<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
(X) Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2000
( ) Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
Commission file number 0-30092
INTERNATIONAL MENU SOLUTIONS CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 91-1849433
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
350 Creditstone Road, Unit 202
Concord, Ontario Canada L4K 3Z2
(Address of Principal Executive Offices)
(416) 366-6368
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES( X ) NO( )
12,538,434 shares of the issuer's common stock, par value $0.001 per share,
and 6,003,632 shares of the issuer's Class N Shares, par value $0.001 per
share, were outstanding at October 31, 2000.
===============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL MENU SOLUTIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 2000 (unaudited)
and December 31, 1999 2
Consolidated Statements of Operations (unaudited) for the three and
nine month periods ended September 30, 2000 and 1999 3
Consolidated Statement of Shareholders' Equity and Comprehensive loss
for the nine months period ended September 30, 2000 4
Consolidated Statements of Cash Flows (unaudited) for the nine month
periods ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6 - 12
</TABLE>
<PAGE> 3
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
September 30, December 31,
2000 1999
---------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 223,014 $ 4,165,370
Accounts receivable 8,101,801 11,824,618
Inventories 12,279,321 5,981,081
Prepaid expenses 2,478,950 796,553
-------------------------------------------------------------------------------------------------------------------
23,083,086 22,767,622
CAPITAL ASSETS, NET 17,570,610 15,026,634
GOODWILL, NET 17,883,955 9,548,989
OTHER INTANGIBLE ASSETS, NET 6,894,809 6,192,013
LONG TERM RECEIVABLE 1,506,356 --
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 66,938,816 $ 53,535,258
===================================================================================================================
LIABILITIES
CURRENT LIABILITIES
Bank operating loans $ 8,860,696 $ 9,803,977
Accounts payable 8,334,176 5,239,600
Accrued liabilities 3,926,926 3,123,712
Current portion of capital lease obligations 570,785 421,131
Current portion of long-term debt 5,564,146 415,958
--------------------------------------------------------------------------------------------------------------------
27,256,729 19,004,378
CAPITAL LEASE OBLIGATIONS 2,163,765 1,395,588
LONG-TERM DEBT 3,746,512 3,620,513
CONVERTIBLE DEBENTURE 4,000,000 4,000,000
DEFERRED INCOME TAXES 753,400 753,400
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 37,920,406 28,773,819
--------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
REDEMPTION VALUE OF WRITTEN PUT OPTIONS 1,015,000 --
--------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class N voting, non-participating stock; US$0.001 par
value; 10,000,000 shares authorized; 6,003,632 and 3,110,795
shares issued 8,704 4,467
Common stock - US$0.001 par value; 25,000,000 shares
authorized; 12,538,434 and 10,476,048 shares issued 18,059 15,051
Additional paid-in capital 38,035,449 28,044,175
Accumulated other comprehensive loss (127,763) (154,974)
Accumulated deficit (9,931,039) (3,147,340)
-------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 28,003,410 24,761,379
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,938,816 $ 53,535,258
===================================================================================================================
</TABLE>
2
<PAGE> 4
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------------- --------------------- ------------------ ---------------------
(RESTATED - NOTE 3) (RESTATED - NOTE 3)
<S> <C> <C> <C> <C>
REVENUE $ 18,028,916 $ 8,647,828 $ 50,494,703 $ 21,680,117
-------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of goods sold 15,347,363 7,377,439 42,569,462 18,782,667
Selling expenses 1,696,247 420,366 3,989,102 1,327,463
Administrative expenses 3,205,534 2,007,619 8,876,565 3,982,614
Gain on sale of assets - - (935,000) -
Amortization of goodwill and other
intangible assets 199,942 145,384 988,322 391,140
-------------------------------------------------------------------------------------------------------------------------------
20,449,086 9,950,808 55,488,451 24,483,884
-------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (2,420,170) (1,302,980) (4,993,748) (2,803,767)
-------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest revenue 146,209 - 148,431 30,253
Interest expense (1,011,888) (260,158) (1,938,382) (573,388)
-------------------------------------------------------------------------------------------------------------------------------
(865,679) (260,158) (1,789,951) (543,135)
-------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (3,285,849) (1,563,138) (6,783,699) (3,346,902)
INCOME TAXES - 25,000 - 169,400
-------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (3,285,849) $ (1,538,138) $ (6,783,699) $ (3,177,502)
===============================================================================================================================
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.19) $ (0.12) $ (0.42) $ (0.30)
===============================================================================================================================
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 16,929,312 13,084,669 16,071,380 10,590,387
===============================================================================================================================
</TABLE>
3
<PAGE> 5
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(UNAUDITED) (CANADIAN DOLLARS)
================================================================================
<TABLE>
<CAPTION>
Additional
Class N Common Paid-In
Shares Amount Shares Amount Capital
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999 3,110,795 $4,467 10,476,048 $15,051 $28,044,175
Translation adjustments
Issuance of common shares
net of issuance costs -- -- 1,767,220 2,580 6,238,668
Issuance of exchangeable shares
by IMSI in connection
with the acquisition of
businesses 3,188,003 4,665 -- -- 3,246,712
Adjustment to additional paid in capital
to reflect 479,069 shares authorized to
be issued -- -- -- -- 1,520,894
Share exchange (295,166) (428) 295,166 428 --
Fair value of warrants issued -- -- -- -- 240,000
-- -- -- -- <240,000>
Fair value of written put option -- -- -- -- 535,000
-- -- -- -- <535,000>
Transfer related to redemption value of
written put option -- -- -- -- (1,015,000)
Net loss
---------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 2000 6,003,632 $8,704 12,538,434 $18,059 $38,035,449
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total Total
Comprehensive Accumulated Stockholders' Comprehensive
Loss Deficit Equity Loss
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 $(154,973) $(3,147,340) $24,761,380
Translation adjustments 27,210 27,210 27,210
Issuance of common shares
net of issuance costs -- -- 6,241,248 --
Issuance of exchageable shares
by IMSI in connection
with the acquisition of
businesses -- -- 3,251,377 --
Adjustment to additional authorized
paid in capital to reflect 479,069
shares to be issued -- -- 1,520,894 --
Share exchange -- -- -- --
Fair value of warrants issued -- -- -- --
-- -- -- --
Fair value of written put options -- -- -- --
-- -- -- --
Transfer related to redemption value of
written put option -- -- (1,015,000) --
Net loss (6,783,699) (6,783,699) (6,783,699)
-------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 2000 $(127,763) $(9,931,039) $28,003,410 $(6,756,489)
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 6
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,783,699) $ (3,177,502)
Item not requiring cash
Depreciation and amortization 2,465,864 1,182,727
Deferred income taxes - (169,400)
Gain on sale of assets (935,000) -
Changes in operating assets and liabilities
Accounts receivable 3,797,817 455,868
Inventories (6,298,240) (3,998,834)
Prepaid expenses (1,682,397) (1,515,327)
Accounts payable 3,334,576 (1,194,199)
Accrued liabilities 830,424 159,380
------------------------------------------------------------------------------------------------------------
(5,270,655) (8,257,287)
------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (2,547,037) (2,766,086)
Additions to intangible assets (1,391,113) (688,371)
Acquisitions (4,993,701)
------------------------------------------------------------------------------------------------------------
(3,938,150) (8,448,158)
------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance of shares 1,992,038 6,603,879
Proceeds (net repayments of) from bank loans (943,280) 8,236,990
Advances to related parties (646,356) -
Convertible debentures issued - 3,640,976
Proceeds from long-term and short-term debt 5,597,142 1,155,761
Payment of long-term debt and
capital lease principal (733,095) (535,780)
------------------------------------------------------------------------------------------------------------
5,266,449 19,101,826
------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (3,942,356) 2,396,381
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,165,370 1,865,612
------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 223,014 $ 4,261,993
------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,535,223 $ 573,388
------------------------------------------------------------------------------------------------------------
Cash paid during the period for income taxes $ - $ -
------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
1. ORGANIZATION
The Corporation 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1999 and the accounting policies
described therein filed on Form 10-KSB with the SEC on April 14, 2000.
