilities and equity $ 13,780,652 $ 9,940,977
</TABLE>
c) Foreign currency translation
i ) Translation of foreign subsidiaries' accounts
Assets and liabilities of the Company's foreign subsidiaries are
translated from their local currencies to the functional currency
at the exchange rate in effect at the balance sheet date.
Revenues and expenses are translated at the average exchange rate
prevailing during the year. The adjustments resulting from
translating the financial statements foreign subsidiaries are
recorded in comprehensive income in a separate component of
equity. The Company's functional and reporting currency is the
Canadian dollar. Consequently, no adjustments have arisen from
the translation of foreign subsidiaries accounts because all
foreign subsidiaries currently use the Canadian dollar as their
functional currency.
ii) Translation of foreign currency transactions
Transactions incurred in currencies other than the functional
currency are converted to the functional currency at the
transaction date. Monetary assets and liabilities denominated in
a currency other than the functional currency are converted to
the functional currency at the exchange rate in effect at each
period end. All foreign currency transaction translation gains or
losses have been included in earnings.
d) Revenue recognition
Revenue is recognized upon shipment of goods to customers net of
allowances for expected returns for fresh-food deliveries.
F-7
<PAGE> 58
e) Inventory
Inventory is valued at the lower of cost and net realizable value with
cost being determined on a first-in, first-out basis.
f) Capital assets
Capital assets are recorded at cost. Depreciation is provided at the
following rates:
Building 20 years straight-line
Plant equipment 5 to 10 years straight-line
Leasehold improvements Straight line over the lease term,
typically five years
Office equipment 20% declining-balance
Computer equipment 30% declining-balance
g) Intangible assets
Intangible assets are recorded at cost and represent packaging artwork
and goodwill. Amortization periods are as follows:
Packaging artwork 3 to 5 years straight-line
Goodwill 20 to 40 years straight-line
h) Asset impairment
The Company reviews the carrying value of intangible and other
long-lived assets on a periodic basis for evidence of impairment. An
impairment loss is recognized when the estimate of undiscounted future
cash flows generated by such assets is less than the carrying amount.
Measurement of the impairment loss is based on the present value of the
expected future cash flows.
i) Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the determination of deferred tax
assets and liabilities based on the differences between the financial
statement and income tax bases of tax assets and liabilities, using
enacted tax rates in effect for the year in which the differences are
expected to reverse. The measurement of a deferred tax asset is
adjusted by a valuation allowance, if necessary, to recognize tax
benefits only to the extent that, based on available evidence, it is
more likely than not that they will be realized.
j) Cash and cash equivalents
Investments in highly liquid debt instruments with original maturities of
90 days or less are designated as cash and cash equivalents.
F-8
<PAGE> 59
k) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reported periods. Actual results could
differ materially from those estimates and assumptions.
l) Recently issued accounting pronouncements
In February, 1997, the Financial Accounting Standards Board ("FASB") in
the United States issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", which has been adopted by the
Company. Upon the adoption of SFAS No. 128, the Company is presenting
basic earnings per share and diluted earnings per share. Basic earnings
per share is computed by dividing the net earnings available to common
shareholders by the weighted average number of common shares
outstanding for the year. Diluted earnings per share is derived by
adjusting the basic earnings per share calculation to reflect the
effect of securities with dilutive potential. The computation of
diluted earnings per share does not include securities with dilutive
potential that would have an anti-dilutive effect on earnings per
share.
In June 1997, the Financial Accounting Standards Board ("FASB") in the
United States issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and presentation of
comprehensive income and its components. The Company's adoption of SFAS
No. 130 had no material effect on the consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting and identification of operating segments
and requires certain financial and descriptive information regarding
those segments. The Company operates in one business segment and
consequently the adoption of SFAS No. 131 had no material effect on the
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards
for the reporting and accounting for derivative instruments. Presently,
the Company currently does not use derivative instruments or conduct
hedging activities. Management is in the process of determining the
impact on the consolidated financial statements.
F-9
<PAGE> 60
3. ACQUISITIONS
YEAR ENDED DECEMBER 31, 1998
DURING THE YEAR ENDED DECEMBER 31, 1998, THE CORPORATION ACQUIRED THE
BUSINESSES, SET OUT IN THE TABLE BELOW, WHICH HAVE BEEN ACCOUNTED FOR
USING THE PURCHASE METHOD (IN THOUSANDS):
<TABLE>
<CAPTION>
Pasta Kitchen (1) TGF/Norbakco (2)
----------------- -----------------
<S> <C> <C>
Acquisition date October 9, 1998 December 1, 1998
Purchase price including acquisition costs $ 395 $ 1,100
Assigned to fair values of net assets acquired:
Current assets 105 2,922
Capital assets 200 2,223
Current liabilities (146) (2,958)
Long-term liabilities -- (1,199)
------------------------------------------------------------------------------------------------------------------------------------
159 988
------------------------------------------------------------------------------------------------------------------------------------
Goodwill $ 236 $ 122
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE CORPORATION ACQUIRED THE ASSETS OF PASTA KITCHEN FOR CASH
CONSIDERATION OF APPROXIMATELY $375,000. ADDITIONAL
CONSIDERATION, ESTIMATED AT $340,000 AT THE DATE OF THE
ACQUISITION, WAS PAYABLE, AT THE OPTION OF THE CORPORATION, IN
CASH OR COMMON SHARES DURING 1999 BASED ON THE ACHIEVEMENT OF
CERTAIN REVENUE TARGETS. THE ADDITIONAL CONSIDERATION WILL BE
RECORDED AS ADDITIONAL PURCHASE PRICE (GOODWILL) WHEN THE
CONTINGENCY IS RESOLVED.
(2) The Corporation acquired all of the outstanding shares of TGF and
59% of the outstanding shares of Norbakco Ltd., a sister
corporation of TGF. Cash of $1,000,000 was paid to the vendors on
closing. An additional cash payment of $600,000, estimated at the
date of acquisition, is payable during 1999 based on the net book
value of TGF in excess of $1,000,000 as of February 28, 1999. The
balance of the purchase price of was paid in the form of three
classes of exchangeable shares of IMSI (Class B, C and D), issued
December 1, 1998, which are exchangeable for shares of the
Company based upon the earnings of TGF for the years ending
February 28, 1999, February 29, 2000 and February 28, 2001 (see
Note 11).
Unaudited supplemental pro forma results of operations
------------------------------------------------------
The following table presents unaudited pro forma revenue, net income
(loss) and income (loss) per share as if the Corporation had acquired
all of TGF, Norbakco and Pasta Kitchen at the beginning of each of the
periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Period from
incorporation
September 26,
Year ended 1997 to
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Revenue $ 13,013 $4,027
Net (loss) income
(478) 207
Net (loss) income per share $ (0.07) $ 0.03
---------------------------------------------------------------------------------------------------------------- -----------------
REVENUE
As reported -6096 -442
TGF for 11 months ended November 30, 1998; 3 months to 12/97 -4247 -3324
Norbacko for 11 months ended November 30, 1998; 3 months to 12/97 -1976 0
Pasta Kitchen - 9 months ended September 30, 1998; 3 months to 12/97 -694 -261
---------------------------------------------------------------------------------------------------------------- -----------------
-13013 -4027
---------------------------------------------------------------------------------------------------------------- -----------------
LOSS
As reported 555 42
Adjustment to amortization 14 18
TGF for 11 months ended November 30, 1998; 3 months to 12/97 -108 -273
Norbacko for 5 months ended November 30, 1998; 3 months to 12/97 25 0
Pasta Kitchen - 9 months ended September 30, 1998; 3 months to 12/97 -8 6
---------------------------------------------------------------------------------------------------------------- -----------------
478.4416667 -207.1
---------------------------------------------------------------------------------------------------------------- -----------------
Amortization adjustment
TGF/Norbacko 6 6
Pasta 9 12
---------------------------------------------------------------------------------------------------------------- -----------------
14 18
---------------------------------------------------------------------------------------------------------------- -----------------
</TABLE>
No effect on shares as no Class X or common shares paid on acquisition date.
Contingent consideration cannot be reasonably pro forma in this scenario
F-10
<PAGE> 61
THE PRECEDING UNAUDITED PRO FORMA AMOUNTS DO NOT PURPORT TO BE
INDICATIVE OF WHAT ACTUAL REVENUES AND RESULTS OF OPERATIONS MIGHT HAVE
BEEN IF THE ACQUISITIONS HAD OCCURRED AT THE BEGINNING AT EACH OF THE
PERIODS PRESENTED ABOVE.
Period from the date of incorporation, September 26, 1997 to December
31, 1997
DURING THE PERIOD ENDED DECEMBER 31, 1997, THE CORPORATION ACQUIRED THE
BUSINESS SET OUT IN THE TABLE BELOW, WHICH HAS BEEN ACCOUNTED FOR USING
THE PURCHASE METHOD (IN THOUSANDS):
<TABLE>
<CAPTION>
PFPI
-----------------
Acquisition date November 1, 1997
<S> <C>
Total consideration and acquisition costs $ 666
-----------------------------------------------------------------------------------------------------------------------------------
Assigned to fair values of net assets acquired
Current assets 413
Capital assets 969
Current liabilities (438)
Long-term debt (550)
-----------------------------------------------------------------------------------------------------------------------------------
394
-----------------------------------------------------------------------------------------------------------------------------------
Goodwill $ 272
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE CORPORATION ACQUIRED ALL THE ISSUED AND OUTSTANDING SHARES OF PFPI
FOR CASH CONSIDERATION OF $374,000. IF THE CORPORATION HAD ACQUIRED
PFPI ON THE DATE OF INCORPORATION, UNAUDITED PRO FORMA REVENUE, LOSS
AND LOSS PER SHARE WOULD HAVE BEEN $666,943, $105,242 AND $(0.02),
RESPECTIVELY. HOWEVER, THE PRECEDING UNAUDITED PRO FORMA AMOUNTS DO NOT
PURPORT TO BE INDICATIVE OF WHAT ACTUAL REVENUES AND RESULTS OF
OPERATIONS MIGHT HAVE BEEN IF PFPI WAS ACQUIRED EFFECTIVE ON THE DATE
OF INCORPORATION.
4. INVENTORIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 957,704 $ 183,760
Work in process 27,185 --
Finished goods 315,001 52,674
------------------------------------------------------------------------------------------------------------------------------------
$1,299,890 $ 236,434
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE> 62
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Cost
Land $ 120,000 $ 120,000
Building 854,524 764,803
Leasehold improvements 104,671 --
Plant equipment 2,383,349 20,686
Office equipment 225,973 4,677
Computer equipment 31,285 6,725
------------------------------------------------------------------------------------------------------------------------------------
3,719,802 916,891
------------------------------------------------------------------------------------------------------------------------------------
Accumulated depreciation
Building 43,687 4,844
Leasehold improvements 1,230 -
Plant equipment 49,503 6,180
Office equipment 5,006 150
Computer equipment 3,180 242
------------------------------------------------------------------------------------------------------------------------------------
102,606 11,416
------------------------------------------------------------------------------------------------------------------------------------
$3,617,196 $ 905,475
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net book value of assets recorded under capital leases totaled
$367,490 (1997 - $Nil), net of accumulated depreciation of $5,694 (1997 - $Nil).
6. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Cost
Packaging artwork $ 210,000 $ 72,737
Goodwill 4,490,271 272,356
------------------------------------------------------------------------------------------------------------------------------------
4,700,271 345,093
------------------------------------------------------------------------------------------------------------------------------------
Accumulated amortization
Packaging artwork 36,936 3,484
Goodwill 36,265 2,244
------------------------------------------------------------------------------------------------------------------------------------
73,201 5,728
------------------------------------------------------------------------------------------------------------------------------------
$4,627,070 $ 339,365
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE> 63
7. BANK INDEBTEDNESS
The Company and its subsidiaries have utilized an aggregate of
$1,030,000 of authorized lines of credit totaling $1,750,000 (1997 -
utilized $40,000 of a $200,000 line of credit). The lines of credit
bear interest at prime plus 1.5% (8.25% at December 31, 1998). The
outstanding balances are due on demand and are secured by a general
assignment of assets of the Company and its subsidiaries and a total of
$950,000 in limited guarantees of the Company.
8. CAPITAL LEASE OBLIGATIONS
The Company has acquired various processing equipment and vehicles
under capital leases expiring July 2003. Monthly principal payments
vary from $330 to $4,265. Capital leases are recorded by discounting
payments based on the lower of the Company's incremental borrowing rate
or the interest rate inherent in the lease.
Minimum lease payments are due as follows:
<TABLE>
<S> <C>
1999 $ 131,378
2000 127,665
2001 103,275
2002 100,050
2003 11,242
---------------------------------------------------------------------------------------------------------------------------
Gross value of minimum lease payments 473,610
Less amount representing interest 81,737
---------------------------------------------------------------------------------------------------------------------------
391,873
Less principal amounts due in one year 94,486
---------------------------------------------------------------------------------------------------------------------------
$ 297,387
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 64
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Business Development Bank of Canada ("BDC")- Mortgage
Repayable in monthly installments of $3,200 plus interest
Interest is calculated based on BDC's floating base rate plus 1%
(9.75% at December 31, 1998), and matures June 23, 2012. The loan
to PFPI is secured by a first charge on PFPI's land and building,
a second charge on PFPI's inventory and accounts receivable, a
$250,000 guarantee by an officer of the Company, a guarantee by
the Company for the full amount of the loan and an assignment
shareholder loans owing by PFPI to IMSI. $ 518,400 $ 550,000
BDC - Equipment loan
Repayable in two principal installments during December and
January of each year for a 5 year term. Interest is payable
monthly at 1.25% (10.00% at December 31, 1998) above BDC's daily
floating base rate. The loan is secured by a first charge on all
personal property of TGF. 832,000 --
Bank of Nova Scotia - Equipment loan
Repayable in monthly installments of $2,137 for a 5-year term
Interest is payable monthly at the Bank of Nova Scotia prime rate
plus 2.5% (9.25% at December 31, 1998). The loan is secured by a
first charge over the assets financed. 133,128 --
Bank of Nova Scotia - BDC repayment loan
Repayable in monthly installments of $1,500 for a period of 39
months. Interest is payable monthly at the Bank of Nova Scotia
prime rate plus 2.5% (9.25% at December 31, 1998). The loan is
secured by a general security agreement over all present and
future personal property. 45,819 --
------------------------------------------------------------------------------------------------------------------------------------
1,529,347 550,000
Less amount due within one year 279,044 31,600
------------------------------------------------------------------------------------------------------------------------------------
$1,250,303 $ 581,600
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE> 65
Principal payments required are due as follows:
<TABLE>
<S> <C>
1999 $ 279,044
2000 289,041
2001 285,860
2002 225,041
2003 123,961
Thereafter 326,400
---------------------------------------------------------------------------------------------------------------------------
$ 1,529,347
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10. COMMITMENTS
The Company is committed under operating leases for business premises
and equipment with terms expiring at various dates through 2005. The
minimum annual payments required under the lease agreements are as
follows:
<TABLE>
<S> <C>
1999 $ 294,113
2000 213,658
2001 216,492
2002 216,492
2003 216,492
Thereafter 207,468
---------------------------------------------------------------------------------------------------------------------------
$ 1,364,715
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11. SHAREHOLDERS' EQUITY
Capital stock of the Corporation
As of December 31, 1999, the Corporation's authorized capital stock
consisted of 25,000,000 shares of common stock with a par value of
US$0.001 per share and 10,000,000 shares of Class N stock with a par
value of US$0.001 per share
Common stock. As of December 31, 1999, there were 10,476,048 shares of
common stock outstanding. Each share of common stock entitles the
holder thereof to one non-cumulative vote, either in person or by
proxy, at meetings of shareholders.
Class N shares. As of December 31, 1999 there were a total of 3,110,795
Class N shares issued and outstanding. The Class N shares are
non-equity participating and are entitled to identical voting rights as
shares of common stock. The Class N shares are issued to shareholders
of IMSI who have shares of IMSI (Class B, C, D, E and X - see
Exchangeable shares of IMSI) that are convertible into shares of common
stock of the Company so that such shareholders of IMSI have voting
rights at meetings of the shareholders of the Company. The holders of
the Class N shares have no rights of participation on a liquidation or
winding up of the Company.
F-15
<PAGE> 66
The Company will be required to reserve approximately 2,500,000 Class N
shares in connection with the conversion rights of the Class B, Class C and
Class D shares issued by IMSI on December 1, 1998 to the selling shareholders in
the TGF/Norbakco acquisition. The holders of the Class B shares, the Class C
shares and the Class D shares are entitled to receive a number of Class N shares
based upon the number of shares of common stock of the Company for which each of
the Class B shares, the Class C shares and the Class D shares may be exchanged
as determined in accordance with the share attributes of each such class (See
description of Class B, C, D shares below). There is no publicly traded market
for the Class N shares.
Exchangeable shares of IMSI
The following securities of IMSI, which are exchangeable into common
shares of the Company, are issued and outstanding. There is no public
trading market for any of the following securities.
Class X shares. IMSI has issued and outstanding 3,110,795 Class X
shares which are exchangeable on the basis of one Class X share and one
Class N share of the Company for one share of common stock of the
Company. Class X shares are non-participating and non-voting.
Class B shares. IMSI has issued 300,000 Class B shares. The Class B
shares are non-participating and non-voting except in respect of any
future modification or changes in the Class B share characteristics.
The Class B shares are exchangeable into such number of shares of
common stock of the Company as determined by calculating the earnings
before income tax, depreciation and amortization ("EBITDA") of TGF for
the twelve month period ended February 28, 1999, and multiplying such
amount by 5, less the adjusted book value; then by dividing that amount
by the Canadian dollar equivalent of US$1.40 (CDN$2.04) at February 28,
1999 and subtracting from that amount 53,000.
Class C shares. IMSI has issued 100,000 Class C shares. The Class C
shares are non-participating and non-voting except in respect of any
future modification or changes in the Class C share characteristics.
The Class C shares are exchangeable into a number of shares of common
stock of the Company, such number of shares to be determined by
calculating the EBITDA of TGF for the twelve month period ended
February 28, 2000; then by dividing that amount by the Canadian dollar
equivalent at February 28, 2000 of the lesser of US$2.00 (CDN$2.92) or
the current market price of one share of common stock of the Company
determined at February 28, 2000.
Class D shares. IMSI has issued 59,000 Class D shares. The Class D
shares are non-participating and non-voting except in respect of any
future modification or changes in the Class D share characteristics.
The Class D shares are exchangeable into a number of shares of common
stock of the Company such number of shares to be determined by
calculating the EBITDA of TGF for the twelve month period ended
February 28, 2001 minus the adjusted EBITDA of TGF for the twelve month
period ended February 28, 2000; then by dividing that amount by the
Canadian dollar equivalent at February 28, 2001 of the lesser of US$
2.00 (CDN$ 2.92) or the current market price of one share of common
stock of the Company determined at February 28, 2001.
F-16
<PAGE> 67
Reverse acquisition
On July 16, 1998, ANM, then a non-operating corporation, acquired all
of the outstanding common shares of IMSI. As a condition of the
transaction, ANM issued 1,400,000 common shares for proceeds of
US$925,000 (CDN$1,373,000), net of issuance costs of US$55,000
(CDN$81,600) on July 15, 1998. In conjunction with the reverse
acquisition transaction, the Company created and authorized 10,000,000
Class N shares, issued 4,000,000 Class N shares to the former common
shareholders of IMSI and IMSI issued 4,000,000 Class X shares to the
former common shareholders of IMSI. The Class N shares are non-equity
participating and are entitled to identical voting rights as the common
stockholders. In addition, one Class N share together with one Class X
share of IMSI are convertible into common shares of the Company on a
one for one basis at the option of the holder until 2013, at which time
the Company can force conversion of the Class N shares. For accounting
purposes, the transaction was treated as a reverse acquisition of ANM
by IMSI as the former common shareholders of IMSI retained the majority
of the voting rights of ANM.
During 1998, 809,538 Class N and 809,538 Class X shares of IMSI were
exchanged for common shares of the Company.
Private placement financing
During the period November 17 to November 28, 1998, the Company sold,
by private placement, 1,997,300 units for US$0.90 each, consisting of
one common share and one-half of a warrant. In exchange for one warrant
and US$1.40, the holder may purchase one common share of the Company.
The warrants expire May 30, 1999. The units have a minimum holding
period of one year from the date of the subscription agreements.
Proceeds, net of broker commissions, were US$1,666,124 (CD$2,550,000).