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.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
101,"Revenue Recognition in Financial Statements," which summarizes the
SEC's views in applying generally accepted accounting principles to
revenue recognition. Implementation of SAB 101 is required no later
than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. The Corporation does not anticipate that the implementation
of SAB 101 will materially affect its financial statements due to the
nature of the business.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in June 1998. SFAS No.
133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133." In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," an amendment of SFAS No.
133. Based on the revised effective date, the Corporation will adopt
SFAS No. 133, as amended by SFAS No. 138, on January 1, 2001, and is
currently assessing the impact of adoption on its consolidated
financial statements.
6
<PAGE> 8
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
3. ACCOUNTING FOR EXCHANGEABLE SHARES ISSUED BY SUBSIDIARY
In connection with the acquisition of Transcontinental Gourmet Foods
and Norbakco Limited in 1998, and D.C. Foods in 1999, the Corporation
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 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
Corporation has restated the consolidated balance sheets, statements of
operations and the statement of stockholders' equity 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".
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>
Net loss as previously reported: $ (2,324,842)
Increase in amortization charges related to increased
goodwill recorded at acquisition date (63,660)
Non recognition of minority interest (789,000)
----------------
Net effect of restatement on net loss and accumulated deficit (852,660)
---------------------
Net loss as restated $ (3,177,502)
---------------------
</TABLE>
7
<PAGE> 9
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
4. CONTINGENT CONSIDERATION ASSOCIATED WITH ACQUISITIONS
In connection with the acquisitions of D.C. Foods, Huxtable's, Ultimate
Cookie and Transcontinental Gourmet Foods ("TGF") which were completed
in May 1999, November 1999, October 1999 and November 1998
respectively, the Corporation has performed calculations to determine
additional consideration payable to the selling shareholders of the
businesses acquired. The calculations were based upon the provisions in
the purchase agreements between the Corporation and the selling
shareholders. The Corporation has recorded the value of the shares as
additional purchase price (goodwill).
Based upon the operating results of D.C. Foods for the period from
December 7, 1998 to December 31, 1999, during the quarter ended September
30, 2000, the Corporation issued 413,024 Class N shares based upon the
conversion formula contained in the Class E Series 1 and Series 2 shares
issued by the Corporation's subsidiary, International Menu Solutions Inc.
Based on the December 31, 1999 market price of the Corporation's common
stock of US$2.94 (CDN$4.24) per common share, the value of the Class E
Series 1 and Series 2 shares is approximately $1,761,000. This
calculation has increased the purchase price and goodwill related to D.C.
Foods by $1,761,000.
Based upon the operating results of Huxtable's for the period from
November 1, 1999 to December 31, 1999, the Corporation was obligated to
issue approximately 956,178 common shares, valued at US$2.94 (CDN$4.24)
per share to the selling shareholders of Huxtable's. The value of the
shares issued on August 8, 2000 was approximately $4,054,000.
Based upon the operating results of Ultimate Cookie for the period from
May 1, 1999 to April 30, 2000, the Corporation was obligated to issue
approximately 479,069 Class N shares based upon the conversion formula
contained in the Class E Series 5 shares issued by International Menu
Solutions Inc. Based on the April 30, 2000 market price of the
Corporation's common stock of US$2.15 (CDN$3.17) per common share, the
value of the Class E Series 5 shares is approximately $1,520,000. This
calculation has increased the purchase price and goodwill related to
Ultimate Cookie by $1,520,000.
Based upon the operating results of TGF for the period from March 1,
1999 to February 29, 2000, the company was obliged to issue
511,261 Class N shares based upon the conversion formula contained in
the Class C exchangeable shares issued by International Menu Solutions
Inc. to the selling shareholders of TGF. Based on a common stock price
of US$2.00 (CDN$2.915) per common share, the value of the Class C shares
is approximately $1,490,000. This calculation has increased the purchase
price and goodwill related to TGF by $1,490,000.
The Class N shares issued by the Corporation, together with the related
shares of International Menu Solutions Inc., are exchangeable for a
number of shares of common stock of the Corporation equal to the number
of Class N shares exchanged.
The Corporation is committed to issue additional consideration,
generally in the form of common shares, to selling shareholders of
businesses acquired based on operating results of the businesses
acquired. Further details are set out in the Corporation's Annual
Report on 10-KSB filed on April 14, 2000.
5. SHARE ISSUANCE
As disclosed in the Company's 8-K filed October 4, 2000, on September
20, 2000, the Corporation received a private placement equity investment
for proceeds of US$1,375,000, (CDN$1,993,750), net of issuance costs of
US$125,000 (CDN$181,250). The equity placement consisted of 750,000
common shares of the Corporation and 500,000 warrants. The warrants
provide the investor with the opportunity to purchase up to 500,000
shares of the Corporation at an exercise price of US$2.00, (CDN$2.96)
per share. The warrants can be exercised at any time and expire
September 20, 2003. In addition, during the one year period following
September 20, 2001, in the event that the average trading price of the
common stock of the Corporation during any 90 consecutive trading days
is less than US$2.25 per share, then at any time during the 60-day
period following such 90 consecutive day period the investor has the
option to elect to put back to the Corporation up to 300,000 shares of
common stock (the "Put Option") issued to investor at a purchase price
of US$2.25 per share. In addition to the issuance costs of $181,250,
within 10 business days after the expiration of the first calendar
quarter following the first anniversary of the closing date, the Company
is obligated to deliver to the investor shares of Common Stock with an
aggregate value of US$125,000. If at that time the trading price is less
than US$1.75 the Company has the option to pay all or any portion of the
US$125,000 in cash.
8
<PAGE> 10
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
In accordance with the guidance provided by Emerging Issues Task force
("EITF") Abstract No. 96-13 "Accounting for Derivative Financial
Instruments indexed to, and Potentially Settled in, a Company's Own
Stock" the Corporation has accounted for the Put Option as an equity
instrument as the only settlement method is physical settlement. The Put
Option was measured at fair value ($535,000) using the Black Scholes
option-pricing model. The assumptions used by management in calculating
the fair value included an expected life of two years; a volatility
factor of 60%; a dividend yield of 0%; and a risk free interest rate of
6.00%. In addition, because physical settelment is assumed or required
and the Corporation is obligated to deliver cash in connection with
physical settlement, an amount equal to the cash redemption amount
($1,015,000) under physical settlement has been transferred to temporary
equity and labeled as "Redemption value of written put option".
The Corporation recorded the fair value of the 500,000 warrants as a
reduction of paid-in capital. The fair value ($240,000) was established
by management using a Black Scholes option-pricing model using the
following assumptions; an expected life of three years; a volatility
factor of 60%; dividend yield of 0%; and a risk free interest rate of
6.00%.
6. DEBT FACILITIES AND CONVERTIBLE DEBENTURES
As of September 30, 2000, the Corporation and its subsidiaries have
utilized an aggregate of approximately $8,230,000 of authorized lines
of credit totaling $10,000,000. The lines of credit bear interest at
Canadian prime plus 1/2% or 8% at September 30, 2000 except for
borrowings secured by cash deposits, in which case interest is
calculated at prime or 7.5%. The outstanding balances are due on demand
and are secured by a general assignment of book debts, a general
security agreement over all assets of the Corporation, life insurance
on certain executives totaling $2,500,000 and a priority agreement with
other lenders of the Corporation.
In addition to the authorized lines of credit, the Corporation 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.
On May 10, 1999, the Corporation's subsidiary IMSI issued approximately
$4,000,000 in convertible debentures to two investors. The debentures
had a term of 48 months, bear interest at 7% per annum for the first 12
months and 13% thereafter, and were convertible at the holder's option
at any time into exchangeable shares of IMSI which are then
exchangeable into shares of the Corporation. IMSI will have the right
to force conversion of the debentures if certain trading statistics are
maintained after July 1, 2000. A total of $359,000 was paid by IMSI in
respect of professional fees and commissions, which have been recorded
as deferred financing costs and are being amortized over the term of
the debenture.
On June 5, 2000, the Corporation entered into a loan agreement with
Southbridge Investment Partnership No.1, First Ontario Labour Sponsored
Investment Fund Ltd., and the Bank of Montreal Capital Corporation for
$4,500,000. An amendment to the agreement was issued September 1, 2000 to
increase the loan to $5,200,000. Interest was payable monthly at a rate
of 12% per annum. The interest rate on any unpaid portion increased to
24% on September 1, 2000, and increases to 36% per annum on December 1,
2000. The loan is subordinated to the Bank of Nova Scotia and other
lenders having first charge on assets and is secured by the assets of the
Corporation and its subsidiaries. The loan is due February 28, 2001. Debt
Issuance costs of $636,020 have been deferred and are being amortized
over a nine month period.
9
<PAGE> 11
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
7. CONTINGENCIES
The Corporation is defending the following legal actions:
1. In 1998, a plaintiff asserted a claim of approximately $200,000
for breach of contract by the Company's Prime Foods division.
The likelihood of loss, if any, is not determinable and no
accrual has been recorded in these financial statements.
2. During the quarter ended September 30, 2000, a plaintiff has
asserted a claim against the Company for approximately $250,000
for damages and the repurchase of the Corporation's shares under a
purchase and sale agreement. The likelihood of loss, if any, is
not determinable and no accrual has been recorded in these
financial statements.
3. During the quarter ended September 30, 2000, a plaintiff has
asserted a claim against the Company and Prime Foods for an
undisclosed amount for breach of contract. The Company is working
with the plaintiff to bring resolution to the issues in dispute.
The likelihood of loss, if any, is not determinable and no accrual
has been recorded in these financial statements.
The Corporation has been requested by certain selling shareholders of
businesses previously acquired by the Corporation to purchase certain
share consideration issued to the selling shareholders in connection with
earnout payments made under the respective purchase agreements. The
maximum value of cash required to settle the demands of the selling
shareholders is approximately $2,000,000. Representatives of the
Corporation are in discussion with the selling shareholders to bring
resolution to this matter.
8. NET LOSS PER SHARE
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
---------------------- ----------------------
(unaudited)
<S> <C> <C>
Net loss per share
Numerator
Net loss available to common shareholders $ (6,783,699) $ (3,177,502)
---------------------- ----------------------
Denominator
Weighted average shares outstanding 16,071,380 10,590,387
---------------------- ----------------------
$ (0.42) $ (0.30)
====================== ======================
</TABLE>
No diluted net 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 deemed or
actually outstanding are considered common stock equivalents for the
purposes of the basic loss per share and weighted average outstanding
common shares calculations.