F-17
<PAGE> 68
12. BROKERS OPTIONS
In conjunction with the share issuance and reverse acquisition of ANM,
the Company granted 1,000,000 stock options to brokers on July 15,
1998. Pursuant to the stock option agreements, the option holders have
the right to purchase common shares of the Company at a price of
US$1.00, commencing February 1, 1999 and expiring July 1, 1999. The
fair value of the brokers' options of $1,058,300 has been included in
additional paid in capital. The fair value of the brokers' options was
determined using the Black-Scholes option pricing model with the
following assumptions: expected life of 0.95 years; risk-free interest
rate of 5.5%; no dividends during the expected term and volatility of
320%.
13. STOCK OPTION PLAN
On August 10, 1998, the Board of Directors of the Company approved a
stock option plan (the "Option Plan") applicable to the Company's
officers and directors and authorized 2,500,000 common shares to be
granted. Pursuant to the Option Plan, options are granted at an amount
not less than the then-current fair market value of the common shares
of the Company. Options may generally be exercised in equal proportions
during the years following the first to fifth anniversary of the date
of grant and expire on the tenth anniversary or upon termination of
employment.
A summary of the activity in the Option Plan since inception is set
forth below:
<TABLE>
<CAPTION>
Options
Available Number of Weighted Average
For Grant Options Exercise Price (US$)
---------------------- ------------------ ----------------------------
<S> <C> <C> <C>
Balance at December 31, 1997 -- --
Authorized 2,500,000 --
Granted (825,000) 825,000 $ 0.80
---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,675,000 825,000 $ 0.80
---------------------------------------------------------------------------------------------------------------------------
Exercisable at December 31, 1997 -- $ --
Exercisable at December 31, 1998 -- $ --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE> 69
The following table summarizes information concerning currently
outstanding options at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Options Contractual Exercise Options Exercise
Exercise price Outstanding Life Price (US$) Exercisable Price (US$)
------------------ ----------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
$0.70 - $1.50 825,000 9.7 years $ 0.80 -- $ --
---------------------------------------------------------------------------------------------------------------------------
825,000 --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. STOCK BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Pro forma information
regarding net income and earnings per share is required by SFAS 123,
and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model. Weighted average
assumptions for stock price volatility, dividend yield, expected life
of stock options and risk free interest rate were 326%, 0%, 5.32 years
and 5.5%, respectively, for 1998. There were no options issued during
1997.
SFAS 123 requires that, for the pro forma disclosure, the compensation
cost based on the fair values of the options at the grant date be
amortized over the vesting period. If compensation cost for stock
options had been determined based on the fair value at the grant dates
consistent with the method prescribed by SFAS 123, the Corporation's
net earnings and earnings per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net loss
As per reported $ (549,198) $ (41,797)
Pro forma $ (608,706) $ (41,797)
Loss per share, basic and diluted
As per reported $ (0.09) $ (0.01)
Pro forma $ (0.09) $ (0.01)
</TABLE>
The weighted average fair value for stock options granted during the
periods ending December 31, 1997 and December 31, 1998 were $nil and
$1.26, respectively.
F-19
<PAGE> 70
15. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1998 1997
------------------------------ ---------------------------
<S> <C> <C>
Current $ -- $
Deferred --
------------------------------------------------------------------------------------------------------------------------------------
$ -- $ --
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Net operating losses $ 680,000 $ 318,000
Difference between tax basis and accounting
basis of capital assets (167,000)
------------------------------------------------------------------------------------------------------------------------------------
513,000 318,000
Valuation allowance (606,000) (318,000)
------------------------------------------------------------------------------------------------------------------------------------
$ (93,000) $ --
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes varies from the expected provision at
the statutory rates for the following reasons:
<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Combined Canadian basic federal and provincial tax rates 44.6% 44.6%
---------------------------------------------------------------------------------------------------------------------------
Recovery of income taxes based on the above rates $ (244,900) $ (18,600)
Increase (decrease) in income taxes resulting from the following:
Permanent differences including goodwill amortization 15,200 1,900
Manufacturing and processing (34,100) 3,200
Change in valuation allowance 288,000 13,500
Other (24,200)
-
---------------------------------------------------------------------------------------------------------------------------
$ -- $ --
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE> 71
The Company and its subsidiary have losses totaling $2,089,000 to
apply against future years' taxable income. The losses, if not
utilized, expire as follows:
<TABLE>
<S> <C>
1999 $ 19,000
2000 34,000
2001 258,000
2002 217,000
2003 331,000
2004 1,230,000
---------------------------------------------------------------------------------------------------------------------------
$ 2,089,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16. LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended Period ended
December 31, December 31,
1998 1997
----------------------------- ----------------------------
<S> <C> <C>
Basic loss per share
Numerator
Loss available to common shareholders $ 549,198 $ 41,797
---------------------------------------------------------------------------------------------------------------------------
Denominator
Weighted average shares outstanding 6,419,141 5,278,000
---------------------------------------------------------------------------------------------------------------------------
$ 0.09 $ 0.01
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
No diluted loss per share disclosure is presented as the conversion of
securities with dilutive potential in both periods had an anti-dilutive
effect on loss per share. The Class N shares outstanding are considered
common stock equivalents for the purposes of the basis loss per share
and weighted average outstanding common shares calculations.
17. FINANCIAL INSTRUMENTS
Fair value
At December 31, 1997 and December 31, 1998 the estimated fair values of
cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities were equal to their carrying values due to the
short-term nature of the items. The estimated fair value of long-term
debt approximates fair value as the debt bears interest at floating
rates.
Credit risk
Credit risk arises due to the concentration of accounts receivable in
one geographic area or with certain customers. This risk is minimized
by the fact that the Company sells product to large supermarket chains
and specialty food retailers. Substantially all customers pay within 10
days of product delivery.
F-21
<PAGE> 72
18. SEGMENTED INFORMATION
The Company operates in one business segment; the development,
marketing and production of a series of specialty food products for
sale to large food retailer chains and specialty food retailers.
Significant customers accounted for the following sales volume
percentages:
<TABLE>
<CAPTION>
Year ended Period ended
Type of December 31, December 31,
Customer 1998 1997
-------------------------------- -------------------------- ----------------------------
<S> <C> <C> <C>
Customer 1 Distributor 12% 14%
Customer 2 Distributor 14% 15%
Customer 3 Retailer 25% 0%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the year, sales to customers outside Canada totaled
approximately $1,017,500.
19. SUBSEQUENT EVENTS (UNAUDITED)
i) Consultant options
On January 1, 1999, the Company issued 125,000 options to a
consultant. The options were granted at an option price of $.90
per share for the first 50,000 options. The remaining 75,000
options were granted at an exercise price of $1.50. All options
expire on December 31, 2001.
ii) Share subscription
On April 16, 1999, Southbridge Inc. ("Southbridge") subscribed
for 1,523,810 common shares of the Company at a subscription
price of $2.625 per common share. Proceeds to the Company, net of
issuance costs, totaled approximately $3,693,000, net of issuance
cost of approximately $307,000. As a part of the subscription,
the Company granted to Southbridge 400,000 warrants which entitle
Southbridge to purchase up to 200,000 common shares at the price
of $2.25 per common share during the period to April 16, 2000 and
200,000 common shares at the price of $2.625 per common share
during the period to April 16, 2001.
c) Acquisition - Tasty Selections Inc. ("Tasty").
On April 16, 1999 IMSI acquired all of the outstanding common
shares of Tasty, manufacturer of muffin and cookie batters located
in Concord, Ontario for consideration totaling approximately
$2,160,000. Under the terms of the agreement, IMSI paid $750,000
cash and issued 442,750 Class X shares of IMSI on closing (see
Note 3).
F-22
<PAGE> 73
d) New banking agreement
On April 16, 1999, the Company entered into a letter of commitment with
a Canadian chartered bank with respect to new and expanded credit
facilities. Under the proposed agreement, the Company would have new
credit facilities as follows: (a) an operating line of credit of
$10,000,000, bearing interest at prime plus 1%, except for borrowings
secured by cash deposits, in which case interest is calculated at
prime; (b) a revolving facility of $3,500,000 for equipment loans,
bearing interest at prime plus 1-1/4%; and (c) a forward exchange
contract facility totaling $7,500,000. The credit facilities will be
secured by a general assignment of book debts, a general security
agreement over all assets of the Company, life insurance on certain
executives totaling $2,500,000 and a priority agreement with other
lenders of the Company.
e) Convertible debenture financing
On May 10, 1999, IMSI and the Company entered into a loan agreement
with First Ontario Fund ("First Ontario") and Bank of Montreal Capital
Corporation ("BMOCC") with respect to a $4 Million financing. The
funding was advanced as to $1.5 Million by BMOCC and as to $2.5 Million
by First Ontario. The financing was secured by general security granted
by each of IMSI and the Company, a guarantee and general security
agreement from each of IMSI's subsidiaries, a mortgage of the premises
owned by Prime Foods Processing Inc. at 620 Colby Drive, Waterloo,
Ontario, and a share pledge agreement executed by the Company pursuant
to which it pledged its common shares in the capital of IMSI to First
Ontario and BMOCC.
The terms of the loan are as follows: (i) the interest rate for the
period ending April 15, 2000 is 7% per annum and thereafter until
maturity on April 15, 2003 is 13% per annum; (ii) the outstanding debt
is convertible, at the option of the holder, into Class X shares of
IMSI at a price of $2.62 per share; (iii) the holder has the right to
acquire a number of Class N shares equal to the number of Class X
shares received; (iv) IMSI has the option to force conversion into
Class X and N shares at any time after July 1, 1999 provided that (a)
the Company's common stock trades on a major North American stock
exchange approved by the lenders, (b) the Company's common stock has a
cumulative trading volume during a twenty day period of the greater of
(1) 300,000 shares of common stock, or (2) five percent of the number
of issued shares of common stock that are not subject to any escrow
agreement or resale restrictions set out in the Ontario Securities Act,
and (c) the weighted average trading price during such twenty day
period is not less than the United States Dollar equivalent of $CD
5.50. A total of $359,000 was paid by IMSI in respect of professional
fees and commissions, which have been recorded as deferred financing
costs.
f) Acquisition - D.C. Foods Inc.