10
<PAGE> 12
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
9. SEGMENTED INFORMATION
The Corporation operated in four business segments. Information regarding
the Corporation's activities on a segmented basis includes the term of
earnings measurement of "EBITDA" which refers to earnings from before
interest, income taxes, depreciation and amortization. EBITDA, while not
a GAAP measure of profitability, is the measure of profit or loss used by
the chief operating decision maker when making decisions regarding
operations. The four operating segments are defined as follows:
"Desserts" - operations of the Corporation producing fresh and
frozen baked goods and desserts.
"Fresh" - operations of the Corporation producing fresh
entrees.
"Frozen" - operations of the Corporation producing frozen
entrees and meal components
"Corporate" - operations of the Corporation providing
administrative, marketing, product development and
financial services for all the various
manufacturing operations
The relevant information in each segment is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 Desserts Fresh Frozen Corporate Total
(NINE MONTHS) -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 9,048,206 $ 3,990,613 $ 37,455,884 $ 2,162,763 $ 50,494,703
EBITDA 166,807 781,911 1,621,431 (5,098,033) 2,527,884
Interest expense (222,273) (86,951) (591,157) (1,038,001) (1,938,382)
=====================================================================================================
Identifiable assets 6,550,539 1,150,653 31,855,805 2,603,055 42,160,052
Intangible assets
and goodwill 1,789,778 575,066 21,175,115 1,238,805 24,778,764
-----------------------------------------------------------------------------------------------------
Total assets 8,340,317 1,725,719 53,030,920 3,841,860 66,938,816
=====================================================================================================
Capital expenditures 446,110 128,153 1,734,803 237,971 2,547,037
Depreciation and
amortization $ 295,326 $ 71,741 $ 1,824,378 $ 274,419 $ 2,465,864
=====================================================================================================
</TABLE>
11
<PAGE> 13
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
-------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
SEPTEMBER 30, 1999 Desserts Fresh Frozen Corporate Total
(NINE MONTHS) -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 5,390,100 $ 1,553,550 $ 14,736,467 $ - $ 21,680,117
EBITDA 82,253 113,725 108,282 (1,925,300) (1,621,040)
Interest expense (83,372) (11,101) (345,066) (133,849) (573,388)
================================================================================================
Identifiable assets 4,512,665 1,050,728 17,036,666 4,875,665 27,475,724
Intangible assets
and goodwill 1,770,909 234,874 10,351,032 853,510 13,210,325
-------------------------------------------------------------------------------------------------
Total assets 6,283,574 1,285,602 27,387,698 5,729,175 40,686,049
=================================================================================================
Capital expenditures 1,159,083 333,153 996,434 277,416 2,766,086
Depreciation and
amortization $ 123,160 $ 34,329 $ 948,045 $ 77,193 $ 1,182,727
=================================================================================================
</TABLE>
10. Subsequent Event
On October 13 and October 17, 2000 an affiliate of a shareholder of the
Corporation advanced a total of $1,750,000 to the Corporation in the form of
Prommissory Notes. The notes are payable on demand, is unsecured and bear
interest at a rate of 15% per annum.
12
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 proforma
statements are as follows:
<TABLE>
<CAPTION>
Period or date Closing High Low Average
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1 to September 30, 1999 0.6805 0.6883 0.6511 0.6712
------------------------------------------------------------------------------------------------------
January 1 to September 30, 2000 0.6646 0.6974 0.6634 0.6794
------------------------------------------------------------------------------------------------------
July 1 to September 30, 1999 0.6805 0.6883 0.6606 0.6730
------------------------------------------------------------------------------------------------------
July 1 to September 30, 2000 0.6646 0.6824 0.6646 0.6747
------------------------------------------------------------------------------------------------------
November 10, 2000 (recent rate) 0.6479 - - -
------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
To assist the reader in understanding the impact on reportable segments (see
Note 9 to the interim financial statements attached), the reportable segments
and their respective divisions are as follows:
Frozen -- Transcontinental Gourment Foods ("TGF") D.C. Foods, and Prime
Foods and Huxtable's.
Fresh -- Pasta Kitchen
Deserts -- Tasty Selections and Ultimate Cookie
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999 AND THE THREE MONTH ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
REVENUE: Revenue for the nine months ended September 30, 2000 increased
$28,814,586 or 132.9% to $50,494,703 from $21,680,117 during the same period in
1999. The growth in revenue can be attributed, in part, to the acquisitions made
in April, May, October, and November 1999 of Tasty Selections, Inc. ("Tasty
Selections"), DC Foods Processing Inc. ("DC Foods"), The Ultimate Cookie Co.
Ltd. ("Ultimate") and Huxtable's Kitchens Inc. ("Huxtable's") (collectively,
"the 1999 acquisitions") which are reflected for the full nine months in 2000.
In addition the Company began to realize revenues generated from the sales
activities of its sales personnel through the development of new sales
opportunities and expanding the customer base beyond those of the customer lists
of the acquired companies. During this period, sales in Fresh and Frozen
segments were all higher than for the same period in 1999 with both segments
showing a greater than 150% sales increase. Certain product lines within the
Desserts segments continued to show lower than historical revenues (on a
proforma basis) due to the elimination of certain fresh direct store delivery
products from its product group. The Deserts segment is continuing to make up
for this direct store product line sales reduction with increased sales in its
Ultimate cookie lines and the addition of a significant new fund raising sales
customer in the U.S. with combined sales in the third quarter approximately $1
million higher than the third quarter of 1999.
Revenue for the three months ended September 30, 2000 increased $9,381,088 to
$18,028,916, up 108.5% from $8,647,828 for the same period last year. Part of
this increase is related to the 1999 acquisitions of Ultimate and Huxtable's
which occurred in October and November, respectively, impacting the Company's
sales by approximately $5,000,000 for the 2000 quarter over the same period in
1999. The Fresh and Frozen segments all posted sales higher than in the same
quarter in 1999 as a result of the addition of new products and the expansion of
markets and customer groups.
13
<PAGE> 15
COST OF GOODS SOLD/GROSS MARGIN: Cost of goods sold for the nine months ended
September 30, 2000 increased to $42,569,462 up $23,786,795 or 126.6% from
$18,782,667 for the same period last year. As a percentage of revenue, cost of
goods sold improved representing 84.3% of revenue for the nine months ended
September 30, 2000, compared to 86.6% for the same period in 1999. The increase
in absolute dollars is largely attributable to the 1999 acquisitions and
increased overall sales. The reduced cost as a percentage of revenue can be
attributed to a more diverse groups of products; lower cost of goods sold as a
result of efficiencies realized as a result of certain capital expenditures made
in the last half of 1999; and the discontinuance of certain lower margin product
lines in the Company's divisions, specifically in its fresh direct store
delivery bakery products.