On May 10, 1999 IMSI acquired all of the outstanding shares of 1005549
Ontario In., the sole shareholder of DC Foods Processing Inc. a
provider of custom and private label food processing services to
Canadian and International markets located in Waterloo, Ontario. Under
the terms of the purchase agreement, IMSI paid $4,000,000 on closing
and issued 893,333 Class X convertible shares. The balance of the
purchase prices was satisfied on closing by issuing a separate class of
shares of IMSI which are exchangeable into shares of the Company in a
structure which is similar to the mechanism used to acquire TGF. (see
Note 3 and Note 11).
F-23
<PAGE> 74
g) Acquisition of remaining 41% equity interest in Norbakco
In May 1999, IMSI acquired the remaining 41% equity interest
in Norbakco, having acquired 59% interest on December 1, 1999. The
consideration paid for the additional interest was the issue by IMSI of
53,000 Class X Shares, the issue by the Company of 53,000 Class N
Shares and the purchase from the selling shareholders shareholder loans
made to Norbakco in the amount of $180,000.
In conjunction with the issuance of the 53,000 Class X Shares
and the 53,000 Class N Shares, IMSI modified the share attributes of
the Class B Shares such that the number of common shares in the capital
stock of the Company that the 300,000 Class B Shares may be exchanged
for is reduced by 53,000 common shares.
h) Broker option extension (see Note 12)
On May 27, 1999, the Company agreed to extend the expiry date with
respect to the brokers options issued July 15, 1999. Of the 1,000,000
options outstanding, 400,000 options will expire on December 31, 1999
and 600,000 options will expire on June 30, 2000.
i) Private placement warrant exercise
During May 1999, the holders of warrants issued in conjunction with the
private placement financing (see Note 11) exercised their rights to
purchase common shares of the Company. Total proceeds to the Company
were $2,069,202 (US$1,398,110).
j) Letter of intent - Huxtable's Foods, L.L.C. ("Huxtables").
On October 14, 1999, the Company entered into a letter of intent to
acquire certain assets of Huxtables through a newly formed subsidiary
of the Company. The terms of the letter call for a cash payment of
US$3,000,000 and future payments, payable in cash or common shares of
the Company based on the earnings of the newly formed subsidiary during
the period to December 31, 2002.
k) Acquisition - The Ultimate Cookie Co. Ltd. "UCC"
On October 18, 1999, the Company acquired all of the outstanding common
shares of UCC by paying $175,000 in cash and by issuing 250,000 Class E
Series 5 shares and 250,000 Class E Series 6 shares of IMSI which are
exchangeable into shares of the Company based on future earnings of
UCC.
l) Exercise of broker options
On October 18, 1999 172,302 brokers options were exercised to purchase
an equivalent number of common shares of the Company. The transaction
resulted in proceeds of US$172,302 to the Company.
F-24
<PAGE> 75
m) Share subscription
On October 20, 1999, Southbridge subscribed for 1,555,556 special
warrants (the "Warrants") at a price of US$3.00 each. The Warrants
entitle the holder to acquire one Class X shares of IMSI for each
Warrant held for no additional consideration until the earlier of five
days after the date of issuance by the Ontario Securities Commission
(the "Commission") of a receipt for a preliminary prospectus filed in
the province of Ontario or October 22, 2000. Approximately $4,000,000
of the proceeds resulting from the subscription for the Warrants is to
be held in escrow until February 29, 2000, pending the approval of
mutually agreeable acquisitions or transactions by the Company. In
addition, the Company is subject to certain penalty provisions which
shall be satisfied by increasing the number of shares issuable upon
surrender of the Warrants by 10 to 32%. The Company will have to comply
with such penalty provisions in the event that the Company does not
raise additional funds or file the required prospectus documents with
the Commission within the timelines specified in the special warrant
indenture.
F-25
<PAGE> 76
INTERNATIONAL MENU SOLUTIONS CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEET
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
September 30,
1999
-------------
(Restated - Note 3)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,261,993
Accounts receivable 4,182,206
Inventories 6,142,777
Prepaid expenses 1,689,980
------------
16,276,956
CAPITAL ASSETS, NET
11,198,768
INTANGIBLE ASSETS, NET
13,210,325
------------
TOTAL ASSETS $ 40,686,049
------------
LIABILITIES
CURRENT LIABILITIES
Bank operating loans $ 8,901,594
Accounts payable 3,343,662
Accrued liabilities 1,117,299
Current portion of capital lease obligations 325,580
Current portion of long-term debt 697,600
------------
14,385,735
CAPITAL LEASE OBLIGATIONS 1,140,984
LONG-TERM DEBT 3,014,145
CONVERTIBLE DEBENTURE 4,000,000
DEFERRED INCOME TAXES 610,300
------------
TOTAL LIABILITIES 23,281,164
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class N voting, non-participating stock - US$0.001 par
value; 10,000,000 shares authorized; 3,655,170 shares issued 5,284
Common stock - US$0.001 par value; 25,000,000 shares 13,634
authorized; 9,531,673 shares issued
Additional paid-in capital 21,302,687
Deficit (3,786,720)
------------
TOTAL STOCKHOLDERS' EQUITY 17,534,885
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,686,049
------------
</TABLE>
F-26
<PAGE> 77
INTERNATIONAL MENU SOLUTIONS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
------------ -----------
(Restated - Note 3)
<S> <C> <C>
REVENUE $ 21,680,117 $ 2,169,537
------------ -----------
COSTS AND EXPENSES
Cost of goods sold 18,782,667 1,933,097
Selling expenses 1,327,463 132,352
Research and development 371,228 102,654
Administrative expenses 3,611,386 321,681
Amortization of intangibles 391,140 10,239
------------ -----------
24,483,884 2,500,023
------------ -----------
LOSS FROM OPERATIONS (2,803,767) (330,486)
------------ -----------
OTHER INCOME (EXPENSE)
Interest revenue 30,253 18,295
Interest expense (573,388) (63,687)
------------ -----------
(543,135) (45,392)
------------ -----------
LOSS BEFORE INCOME TAXES (3,346,902) (375,878)
INCOME TAXES 169,400 --
------------ -----------
NET LOSS $ (3,177,502) $ (375,878)
------------ -----------
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.30) $ (0.07)
------------ -----------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 10,590,387 5,691,889
------------ -----------
</TABLE>
F-27
<PAGE> 78
INTERNATIONAL MENU SOLUTIONS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (Restated - Note 3) $ (3,177,502) $ (375,878)
Item not requiring cash
Depreciation and amortization (Restated - See 3) 1,182,727 81,901
Deferred income taxes (169,400) --
Changes in operating assets and liabilities
Accounts receivable 455,868 (142,248)
Inventories (3,998,834) (43,188)
Prepaid expenses (1,515,327) (12,556)
Accounts payable (1,194,199) (57,405)
Accrued liabilities 159,380 12,915
------------ -----------
(8,257,287) (536,459)
------------ -----------
INVESTING ACTIVITIES
Purchase of capital assets (2,766,086) (96,556)
Additions to intangible assets (688,371) (85,779)
Acquisitions, net of cash acquired in 1998 -
$2,514, June 1999 $206,302; including bank
overdraft assumed in 1999 - $1,126,779 (4,993,701) --
------------ -----------
(8,448,158) (182,335)
------------ -----------
FINANCING ACTIVITIES
Issuance of shares 6,603,879 1,513,408
Proceeds from bank loans 8,236,990 255,000
Convertible debentures issued, net
of issuance costs of $359,024 3,640,976
Proceeds from long term debt 1,155,761 --
Payment of long-term debt and
capital lease principal (535,780) (24,891)
Redemption of Class A preferred stock -- (292,868)
------------ -----------
19,101,826 1,450,649
------------ -----------
NET CHANGE IN CASH AND
CASH EQUIVALENTS 2,396,381 731,855
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,865,612 299,274
------------ -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,261,993 $ 1,031,129
------------ -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 573,388 $ 63,687
------------ -----------
Cash paid during the period for income taxes $ -- $ --
------------ -----------
</TABLE>
F-28
<PAGE> 79
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
1. ORGANIZATION
The Company and its subsidiaries develop, market and produce a series of
specialty food products for sale to food distributors, food retailer
chains and specialty food retailers.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-QSB and
Regulation S-B. Consequently, the accompanying unaudited consolidated
financial statements are not presented with footnotes required by
generally accepted accounting principles. These financial statements
should be read in conjunction with the audited consolidated financial
statements for December 31, 1998 recently filed on Form 10-SB with the
SEC.
The financial information presented reflects all adjustments (including
normal recurring adjustments) which are, in the opinion of management,
necessary to produce a fair statement of the financial position and
results of operations for the periods included in this report.
3. ACCOUNTING FOR EXCHANGEABLE SHARES ISSUED BY SUBSIDIARY
The acquisitions of Transcontinental Gourmet Foods and Norbakco Limited
in 1998 and the acquistion of D.C. Foods in May 1999 were completed using
exchangeable shares as part of the consideration paid to the selling
shareholders of the businesses acquired. The Company accounted for the
issuance of exchangeable shares in connection with the business
combinations by having an independent valuation performed and including
the value of the exchangeable shares in the purchase price as of the
acquisition date. This method of accounting resulted in recognition of
substantially all of the purchase price (and related intangible assets)
being recognized at the date of acquisition and the presentation of the
exchangeable shares as minority interest on the consolidated balance
sheet of the Company. However, this method of accounting of the shares
was challenged by the staff of the Securities and Exchange Commission
("SEC") in connection with the Corporation's filings on Form 10-SB. In
the opinion of the staff of the SEC, the underlying nature of the shares
was that of contingent consideration since the shares are exchangeable
into common shares of the parent based on future earnings of the business
acquired. Consequently, the Company has restated the consolidated balance
sheets, statements of operations and cash flows for the nine months ended
September 30, 1999 and used the principles of contingent consideration
accounting for such acquisitions as prescribed by paragraphs 79 to 80 of
APB No. 16, "Business Combinations".
F-29
<PAGE> 80
The effect of applying contingent consideration accounting was as
follows:
Effect on reported net loss for the nine months ended September 30,
1999:
<TABLE>
<S> <C> <C>
Previously reported net loss and loss per share: $(2,324,842) $(0.22)
Change in amortization of intangible assets reflecting new
accounting method for recognition of intangible assets
related to businesses acquired (63,660)
Non recognition of minority interest (789,000)
----------- -----
Effect of restatement on net loss and accumulated deficit (852,660) (0.08)
----------- -----
Restated loss and loss per share: $(4,030,162) $(0.30)
----------- -----
</TABLE>
Effect on reported net loss for the three months ended September 30,
1999:
<TABLE>
<S> <C> <C>
Previously reported net loss and loss per share: $(1,109,446) $(0.08)
Change in amortization of intangible assets reflecting new
accounting method for recognition of intangible assets
related to businesses acquired (17,692)
Non recognition of minority interest (411,000)
----------- -----
Effect of restatement on net loss and accumulated deficit (428,692) $(0.04)
----------- -----
Restated net loss and loss per share: $(1,966,830) $(0.12)
----------- -----
</TABLE>
4. FOREIGN CURRENCY TRANSLATION
a) Translation of foreign subsidiaries' accounts
Assets and liabilities of the Company's foreign subsidiaries
are translated from their local currencies to the functional
currency at the exchange rate in effect at the balance sheet
date. Revenues and expenses are translated at the average
exchange rate prevailing during the year. The adjustments
resulting from translating the financial statements foreign
subsidiaries are recorded in comprehensive income in a
separate component of equity. The Company's functional
currency is the Canadian dollar. Consequently, no adjustments
have arisen from the translation of foreign subsidiaries
accounts because all subsidiaries currently operate in Canada.
b) Translation of foreign currency transactions
Transactions incurred in currencies other than the functional
currency are converted to the functional currency at the
transaction date. Monetary assets and liabilities denominated
in a currency other than the functional currency are converted
to the functional currency at the exchange rate in effect at
each period end. All foreign currency transaction translation
gains or losses have been included in earnings.
F-30
<PAGE> 81
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", which has been adopted by the Company. Upon the
adoption of SFAS No. 128, the Company is presenting basic earnings per
share and diluted earnings per share. Basic earnings per share is
computed by dividing the net earnings available to common shareholders
by the weighted average number of common shares outstanding for the
year. Diluted earnings per share is derived by adjusting the basic
earnings per share calculation to reflect the effect of securities with
dilutive potential. The computation of diluted earnings per share does
not include securities with dilutive potential that would have an
anti-dilutive effect on earnings per share.
In June 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for the reporting and presentation of
comprehensive income and its components. The Company's adoption of SFAS
No. 130 has had no significant impact on the Company's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting and identification of operating segments
and requires certain financial and descriptive information regarding
those segments. The Company operates in one business segment and
consequently the adoption of SFAS No. 131 had no material effect on the
consolidated financial statements.
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards
for the reporting and accounting for derivative instruments. Presently,
the Company's use of derivative instruments and hedging arrangements is
not significant. Management is in the process of determining the impact
of SFAS No. 133 on the consolidated financial statements.
6. ACQUISITIONS
DURING THE PERIOD ENDED SEPTEMBER 30, 1999, INTERNATIONAL MENU
SOLUTIONS INC. ("IMSI"), A CANADIAN SUBSIDIARY OF THE COMPANY, ACQUIRED
THE BUSINESSES SET OUT IN THE TABLE BELOW WHICH HAVE BEEN ACCOUNTED FOR
USING THE PURCHASE METHOD:
<TABLE>
<CAPTION>
Tasty Selections (1) DC Foods (2)
-------------------- ------------
Acquisition date April 15, 1999 May 10, 1999
<S> <C> <C>
Estimated purchase price including acquisition costs $ 2,220,000 $ 6,533,000
--------------------------------------------------------------------------------------------
Assigned to fair values of net assets acquired:
Current assets 1,383,000 1,857,000
Capital assets 494,000 4,891,000
Current liabilities (677,000) (1,571,000)
Long-term liabilities (758,000) (2,220,000)
--------------------------------------------------------------------------------------------
442,000 2,957,000
--------------------------------------------------------------------------------------------
Goodwill $ 1,778,000 $ 3,576,000
--------------------------------------------------------------------------------------------
</TABLE>
(1) IMSI acquired all of the outstanding shares of Tasty
Selections Inc. ("Tasty Selections"), a manufacturer of muffin
and cookie batters located in Concord, Ontario operating under
the trade name "Tasty Batters". Tasty was acquired by paying
cash of $1,000,000 and by issuing 442,750 Class N shares of
the Corporation and 442,750 Class X shares of IMSI to the
vendors, valued at $2.63 per Class X share.
F-31
<PAGE> 82
(2) IMSI acquired all of the issued and outstanding shares of
1005549 Ontario Inc, the sole shareholder of D.C. Foods
Processing Inc. a provider of custom and private label food
processing services to Canadian and International markets
located in Waterloo, Ontario (collectively "D.C. Foods").
Pursuant to the terms of the purchase agreement, the purchase
price payable to the former shareholders of D.C. Foods was
satisfied by paying $4,000,000 in cash; by issuing 893,333
Class N shares of the Corporation and 893,333 Class X shares
of IMSI valued at $2.63 per Class X share; and by issuing
250,000 Class E Series 1 shares, 250,000 Class E Series 2
shares, 250,000 Class E Series 3 shares and 250,000 Class E
Series 4 shares of IMSI. The Class E Series shares are
exchangeable into common shares of the Corporation based on
the earnings recorded by D.C. Foods in 1999 and 2002. The
value of each series of Class E shares will be recorded as
additional purchase price once the earnings contingencies are
resolved.
On May 17, 1999, IMSI acquired the remaining 41%
equity interest in Norbakco, having acquired 59% interest on December
1, 1998. The consideration paid for the additional interest was the
issue by IMSI of 53,000 Class X Shares, the issue by the Company of
53,000 Class N Shares and the purchase from the selling shareholders
shareholder loans made to Norbakco in the amount of $180,000.
Goodwill arising from the above acquisitions is being amortized
straight-line over a 20 year period.
7. INVENTORY
<TABLE>
<CAPTION>
September 30,
1999
--------------
(unaudited)
<S> <C>
Raw materials $ 2,774,520
Work in process 1,148,134
Finished goods 2,220,123
-----------------------------------------------------------------------------
$ 6,142,777
-----------------------------------------------------------------------------
</TABLE>
8. BANKING FACILITIES AND CONVERTIBLE DEBENTURES
As of September 30, 1999, the Company and its subsidiaries have
utilized an aggregate of approximately $7,800,000 of authorized lines
of credit totaling $10,000,000 (unaudited) (December 31, 1998 -
utilized an aggregate of $1,030,000 of authorized lines of credit
totaling $1,750,000. The lines of credit bear interest at Canadian
prime plus 1.5% at June 30, 1999 or 7.75% (unaudited) (prime plus 1.5%
or 8.25% at December 31, 1998). The credit facilities are secured by a
general assignment of book debts, a general security agreement over all
assets of the Company, life insurance on certain executives totaling
$2,500,000 and a priority agreement with other lenders of the Company.
In addition to the authorized lines of credit, the Company has a
revolving facility of $3,500,000 for equipment loans, bearing interest
at prime plus 1-1/4% and a forward exchange contract facility totaling
$7,500,000.
F-32
<PAGE> 83
On May 10, 1999, the Company's subsidiary IMSI issued
approximately $4,000,000 in convertible debentures to two investors.
The debentures will have a term of 48 months, bear interest at 7% per
annum for the first 12 months and 13% thereafter, and will be
convertible at the holder's option at any time into exchangeable shares
of IMSI which are then exchangeable into shares of the Company. IMSI
will have the right to force conversion of the debentures if certain
trading statistics are maintained after July 1, 1999. A total of
$359,000 was paid by IMSI in respect of professional fees and
commissions, which have been recorded as deferred financing costs.
8. CAPITAL TRANSACTIONS
In the nine-month period ended September 30, 1999, 924,375 Class N and
924,375 Class X shares of IMSI were exchanged for common shares of the
Company (unaudited).
Private placement financing
During the period November 17 to November 28, 1998, the
Company sold, by private placement, 1,997,300 units for US$0.90 each,
consisting of one common share and one-half of a warrant. In exchange
for one warrant and US$1.40, the holder may purchase one common share
of the Company until May 31, 1999. These warrants were exercised during
May 1999. Total proceeds resulting from the exercise of the warrants to
the Company were $2,069,202 (US$1,398,110).
On April 16, 1999, Southbridge Inc. ("Southbridge") subscribed
for 1,523,810 common shares of the Company at a subscription price of
$2.625 per common share. Proceeds to the Company, net of issuance
costs, totaled approximately $3,693,000, net of issuance cost of
approximately $307,000. As a part of the subscription, the Company
granted to Southbridge 400,000 warrants which entitle Southbridge to
purchase up to 200,000 common shares at the price of $2.25 per common
share during the period to April 16, 2000 and 200,000 common shares at
the price of $2.625 per common share during the period to April 16,
2001.
9. NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------ ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss per share
Numerator
Net loss available to common shareholders $ (1,538,138) $ (205,434) $ (3,177,502) $ (375,878)
------------ ----------- ------------ -----------
Denominator
Weighted average shares outstanding 13,084,669 5,678,000 10,590,387 5,691,889
------------ ----------- ------------ -----------
$ (0.12) $ (0.04) $ (0.30) $ (0.07)
------------ ----------- ------------ -----------
</TABLE>
No diluted net loss per share disclosure is presented as the conversion
of securities with dilutive potential in all periods had an
anti-dilutive effect on loss per share. The Class N shares outstanding
are considered common stock equivalents for the purposes of the basis
loss per share and weighted average outstanding common shares
calculations.
F-33
<PAGE> 84
10. SUBSEQUENT EVENTS (UNAUDITED)
n) Letter of intent - Huxtable's Foods, L.L.C. ("Huxtables").
On October 14, 1999, the Company entered into a letter of
intent to acquire certain assets of Huxtables through a newly
formed subsidiary of the Company. The terms of the letter call
for a cash payment of US$3,000,000 and future payments,
payable in cash or common shares of the Company based on the
earnings of the newly formed subsidiary during the period to
December 31, 2002.
o) Acquisition - The Ultimate Cookie Co. Ltd. "UCC"
On October 18, 1999, the Company acquired all of the
outstanding common shares of UCC by paying $175,000 in cash
and by issuing 250,000 Class E Series 5 shares and 250,000
Class E Series 6 shares of IMSI which are exchangeable into
shares of the Company based on future earnings of UCC.
p) Exercise of broker options
On October 18, 1999, 172,302 options held by brokers of
previous financings were exercised to purchase an equivalent
number of common shares of the Company. The transaction
resulted in proceeds of US$172,302 to the Company.
q) Share subscription
On October 20, 1999, Southbridge subscribed for 1,555,556
special warrants (the "Warrants") at a price of US$3.00 each.