During the three month period ended September 30, 2000 the Company, as discussed
above, continued to see margin improvement as a result of its capital
expenditure programs in 1999, increased volumes and changes in product mix. Cost
of sales decreased to $84.8% of revenue from 85.3% after adjustment for Seafood
Selections inventory sales at cost. Total cost of sales for the period
increased from $7,377,439 in the third quarter of 1999 to $15,347,363 in the
same period of 2000.
The sales cycle for some of the Company's products typically reflect lower sales
during the first two quarters resulting in partial underabsorption of some
direct overhead costs. Therefore, during this period, margins are typically
lower than the overall percentage for the year.
SELLING EXPENSES: Selling expenses increased $2,661,639 to $3,989,102 (7.8% of
revenue) for the nine months ended September 30, 2000 compared to $1,327,463
(6.1% of revenue) for the same period in 1999. The increase for the nine months
ended September 30, 2000 is primarily attributable to the 1999 acquisitions;
increased selling expenses beyond those of the combined costs of the existingand
acquired manufacturing units as a result of the corporate involvement in the
promotion of each division's products and the Company's Selections line; and the
introduction of new products to the market. The Company began incurring costs in
the execution of this sales and marketing strategy in the second quarter and
early third quarter of 1999 and, therefore, such costs were not incurred at the
increased level until part way through 1999. During the three month period ended
September 30, 2000, selling expenses increased to $1,696,247 from $420,366
primarily as a result of the Ultimate and Huxtable's acquisitions made in the
third quarter of 1999 as well as the increased sales and marketing costs of the
Company in marketing its products.
ADMINISTRATIVE EXPENSES: Administrative expenses increased $4,693,951 to
$8,876,565 (17.5% of revenue) for the nine months ended September 30, 2000
compared to $3,982,614 for the same period last year (18.4% of revenue). The
increase in absolute dollars is due largely to the 1999 acquisitions. In
addition, the Company continues 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, investor relations, and product marketing. The Company began
incurring costs in the execution of its administrative strategy in the second
quarter of 1999. Therefore, these costs were not incurred at this increased
level for all of the 1999 nine month period. Included in the administrative
expenses for the nine months ended September 30, 2000 are $219,000 of
allowances for doubtful accounts receivable. During the three month period
ended September 30, 2000, administration expenses increased to $3,205,534 from
$2,007,619 primarily as a result of the Ultimate and Huxtable's acquisitions
made the third quarter of 1999 as well as increased administrative costs of the
Company as identified above, and the impact of increasing the allowance for
doubtful accounts in September 2000.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES: Amortization of intangibles
increased to $988,322 (2.0% of revenues) for the nine months ended September 30,
2000 compared to $391,140 (1.8% of revenue) in the same period in 1999. The
increase of $597,182 in the expense for intangibles amortization is a result of
increased purchased goodwill on acquired businesses and continued increased
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 to achieve improved brand recognition through enhanced
quality and uniformity in product presentation. In addition, the value of the
intangibles increased during the nine month period ended September 30, 2000 as a
result of settlement and determination of certain acquisition earnout amounts in
the first nine months of 2000. The three month period ended September 30, 2000
reflects the increase expense related to the settlement of certain earnout
amounts and the increase in goodwill. Amortization increased from $144,384 in
the third quarter of 1999 by $199,942 in the similar period of 2000.
GAIN ON SALE OF ASSETS: On June 30, 2000, the Company sold certain intangible
assets, recipes, and trademarks of the Seafood Selections product line. Under
the terms of the agreement, the Company sold the recipes and trademarks for
$935,000 payable over four years. In return the purchasers agreed to pay
royalties on sales for a period of up to six years, subject to certain minimum
payment amounts at rates of between 1% and 3% of revenues with the initial
payments to be used to paydown any unpaid balance due at the end of the fourth
\year.
14
<PAGE> 16
In addition, the purchasers agreed to buy the certain raw material inventory
from the Company during the period up to February 28, 2001 at which time the
purchasers agree to pay for any inventory not previously purchased to that date.
LOSS FROM OPERATIONS: The Company's loss from operations increased $2,189,981 to
$4,993,748 (9.8% of revenues) for the nine months ended September 30, 2000 as
compared to the loss of $2,803,767 (12.9% of revenues) in the 1999 period. The
increase in loss is primarily due to significant increases in product
development, marketing, amortization of intangibles, and corporate compliance
and new administrative costs incurred to execute the growth strategy of the
Company. The loss for 2000 was partially offset by the gain on sale of assets.
The loss from operations for the three months ended September 30, 2000 increased
$1,117,190 to $2,420,170 from $1,302,980 over the same period in 1999; however,
as a percentage of revenue the loss stayed relatively constant. Losses in the
three month period ended September 30, 2000 are consistent with the Company's
current sales cycle. It typically incurs higher operating, selling and
administrative expenses (as a percentage of revenues) during this period and
builds inventories in anticipation of its late third quarter and fourth quarter
sales.
FINANCING COSTS: Net interest expense increased $1,246,816 to $1,789,951 for the
nine months ended September 30, 2000 as compared to $543,135 for the same period
last year. The increase is due primarily to the combined operating line
financing for the Company's divisions, interest charges with respect to
long-term debt, including the Company's convertible debt, capital lease
obligations associated with new capital equipment acquired during 1999 and 2000;
and interest and fees associated with the short term loan obtained in June, 2000
which increased its interest expense. In total, the Company's operating line was
higher during the nine months ended September 30, 2000 as compared to the same
period in 1999.
CONSOLIDATED BALANCE SHEET
BALANCE SHEET AS AT SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999.
As a result of the 1999 acquisitions and organic growth the Company's
Consolidated Balance Sheet at September 30, 2000 reflects certain significant
changes from December 31, 1999.
ACCOUNTS RECEIVABLE: Accounts receivable decreased from $11,824,618 at December
31, 1999 to $8,101,801 at September 30, 2000. This decrease is primarily a
function of the impact of the Company's sales cycle and increased sales in the
fourth quarter.