The Warrants entitle the holder to acquire one Class X shares
of IMSI for each Warrant held for no additional consideration
until the earlier of five days after the date of issuance by
the Ontario Securities Commission (the "Commission") of a
receipt for a preliminary prospectus filed in the province of
Ontario or October 22, 2000. Approximately $4,000,000 of the
proceeds resulting from the subscription for the Warrants is
to be held in escrow until February 29, 2000, pending the
approval of mutually agreeable acquisitions or transactions by
the Company. In addition, the Company is subject to certain
penalty provisions which shall be satisfied by increasing the
number of shares issuable upon surrender of the Warrants by
10% to 32%. The Company will have to comply with such penalty
provisions in the event that the Company does not raise
additional funds or file the required prospectus documents
with the Commission within the timelines specified in the
special warrant indenture.
F-34
<PAGE> 85
(a) INTERNATIONAL MENU SOLUTIONS CORPORATION
(b) Pro Forma Consolidated Balance Sheet
SEPTEMBER 30, 1999
CANADIAN DOLLARS
<TABLE>
<CAPTION>
Historical
International Menu
Solutions Huxtable's Foods,
Corporation L.L.C. Pro forma
("IMSC") ("Huxtables") Pro forma IMSC Consolidated
September 30, 1999 September 30, 1999 Adjustments September 30, 1999
(unaudited) (unaudited) (unaudited) Note (unaudited)
--------------------------------------------------------- -------------- -------------- ----- --------------
(Note 1 (e))
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,262,000 $ 348,000 $ 6,600,000 3
(4,526,000) 2 (iv) $ 6,684,000
Accounts receivable 4,182,000 1,267,000 -- 5,449,000
Inventory 6,143,000 1,386,000 -- 7,529,000
Prepaid expenses and other 1,690,000 71,000 -- 1,761,000
current assets
--------------------------------------------------------- -------------- -------------- --------------
16,277,000 3,072,000 2,074,000 21,423,000
CAPITAL ASSETS, NET 11,199,000 1,827,000 -- 13,026,000
INTANGIBLE ASSETS, NET 13,210,000 35,000 1,957,000 2 (iv) 15,202,000
--------------------------------------------------------- -------------- -------------- --------------
$ 40,686,000 $ 4,934,000 $ 4,031,000 $ 49,651,000
--------------------------------------------------------- -------------- -------------- --------------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness $ 8,902,000 $ 1,323,000 $ (1,323,000) 2 (iv) $ 8,902,000
Accounts payable 3,344,000 1,103,000 -- 4,447,000
Accrued liabilities 1,117,000 544,000 354,000 2 (iv) 2,015,000
Current portion of capital 326,000 279,000 -- 605,000
lease obligation
Current portion of 697,000 87,000 (87,000) 2 (iv) 697,000
long-term debt
--------------------------------------------------------- -------------- -------------- --------------
14,386,000 3,336,000 (1,056,000) 16,666,000
CAPITAL LEASE OBLIGATION 1,141,000 85,000 -- 1,226,000
--
LONG-TERM DEBT 3,014,000 66,000 (66,000) 2 (iv) 3,014,000
--
DUE TO STOCKHOLDERS/MEMBERS -- 2,248,000 (2,248,000) 2 (iv) --
CONVERTIBLE DEBENTURES ISSUED BY 4,000,000 -- -- 4,000,000
SUBSIDIARY
DEFERRED INCOME TAXES 610,000 -- -- 610,000
--
--------------------------------------------------------- -------------- -------------- --------------
23,151,000 5,735,000 (3,370,000) 25,516,000
--------------------------------------------------------- -------------- -------------- --------------
STOCKHOLDERS' EQUITY
Capital stock 19,000 -- -- 19,000
Member's accounts (345,000) 345,000 2 (iv) --
Additional paid-in capital 21,303,000 -- 6,600,000 3 27,903,000
Notes and accrued interest (456,000) 456,000 2 (iv) --
receivable from related
parties
Retained earnings (deficit) (3,787,000) -- -- (3,787,000)
--------------------------------------------------------- -------------- -------------- --------------
17,535,000 (801,000) 7,401,000 24,135,000
--------------------------------------------------------- -------------- -------------- --------------
$ 40,686,000 $ 4,934,000 $ 4,031,000 $ 49,651,000
--------------------------------------------------------- -------------- -------------- --------------
</TABLE>
F-35
<PAGE> 86
(c) INTERNATIONAL MENU SOLUTIONS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
CANADIAN DOLLARS
<TABLE>
<CAPTION>
Historical
International Menu Historical Historical
Solutions Tasty Selections Inc. DC Food Processing Huxtable's Foods
Corporation ("IMSC") ("Tasty") Inc. ("DC") L.L.C. ("Huxtables")
Nine months ended January 1, 1999 to December 6, 1998 to Nine months ended
September 30, 1999 date of acquisition date of acquisition September 30, 1999
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------- --------------------- -------------------- --------------------
(Note 1 (e))
<S> <C> <C> <C> <C>
REVENUE $ 21,680,000 $1,344,000 $7,496,000 $ 11,079,000
------------------------------------------------------------ ---------- ---------- ------------
COSTS AND EXPENSES
Cost of goods sold 18,783,000 1,015,000 6,771,000 8,543,000
Selling expenses 1,328,000 97,000 49,000 1,429,000
Research and development 371,000 -- -- 314,000
Administrative expenses 3,611,000 79,000 143,000 1,828,000
Amortization of intangible assets 391,000 -- 2,000 --
------------------------------------------------------------ ---------- ---------- ------------
24,484,000 1,191,000 6,965,000 12,114,000
------------------------------------------------------------ ---------- ---------- ------------
INCOME(LOSS) FROM OPERATIONS (2,804,000) 153,000 531,000 (1,035,000)
------------------------------------------------------------ ---------- ---------- ------------
OTHER INCOME (EXPENSE)
Interest revenue 30,000 -- -- --
Interest expense (573,000) (34,000) (68,000) (116,000)
------------------------------------------------------------ ---------- ---------- ------------
(543,000) (34,000) (68,000) (116,000)
------------------------------------------------------------ ---------- ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (3,347,000) 119,000 463,000 (1,151,000)
INCOME TAXES 169,000 (33,000) (162,000) -
------------------------------------------------------------ ---------- ---------- ------------
NET INCOME (LOSS) $(3,178,000) $ 86,000 $ 301,000 $(1,151,000)
------------------------------------------------------------- ---------- ---------- ------------
LOSS PER SHARE - DILUTED AND BASIC
---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES -- -- --
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
IMSC Consolidated
Nine months ended
Pro Forma September 30, 1999
Adjustments Note (unaudited)
------------- --------- --------------------
<S> <C> <C> <C>
REVENUE $ -- $ 41,599,000
----------------------------------------- ------------- ------------
COSTS AND EXPENSES
Cost of goods sold -- 35,112,000
Selling expenses -- 2,903,000
Research and development -- 685,000
Administrative expenses -- 5,661,000
Amortization of intangible assets 23,000 3 b)
79,000 2 (iii); 2 (v)
30,000 2 (ii); 2 (v)
98,000 2 (iv); 2 (v) 623,000
----------------------------------------- ------------- ------------
230,000 44,984,000
----------------------------------------- ------------- ------------
INCOME(LOSS) FROM OPERATIONS (230,000) (3,385,000)
----------------------------------------- ------------- ------------
OTHER INCOME (EXPENSE)
Interest revenue -- 30,000
Interest expense (93,000) 3 b) (884,000)
----------------------------------------- ------------- ------------
(93,000) (854,000)
----------------------------------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (323,000) (4,239,000)
INCOME TAXES - (26,000)
----------------------------------------- ------------- ------------
NET INCOME (LOSS) $ (323,000) $(4,265,000)
----------------------------------------- ------------- -----------
LOSS PER SHARE - DILUTED AND BASIC $ (0.36)
-------------------------------------------------------- ------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 11,935,193 4 11,935,193
-------------------------------------------------------- ------------
</TABLE>
F-36
<PAGE> 87
(d) INTERNATIONAL MENU SOLUTIONS CORPORATION
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 CANADIAN DOLLARS
<TABLE>
<CAPTION>
Historical Historical
International Menu Transcontinental Historical Historical
Solutions Gourmet Foods Tasty Batters DC Food Processing
Corporation ("IMSC") ("TGF") ("Tasty") Inc. ("DC")
Nine months ended Nine months ended Nine months ended Nine months ended
September 30, 1998 September 30, 1998 September 30, 1998 September 7, 1998
(unaudited) (unaudited) (unaudited) (unaudited)
-------------------- -------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
REVENUE $2,170,000 $1,790,000 $3,512,000 $ 12,803,000
------------------------------------------------------------ ---------- ---------- ------------
COSTS AND EXPENSES
Cost of goods sold 1,933,000 1,157,000 2,743,000 11,468,000
Selling expenses 132,000 287,000 255,000 86,000
Research and development 103,000 - -- --
Administrative expenses 322,000 361,000 340,000 563,000
Amortization of intangible assets 10,000 -- -- 4,000
------------------------------------------------------------ ---------- ---------- ------------
2,500,000 1,805,000 3,338,000 12,121,000
------------------------------------------------------------ ---------- ---------- ------------
INCOME(LOSS) FROM OPERATIONS (330,000) (15,000) 174,000 682,000
------------------------------------------------------------ ---------- ---------- ------------
OTHER INCOME (EXPENSE)
Interest revenue 18,000 -- -- --
Interest expense (64,000) (79,000) (82,000) (94,000)
------------------------------------------------------------ ---------- ---------- ------------
(46,000) (79,000) (82,000) (94,000)
------------------------------------------------------------ ---------- ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (376,000) (94,000) 92,000 588,000
INCOME TAXES - 33,000 (32,000) (206,000)
------------------------------------------------------------ ---------- ---------- ------------
NET INCOME (LOSS) $(376,000) $ (61,000) $60,000 $382,000
------------------------------------------------------------ ---------- ---------- ------------
LOSS PER SHARE - DILUTED AND BASIC
---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Huxtable's Foods Pro Forma
L.L.C. ("Huxtable's") IMSC Consolidated
Nine months ended Nine months ended
September 30, 1998 Pro Forma September 30, 1998
(unaudited) Adjustments Note (unaudited)
-------------------- ----------- --------- ------------------
(Note 1 (e))
<S> <C> <C> <C> <C>
REVENUE $ 11,198,000 $ -- $ 31,473,000
---------------------------------------- ------------ ----------- ------------
COSTS AND EXPENSES
Cost of goods sold 8,511,000 -- 25,812,000
Selling expenses 1,302,000 -- 2,062,000
Research and development 333,000 -- 436,000
Administrative expenses 1,926,000 -- 3,512,000
Amortization of intangible assets -- 68,000 3 b)
6,000 2 (i); 2(v)
179,000 2 (iii); 2 (v)
89,000 2 (ii); 2(v)
98,000 2 (iv); 2(v) 454,000
---------------------------------------- ------------ ----------- ------------
12,072,000 440,000 32,276,000
---------------------------------------- ------------ ----------- ------------