INVENTORY: Inventory at September 30, 2000 of $12,279,321 is approximately $6
million higher than at December 31, 1999. The increase is primarily related to
the build-up required to meet the anticipated fourth quarter sales increase.
CAPITAL ASSETS: Between December 31, 1999 and September 30, 2000 the Company's
capital assets increased by approximately $2,500,000 (net of depreciation). The
increase is largely related to ongoing capital expansion, primarily in TGF,
Pasta Kitchens and DC Foods.
GOODWILL AND OTHER INTANGIBLE ASSETS: During the period between December 31,
1999 and September 30, 2000, the Company's goodwill and other intangible assets
(net of amortization expense) increased by $9,037,762. During the nine months
ended September 30, 2000, the Company recognized additional goodwill on certain
acquisitions as part of the earnout process. These earnouts, included TGF for
the year ended February 28, 2000; Huxtable's for the period ended December 31,
1999; DC Foods for the period ended December 31, 1999; and Ultimate for the
year ended April 30, 2000. In each case the impact on the financial statements
is reflected when the contingency is considered resolved, which typically
occurs after the earnout trigger date.
15
<PAGE> 17
LONG TERM RECEIVABLE: The Company has two long-term receivables. The first is
in connection with the sale of assets of Seafood Selections, the second is in
connection with the Company's advances to Great American Barbecue Company
("GABCO") with whom the Company entered into an Interim Operating Agreement in
September 2000 and accordingly advanced funds under the terms of the agreement.
BANK OPERATING LOANS (NET OF CASH AND CASH EQUIVALENTS): The Company's bank
operating loans, net of the cash and cash equivalent increased from $5,638,607
to $8,637,682. As further discussed in the Liquidity and Capital Resources
section below, the increase primarily reflects the increased requirement for
cash to fund inventory and other operating costs.
CURRENT PORTION OF LONG TERM DEBT. The primary increase in the Current Portion
of Long Term Debt is the inclusion of the $5.2 million working capital loan from
Southbridge, First Ontario Fund, and Bank of Montreal Capital Corporation
("Southbridge et al") which matures February 28, 2001.
SHARE CAPITAL: The share capital increase reflects the issuance of shares to
PAC, Inc in September 2000, and the issuance of, or commitment to issue, shares
related to the settlement of the earnout determination for TGF, DC Foods,
Huxtable's and Ultimate which upon determination of their earn-outs were, or are
to be, settled by way of the issuance of shares.
RISKS AND UNCERTAINTIES
The Company believes that the future results of operations could be
impacted by factors such as market acceptance of new products, and the success
of the Company's marketing of its home meal replacement products. Similarly,
future earnings may be adversely affected by changes in the costs of goods sold,
business and labor. Additionally, where the Company continues to expand its
business internationally, fluctuations in 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 ability to develop and market products that successfully
adapt to current market needs may also have an impact on the Company's results
of operation. A portion of future revenues will come from new products. The
Company cannot determine the ultimate effect that new products and services will
have on revenues, earnings or price of its Common Stock.
The Company's organic sales growth, 1999 acquisitions and pursuance of
its acquisition strategy continued to utilize significant working capital during
the first three quarters of 2000, after which the Company anticipates the
realization of significant cash inflows through the conversion of inventory to
accounts receivable and cash. Should sales in the fourth quarter be lower than
anticipated, the impact on the Company's cash position could be less than
anticipated and result in a higher than expected investment in inventory. The
Company's operating results could be adversely effected if it fails to
successfully integrate or manage acquired companies or if it is not able to
obtain the cost savings which it anticipate. Furthermore, the Company's result
of operations could suffer if the acquired companies do not perform as expected.
Due to factors including those noted above and elsewhere in the
Management's Discussion and Analysis of Financial Conditions and Results of
Operation, 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.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's business cycle involves a significant
investment in working capital during the first nine months of the year in
anticipation of its late third quarter and fourth quarter sales. The Company
continued to build or maintain high levels of inventories in its TGF, Prime and
Huxtable's
16
<PAGE> 18
divisions. For these divisions, inventories are expected to start to decline in
October consistent with their sales cycle. The Company moved certain
production activities to Prime requiring the building of certain inventories
that are, again, in anticipation of fourth quarter sales. In addition, the
Company has continued to incur increased 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. The operations of the Fresh and Frozen
Segments have had positive cash flows from operations during the first nine
months of 2000 which funded their operations and contributed to the costs of
the Company.
The Company's cash and cash equivalents decreased from $4,165,370 at
December 31,1999 to $223,014 at September 30, 2000. Of these funds, $200,000
represents funds required to be maintained as security for certain of its long
term debt. Bank credit facilities with the Bank of Nova Scotia utilized at
September 30, 2000 totaled approximately $8,230,000. Total credit facilities
available at September 30, 2000 were $10,000,000. The Company's $3,500,000
revolving equipment line is substantially utilized, while its non-revolving
$1,500,000 equipment line has not been accessed to date.
Bank of Nova Scotia:
In August, 2000 the Company agreed to renew its credit facilities with
the Bank of Nova Scotia under the following terms:
(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'
acceptance and bears interest on direct advances at The Bank of Nova
Scotia's prime rate plus 1/2%. The operating line is repayable on
demand. As security for the operating line International Menu Solutions
Inc. ("IMSI") provided to The Bank of Nova Scotia with general security
referred to below, under the new facility; 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 and
bearing interest at The Bank of Nova Scotia Prime plus 1 1/4% or by
way of equipment leases bearing interest at The Bank of Nova Scotia
Prime plus 1 1/4%. As security for the term facility, IMSI is to
provide appropriate leases and/or conditional sales contracts as well
as to maintain certain insurance coverage on the assets financed. In
addition, the general security referred to below is security for the
term facility.
(3) A non-revolving equipment purchase facility to purchase equipment in
the maximum authorized amount of $1,500,000. The term facility may be
utilized by way of term promissory notes with a term of 5 years and
bearing interest at The Bank of Nova Scotia Prime plus 1 1/2% or by
way of equipment leases bearing interest at The Bank of Nova Scotia's
Prime plus 1 1/2% to finance up to 70% of the equipment value. As
security for the term facility, IMSI is to provide appropriate leases
and/or conditional sales contracts as well as to 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, TGF,
Tasty Selections, 1005549 Ontario Limited and DC Foods, Huxtable's and the
Company have 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.