INCOME(LOSS) FROM OPERATIONS (874,000) (440,000) (803,000)
---------------------------------------- ------------ ----------- ------------
OTHER INCOME (EXPENSE)
Interest revenue -- -- 18,000
Interest expense (120,000) (210,000) 3 b) (649,000)
---------------------------------------- ------------ ----------- ------------
(120,000) (210,000) (631,000)
---------------------------------------- ------------ ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (994,000) (650,000) (1,434,000)
INCOME TAXES -- -- (205,000)
---------------------------------------- ------------ ----------- ------------
NET INCOME (LOSS) $(994,000) $(650,000) $(1,639,000)
---------------------------------------- ------------ ----------- ------------
LOSS PER SHARE - DILUTED AND BASIC $ (0.15)
----------------------------------------------------------------------------------- ------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 10,930,065 4 10,930,065
----------------------------------------------------------------------------------- ------------
</TABLE>
F-37
<PAGE> 88
(e) INTERNATIONAL MENU SOLUTIONS CORPORATION
(f) Pro Forma Statement of Operations
YEAR ENDED DECEMBER 31, 1998
CANADIAN DOLLARS
<TABLE>
<CAPTION>
Historical
Historical Historical Transcontinental Historical
International Menu Norbakco Ltd. Gourmet Foods Tasty Batters
Solutions ("Norbakco") ("TGF") ("Tasty")
Corporation ("IMSC") Six months ended Eleven months ended Twelve months ended
Year ended November 30, 1998 November 30, 1998 December 31, 1998
December 31, 1998 (unaudited) (unaudited) (unaudited)
-------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
REVENUE $6,096,000 $1,976,000 $4,247,000 $5,574,000
---------------------------------------------------------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of goods sold 4,730,000 1,762,000 2,825,000 4,287,000
Selling expenses 610,000 50,000 539,000 392,000
Research and development 426,000 -- -- --
Administrative expenses 765,000 170,000 688,000 461,000
Amortization of intangibles assets 47,000 -- -- --
---------------------------------------------------------- ---------- ---------- ----------
6,578,000 1,982,000 4,052,000 5,140,000
---------------------------------------------------------- ---------- ---------- ----------
INCOME(LOSS) FROM OPERATIONS (482,000) (6,000) 195,000 434,000
---------------------------------------------------------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest revenue 25,000 -- -- --
Interest expense (98,000) (20,000) (117,000) (126,000)
---------------------------------------------------------- ---------- ---------- ----------
(73,000) (20,000) (117,000) (126,000)
---------------------------------------------------------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (555,000) (26,000) 78,000 308,000
INCOME TAXES -- -- (29,000) (88,000)
---------------------------------------------------------- ---------- ---------- ----------
NET INCOME (LOSS) $ (555,000) $(26,000) $107,000 $220,000
---------------------------------------------------------- ---------- ---------- ----------
LOSS PER SHARE - DILUTED AND BASIC
------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Historical
DC Food Processing Huxtable's Foods Pro Forma
Inc. ("DC") L.L.C. ("Huxtables") IMSC Consolidated
Twelve months ended Twelve months ended Twelve months ended
December 6, 1998 December 31, 1998 Pro Forma December 31, 1998
(unaudited) (unaudited) Adjustments Note (Unaudited)
-------------------- -------------------- ----------- ------------- -------------------
(Note 1 (e))
<S> <C> <C> <C> <C> <C>
REVENUE $ 17,580,000 $ 18,254,000 $ -- $ 53,727,000
--------------------------------------- ------------ ------------ --------- ------------
COSTS AND EXPENSES
Cost of goods sold 15,979,000 15,129,000 -- 44,712,000
Selling expenses 21,000 945,000 -- 2,557,000
Research and development -- 450,000 -- 876,000
Administrative expenses 561,000 2,389,000 -- 5,034,000
Amortization of intangibles assets 7,000 -- 90,000 3 b)
7,000 2 (i); 2 (v)
238,000 2 (iii); 2 (v)
119,000 2 (ii); 2 (v)
130,000 2 (iv); 2 (v) 638,000
--------------------------------------- ------------ ------------ --------- ------------
16,568,000 18,913,000 584,000 53,817,000
--------------------------------------- ------------ ------------ --------- ------------
INCOME(LOSS) FROM OPERATIONS 1,012,000 (659,000) (584,000) (90,000)
--------------------------------------- ------------ ------------ --------- ------------
OTHER INCOME (EXPENSE)
Interest revenue -- 6,000 -- 31,000
Interest expense (117,000) (211,000) (280,000) 3 b) (969,000)
--------------------------------------- ------------ ------------ --------- ------------
(117,000) (205,000) (280,000) (938,000)
--------------------------------------- ------------ ------------ --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 895,000 (864,000) (864,000) (1,028,000)
INCOME TAXES (289,000) -- -- (348,000)
--------------------------------------- ------------ ------------ --------- ------------
NET INCOME (LOSS) $606,000 $ (864,000) $(864,000) $(1,376,000)
--------------------------------------- ------------ ------------ --------- ------------
LOSS PER SHARE - DILUTED AND BASIC $ (0.12)
----------------------------------------------------------------------------------------------- ------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 11,183,412 4 11,183,412
----------------------------------------------------------------------------------------------- ------------
</TABLE>
F-38
<PAGE> 89
Footnotes to Pro Forma Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying pro forma consolidated balance sheet as of September
30, 1999 and pro forma consolidated statements of operations for the
nine-month periods ended September 30, 1999 and 1998 and for the year
ended December 31, 1998 of International Menu Solutions Corporation
("IMSC") have been prepared to give effect to the business combinations
involving Transcontinental Gourmet Foods Inc. ("TGF"), Tasty Selections
Inc. ("Tasty Selections"), 1005549 Ontario Limited ("D.C. Foods") and
Huxtable's Kitchens, L.L.C. ("Huxtable's") and related transactions
described elsewhere herein on the basis of the assumptions described in
Notes 2 to 4 below. The pro forma consolidated balance sheet and pro
forma consolidated statement of operations of IMSC have been prepared
from the following:
a) The audited consolidated financial statements of IMSC for the
year ended December 31, 1998 and the unaudited consolidated
financial statements of IMSC for the nine-month period ended
September 30, 1999;
b) The unaudited financial statements of TGF for the eleven-month
period ended November 30, 1998;
c) The unaudited financial statements of Tasty for the year ended
December 31, 1998 and for the four-month period ended March
31, 1999;
d) The audited consolidated financial statements of D.C. Foods
for the year ended December 6, 1998 and the unaudited
consolidated financial statements for the period from December
7, 1998 to April 30, 1999; and
e) The audited financial statements of Huxtable's for the year
ended December 31, 1998 and the unaudited financial statements
of Huxtable's for the nine-month period ended September 30,
1999. The statements of operations for Huxtable's for the year
ended December 31, 1998 and the nine-month period ended
September 30, 1999 were originally stated in US dollars. These
statements have been translated to Canadian dollars at the
average exchange rate prevailing during the respective
periods. The average exchange rates (USD/CAD) used were
0.6747, 0.6712 and 0.6838 for the year ended December 31, 1998
and the nine month-periods ended September 30, 1999 and 1998,
respectively. The assets and liabilities appearing on the
balance sheet of Huxtable's as of September 30, 1999 were
translated at an exchange rate of 0.6805. Condensed historical
and translated values are as follows:
<TABLE>
<CAPTION>
Historical reported Translated amount
Item amount
------------------------------------------------------- ------------ ------------------
(US Dollars) (Canadian dollars)
(in thousands)
<S> <C> <C>
Balance sheet (September 30, 1999):
Current assets $ 2,090 $ 3,072
Property and equipment 1,243 1,827
Other 24 35
------------------------------------------------------------------------------------------------
Total assets 3,357 4,934
------------------------------------------------------------------------------------------------
Current liabilities 2,270 3,336
Long-term debt and leases 103 151
Accrued preferred return 1,530 2,248
------------------------------------------------------------------------------------------------
Total liabilities 3,903 5,735
------------------------------------------------------------------------------------------------
Members deficiency (546) (801)
------------------------------------------------------------------------------------------------
Total liabilities and members deficiency $ 3,357 $ 4,934
------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE> 90
BASIS OF PRESENTATION (CONTINUED)
<TABLE>
<CAPTION>
Item Historical reported Translated amount
amount
------------------------------------------------------- ------------------------------------------
(US Dollars) (Canadian dollars)
(in thousands)
<S> <C> <C>
Income statement:
Nine months ended September 30, 1999
Revenue $ 7,436 $ 11,079
Operating expenses 8,130 12,114
------------------------------------------------------------------------------------------------
Loss from operations (694) (1,035)
Other income (expense) (78) (116)
------------------------------------------------------------------------------------------------
Net loss $ (772) $ (1,151)
------------------------------------------------------------------------------------------------
Nine months ended September 30, 1998
Revenue $ 7,657 $ 11,198
Operating expenses 8,259 12,072
------------------------------------------------------------------------------------------------
Loss from operations (602) (874)
Other income (expense) (79) (120)
------------------------------------------------------------------------------------------------
Net loss $ (681) $ (994)
------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Revenue $ 12,303 $ 18,254
Operating expenses 12,747 18,913
------------------------------------------------------------------------------------------------
Loss from operations (444) (659)
Other income (expense) (138) (205)
------------------------------------------------------------------------------------------------
Net loss $ (582) $ (864)
------------------------------------------------------------------------------------------------
</TABLE>
The pro forma consolidated balance sheet and pro forma consolidated
statement of operations are not intended to reflect the financial
position of IMSC which would have actually resulted had the combination,
related transactions and other pro forma adjustments been effected on the
dates indicated. Further, the pro forma financial information is not
necessarily indicative of the financial position that may prevail in the
future.