The Company believes that it is currently in compliance with financial
covenants related to its banking facilities.
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 entered into a loan agreement with its
largest shareholder, Southbridge Investment Partnership No. 1, or "Southbridge",
First Ontario Labour Sponsored Investment
17
<PAGE> 19
Fund Ltd., and Bank of Montreal Capital Corporation ('Southbridge, et al") as
lenders pursuant to which IMSI borrowed the principal amount of $4,500,000.
Interest was payable monthly at a rate of 12% per annum until August 31, 2000,
then increased to match the funds' equity returns to a rate of 24% per
annum for the period from September 1, 2000 to and including November 30,
2000, and will increase to a rate of 36% per annum for the period from
December 1, 2000 to and including February 28, 2001. 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 Companya and its subsidiaries. We
received approximately $4,000,000 after deduction of fees and commissions in
June 2000. The loan amount was amended to $5,200,000 in September. As a result
of the amendment, the Company received an additional $620,000 (after reduction
for fees and legal costs) in working capital financing under the same terms.
The loan matures on February 28, 2001.
Equity Investment:
In September the Company received an equity investment, shares and
warrants, from PAC, Inc in the amount of US$1,500,000 (CDN$2,175,000) which is
described in further detail in the Company's Form 8-K filed October 4, 2000. Of
the net funds, during the period, US$500,000 was used in September 2000 to fund
working capital of GABCO under the terms of the Company's Interim Operating
Agreement dated September 20, 2000 with GABCO. An additional US$500,000 was
advanced to GABCO in October. The balance of the net funds was used for general
working capital purposes for the Company.
Other Financing Activities:
In addition to financing identified above, the Company received the
following short term debt and equity financing:
In October 2000, the Company obtained further working capital financing
in the amount of a $1,750,000 by way of promissory notes payable on demand to an
affiliate of Southbridge. The notes bear an interest rate of 15% per annum.
In addition to the above, as the date of this report, the Company is
negotiating a term sheet with Southbridge whereby Southbridge would agree to
provide security and a guarantee in support of additional operating loans with
the Bank of Nova Scotia in the amount of $3,000,000 (the "Bulge Facility"). The
Bulge Facility would mature on January 15, 2002. The Company has received and
signed a commitment letter with the Bank of Nova Scotia which assumes the
security and guarantee which would be provided in the proposed term sheet with
Southbridge. Under the term sheet, Southbridge would receive transaction fees of
a portion of which may be contingent on certain conditions relating to debt
refinancing or renegotiation, simplification of capital structure and
determination of earn out payments to sellers of businesses to the Company being
satisfied. Southbridge would also receive a guarantee fee and a standby fee. As
well, the Company may be required to issue Warrants.
Future Payments on Acquisitions:
With respect to future payments related to acquisitions, the Company's
strategy has been to perfect the purchase with the issuance of shares from
treasury rather than cash. As previously mentioned, the Company has issued, or
has an obligation to issue, shares based on a formula for a given period or
periods to TGF, DC Foods, Ultimate, and Huxtable's. In certain circumstances,
the Company has the option to make the payment in cash.
The following vendors of acquired companies have the right to request
cash payment:
The vendors and DC Foods have a put option on their Class E Series 1 and
2 shares related to an earn out for the period ended December 31, 1999. Under
this option, the shareholders have a right to sell back to the Company and the
Company shall, subject to applicable laws, purchase the shares at the share
price at the valuation date. This amount has been determined to be $1,760,000.
The vendors have made a request to exercise their put option, the closing date
for which is December 18, 2000.
Also, under the terms of the share purchase agreement with Ultimate, if
the Company can not provide free trading common shares by August 31, 2000
(which would be issued in exchange for their Class E, Series 5 shares and
Class N shares to which they are entitled in accordance with the earn out
formula for the Class E Series 5 shares), the Company shall, at the request of
the vendors, and subject to applicable laws, repurchase one-third of the shares
at the market price applicable when the shares would have been free trading.
This amount has been determined to be $250,000. The vendors have made a request
for payment.
In both cases, the Company is currently negotiating with the selling
shareholders to resolve to the payment terms. Should payment be required, and
the Company is permitted to make such payment under law, the amount due to the
vendors of Ultimate, would be financed from working capital. In regards to the
vendors of DC Foods, it is likely
18
<PAGE> 20
the amount would have to be financed through additional debt or equity, or
through a payment plan to be negotiated with the vendors such that the amount
may be paid over time.
The vendors of the acquired assets of Huxtable's Kitchens 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 an earn out
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.
Therefore, the first potential cash payment would be due approximately April
2001. 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
or negotiation of terms of payment with the vendors.
Financing requirements:
The Company anticipates positive cash flows in the fourth quarter of
2000 and the first quarter of 2001 as it realizes the cash generated from fourth
quarter sales and the reduction in inventory. In addition, the Company is
seeking to finalize the Bulge Facility, which could provide $3 million of
financing to assist the Company meet its working capital needs. However, as
noted above, the Company's short-term debt includes (i) demand obligations of
$1,750,000 resulting from its October 2000 borrowings and (ii) the $5,200,000
loan from Southbridge, et al which matures on February 28, 2001. In addition,
the Company will need to provide for the payments to vendors of acquired
businesses described above. Therefore, Management continues to explore
additional financing opportunities through either debt or equity or the
restructure or refinance of existing debt to fund the operations of the
Company, further acquisitions and capital expansion. The Company has continued
to approach financial services companies to assist the raising of debt or equity
financing to fund acquisitions and working capital and replace the Southbridge,
et al loan by February 2001. However, there can be no assurance that the Company
or IMSI will be able to complete the Bulge Facility, repay, restructure or
refinance existing debt or raise additional financing. Further, there can be no
assurance that such financing will be sufficient to meet its business plan or
other ongoing needs. A failure to raise sufficient additional financing or
restructure existing debt would have a material adverse effect on the Company
and could result in defaults under the Company's credit and other agreements.
Contingent Acquisition Costs
The following table summarizes the contingent acquisition costs and their
payment or exchange mechanism.