F-40
<PAGE> 91
2. PRO FORMA ASSUMPTIONS RELATING TO ACQUISITIONS
SINCE INCEPTION, THE COMPANY HAS ACQUIRED THE FOLLOWING
SIGNIFICANT BUSINESSES, SET OUT IN THE TABLE BELOW, WHICH HAVE BEEN
ACCOUNTED FOR USING THE PURCHASE METHOD:
<TABLE>
<CAPTION>
TGF/ (i) Tasty (ii) D.C. Foods (iii) Huxtable's (iv)
-------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Original purchase price
Including acquisition costs $ 1,100,000 $ 2,220,000 $ 6,533,000 $ 4,880,000
Assigned fair values
of net assets acquired
Current assets 2,922,000 1,383,000 1,857,000 3,072,000
Capital assets 2,223,000 494,000 4,891,000 1,862,000
Current liabilities (2,958,000) (677,000) (1,571,000) (1,926,000)
Long-term liabilities (1,199,000) (758,000) (2,220,000) (85,000)
------------------------------------------------ ---------------------------------------------------------
988,000 442,000 2,957,000 2,923,000
----------------------------------------------------------------------------------------------------------
Intangible assets acquired (v) $ 122,000 $ 1,778,000 $ 3,576,000 $ 1,957,000
----------------------------------------------------------------------------------------------------------
</TABLE>
i) The Corporation acquired all of the outstanding shares of TGF
in December 1998. Cash of $1,000,000 was paid to the vendors on
closing. An additional cash payment of $600,000, estimated at the date
of acquisition, was payable during 1999 based on the net book value of
TGF in excess of $1,000,000 at February 28, 1999. The balance of the
purchase price of was paid in the form of three classes of exchangeable
shares of IMSI (Class B, C and D), issued December 1, 1998, which are
exchangeable for shares of the Corporation based upon the earnings of
TGF for the years ending February 28, 1999, February 29, 2000 and
February 28, 2001.
ii) The Company acquired all of the outstanding shares of Tasty in
April 1999 for total consideration of approximately $2,160,000. Tasty
was acquired by paying cash of $1,000,000 and by issuing 442,750 Class
N shares of the Corporation and 442,750 Class X shares of IMSI to the
vendors, valued at $2.63 per Class X share
iii) IMSI acquired all of the issued and outstanding shares of D.C.
Foods in May 1999. Pursuant to the terms of the purchase agreement, the
purchase price payable to the former shareholders of D.C. Foods was
satisfied by paying $4,000,000 in cash; by issuing 893,333 Class N
shares of the Corporation and 893,333 Class X shares of IMSI valued at
$2.63 per Class X share; and by issuing 250,000 Class E Series 1
shares, 250,000 Class E Series 2 shares, 250,000 Class E Series 3
shares and 250,000 Class E Series 4 shares of IMSI. The Class E Series
shares are exchangeable into common shares of the Corporation based on
the earnings recorded by D.C. Foods in 1999 and 2002. The value of each
series of Class E shares will be recorded as additional purchase price
once the earnings contingencies are resolved.
F-41
<PAGE> 92
2. PRO FORMA ASSUMPTIONS RELATING TO ACQUISITIONS (continued)
iv) The Company purchased substantially all of the operating
assets and certain liabilities (except bank operating loans, long-term
debt and amounts owing to members) of Huxtable's in November 1999.
Pursuant to the purchase agreement, US$3,080,000 (CDN$4,526,000) was
paid in cash. Acquisition costs are estimated at $354,000. Additional
payments in cash or shares of common stock of the Company will be made
based upon the future earnings levels of Huxtable's and will be
recorded as additional purchase price once the earnings contingencies
are resolved.
v) Intangible assets acquired in the various acquisitions include
goodwill, brands, recipes, manufacturing systems and technology,
customer lists and assembled workforce. Goodwill is amortized over a
20-year period. The remainder of the intangible assets will have
shorter amortization periods ranging from 5 to 15 years. At the time of
preparation of these pro forma financial statements, the valuation of
the individual intangible assets acquired is not complete. In
anticipation of the results of the valuation process, management has
used an amortization period of 15 years for all intangible assets in
the preparation of the pro forma financial statements. Management
expects that the weighted average life of intangible assets acquired to
date will be between 15 and 18 years.
F-42
<PAGE> 93
3. PRO FORMA ASSUMPTIONS RELATING TO ACQUISITION FINANCING
i) Share subscription
On April 16, 1999, Southbridge Inc. ("Southbridge") subscribed
for 1,523,810 common shares of the Company at a subscription
price of $2.625 per common share. Proceeds to the Company, net
of issuance costs, totalled approximately $3,693,000, net of
issuance cost of approximately $307,000. As a part of the
subscription, the Company granted to Southbridge 400,000
warrants which entitle Southbridge to purchase up to 200,000
common shares at the price of $2.25 per common share during
the period to April 16, 2000 and 200,000 common shares at the
price of $2.625 per common share during the period to April
16, 2001.
ii) Convertible debenture
On May 10, 1999, IMSI and the Company entered into a loan
agreement with First Ontario Fund ("First Ontario") and Bank
of Montreal Capital Corporation ("BMOCC") with respect to a
CDN$4 Million financing. The funding was advanced as to $1.5
Million by BMOCC and as to $2.5 Million by First Ontario. The
financing was secured by general security granted by each of
IMSI and the Company, a guarantee and general security
agreement from each of IMSI's subsidiaries, a mortgage of the
premises owned by Prime at 620 Colby Drive, Waterloo, Ontario,
and a share pledge agreement executed by the Company pursuant
to which it pledged its common shares in the capital of IMSI
to First Ontario and BMOCC.
The terms of the loan are as follows: (a) the interest rate
for the period ending April 15, 2000 is 7% per annum and
thereafter until maturity on April 15, 2003 is 13% per annum;
(b) the outstanding debt is convertible, at the option of the
holder, into Class X shares of IMSI at a price of $2.62 per
share; (c) the holder has the right to acquire a number of
Class N shares equal to the number of Class X shares received;
(d) IMSI has the option to force conversion into Class X and N
shares at any time after July 1, 1999 provided that (i) the
Company's common stock trades on a major North American stock
exchange approved by the lenders, (ii) the Company's common
stock has a cumulative trading volume during a twenty day
period of the greater of (1) 300,000 shares of common stock,
or (2) five percent of the number of issued shares of common
stock that are not subject to any escrow agreement or resale
restrictions set out in the Ontario Securities Act, and (iii)
the weighted average trading price during such twenty day
period is not less than the United States Dollar equivalent of
$CD 5.50.
F-43
<PAGE> 94
iii) Special warrants
On October 22, 1999, Southbridge Equities Inc., a corporation organized
under the laws of the Province of Ontario, Canada ("Southbridge
Equities"), subscribed for 1,555,556 special warrants ("Special
Warrants") of IMSI, for an aggregate consideration of approximately
US$4.7 million (CDN$6,600,000). Each Special Warrant entitles
Southbridge Equities, upon exercise thereof without any further
consideration, to receive one Non-voting Class X share (an
"Exchangeable Share") of IMSI. Such Special Warrants are immediately
exercisable and any Special Warrant not exercised by October 22, 2000
(or earlier under certain circumstances) will be deemed to have been
exercised as of such date. The Special Warrants are subject to
customary anti-dilution adjustment provisions. In addition, each
Special Warrant will be exercisable for (i) 1.1 Exchangeable Shares in
the event that IMSI does not receive a receipt for a (final) prospectus
issued by the Ontario Securities Commission by August 5, 2000, and (ii)
1.2 Exchangeable Shares in the event that IMSI is not able to obtain
additional financing of least US$7 million by March 30, 2000 or certain
trading volume and price targets for the Company's common stock are not
met. Also, in the event that IMSI is not able to obtain such additional
financing by March 30, 2000, the Special Warrants will be deemed to be
amended to change all references to Exchangeable Shares to refer to the
common stock of the Company. These securities were sold in an offshore
transaction in reliance on Regulation S under the Securities Act of
1933, as amended. In connection with such subscription, the Company and
its subsidiary entered into additional agreements with Southbridge
Equities which, among other thing, address registration rights. The
proceeds will be used to fund previously announced acquisitions and
expansion plans.
F-44
<PAGE> 95
4. PRO FORMA ASSUMPTIONS RELATING TO BASIC LOSS PER SHARE
<TABLE>
<CAPTION>
Nine months ended Year ended
September 30, December 31,
1999 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Numerator
Net loss available to common shareholders $ (4,265,000) $ (1,639,000) $ (1,376,000)
-------------------------------------------------------------------------------------------------------------
Denominator
Shares outstanding at the beginning
of the period 9,075,300 5,678,000 5,678,000
Pro forma adjustments:
Effect of shares issued in July 1998
equity financing prior to merger
with IMSI (1,400,000 shares issued) 394,872 648,219
Effect of shares issued in November
and December 1998 related to equity
financing (Regulation S offering) (i) 1,997,300 1,997,300
Effect of shares issued in equity
financing (see note 3 (i)) (i) 1,523,810 1,523,810 1,523,810
Effect of shares issued in acquisition
of Tasty (see Note 2 (ii)) (ii) 442,750 442,750 442,750
Effect of shares issued in acquisition
D.C. Foods (see Note 2 (iii)) (ii) 893,333 893,333 893,333
-------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 11,935,193 10,930,065 11,183,412
-------------------------------------------------------------------------------------------------------------
Net loss per share (basic) $ (0.36) $ (0.15) $ (0.12)
-------------------------------------------------------------------------------------------------------------
</TABLE>
i) For pro forma purposes, shares issued in conjunction with equity
financings for which the majority of the proceeds were used to
complete an acquisition were assumed to be outstanding at the
beginning of the related period.
ii) For pro forma purposes, shares issued in connection with acquisitions
were assumed to be outstanding at the beginning of the related
period.
iii) No diluted net loss per share disclosure is presented as the
conversion of securities with potential for dilution would have had
an anti-dilutive effect on net loss per share.
F-45