The table below identifies the criteria upon which the valuation of the
Company's acquisitions is determined. The number of shares to be issued is
dependent upon the future revenues and expenses in determining the EBITDA** for
the acquired businesses for valuation purposes as well as the future share price
at the time of the valuation. Accordingly, it is not appropriate for management
to provide an estimation of the expected cost and shares to be issued. The
number of shares can only be determined upon the resolution of the contingencies
associated with the determining factors identified above as outlined in APB 16.
Where payments are to be made in cash at the vendors' request as
provided in the purchase agreements, the Company would first make the payment
out of working capital provided such funds were available to cover said payment.
Depending upon the amount due, the Company may be required to finance the
payment through negotiation with the vendor, or obtain additional long term debt
or equity financing.
The following is a summary of contingent purchase costs to be resolved:
<TABLE>
<CAPTION>
VENDOR/EXCHANGEABLE SHARE CLASS PAYOUT CALCULATION PAYOUT OR EXCHANGE MECHANISM
<S> <C> <C>
TGF, Class D Increase in EBITDA** for TGF for YE Entitles holders to Class N shares
Feb 28/01 over Feb 28/00. which upon exchange with
(# of Class N shares are based on lesser appropriate number of Class D
of then common stock price and US$2.00) shares can be converted to
Common Shares
DC Foods, Class E (Series 3 and 4) 4 times EBITDA for DC Foods for YE Dec Entitles holders to Class N
31/02 (or earlier period) minus $6 million shares which upon exchange with
minus EBITDA for the year ended appropriate number of Class E
Dec. 31/99 (S3/4) shares can be converted
to Common shares.
(# of Class N shares are based on market
price of common stock at the time)
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C>
Ultimate Cookie, Class E (Series 6) 25% of (2002 Ultimate Sales + IMSI sales Entitles holders to Class N shares
of Felix & Norton Products + Tasty sales which upon exchange with
in Quebec) plus certain tax credits appropriate number of Class E
minus 4 times EBITDA for Ultimate (S6) shares can be converted to
for the year ended April 30, 2000. common shares.
(# of Class N shares are based on market
price of common stock at the time)
</TABLE>
COMMON SHARES TO BE ISSUED
<TABLE>
<CAPTION>
VENDOR/PAYMENT TERMS PAYOUT CALCULATION PURCHASE EXCHANGE MECHANISM
<S> <C> <C>
Tasty Selections 4 times EBITDA of "Bakery Operations" for Common shares
(Non-competition agreement YE Dec 31/01 minus $2.16 million, or
with Alan Greenspoon) 3 times EBITDA of "Bakery Operations" for
YE Dec 31/02 minus $2.6 million
(# of Common shares are based on market
price of common stock at the time)
Huxtable's 2000 payout 1 x EBITDA for Year ended Dec 31/00 Common shares. Under certain
(# of common shares are based on market conditions the vendors of
price of common stock at the time) Huxtable's or IMSC may
request/make the payment in cash.
Huxtable's 2001 payout 1 times EBITDA for Huxtables for year Common shares. Under certain
ended Dec 31/01 conditions the vendors of
(# of common shares are based on market Huxtable's or IMSC may
price of common stock at the time) request/make the payment in cash.
Huxtable's 2002 payout 5 times EBITDA for year ended Dec 31/02* Common shares. Under certain
minus sum of EBITDA based payment amounts conditions the vendors of
*Note: the Huxtable's vendors previously paid. Huxtable's or IMSC may
may choose Dec. 2000, 2001, or request/make payment in cash.
2002 as the year of to apply the
5 times EBITDA valuation,
reducing the resulting payment (# of common shares are based on market
amount by those amount paid price of common stock at the time)
previously.
</TABLE>
**With respect to acquisition information above and other disclosures
throughout this document, there exist 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 and
business perspective, EBITDA is an important measure of profit and is
primarily used in the following circumstances:
- it is the primary measure upon which resources are allocated
to operations within the corporate group;
- it is the basis upon which businesses that are being
considered for acquisitions are valued (i.e. usually some
multiple of EBITDA); and
- it is the basis upon which the ultimate purchase prices for
previous acquisitions are determined as many acquisitions
have been completed using an earn-out structure, whereby the
vendors of businesses
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<PAGE> 22
acquired receive payments based on a formula based primarily
on the EBITDA reported by the related businesses.
EBITDA is a non-GAAP measure of profitability and is not intended to
replace GAAP measures of earnings or cash flows reported in the financial
statements and therefore is not presented in the Company's external
financial statements.
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.
As a result of financing activities during the year, the Company's
$5,2 million loan comes due in February 2001. The Company's inability to repay
this loan through cash received in the fourth quarter, obtain adequate
replacement financing, or renegotiate the terms of the loan could have a
material impact on the business and its ability to fund future operations.
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 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.
21
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 2000, the Company issued 55,042 shares of common stock of the
Company as final payment for the Company's purchase of Pasta Kitchens at a value
of $240,000 under the terms of the Company's October 1999 acquisition of the
assets of Pasta Kitchens. The value reflects an increase in goodwill for the
acquired company; the Company did not receive any proceeds from the issuance of
these shares. These securities were issued in an offshore transaction in
reliance on Regulation S under the Securities Act of 1933 (the "Securities
Act").
In August 2000, the Company issued 6,000 shares of common stock of the
Company as partial settlement of its account for services. The shares were
issued for total consideration of $18,531. These securities were issued in an
offshore transaction in reliance on Regulation S under the Securities Act.
In July 2000, the Company issued shares to holders of options that had
been exercised in a October 1998 but were, due to an oversight by the Company,
not issued. The options representing 5,000 Class X shares of IMSI and a similar
number of Class N shares of the Company being were issued at a per share
exercise price of US$0.001 (CDN$0.0015), resulting in US$5 (CDN$7) 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.
In August 2000, the Company issued to the vendors of Huxtable's 956,158
shares of Common Stock of the Company at a value of approximately $4,000,000
under the terms of the Company's November 1999 acquisition of the assets of
Huxtable's based on the performance of the division during the period to
November 1, 1999 to December 31, 1999 as provided in the asset purchase
agreement. The value reflects an increase in goodwill for the acquired company,
the Company did not receive any proceeds from the issuance of the shares. These
securities were issued in an exempt transaction in under Section 4(2) of the
Securities Act.
In September 2000 the Company has issued a total of 3,183,003 Class N
shares of the Company in relation to the exchangeable shares of IMSI under
various share purchase agreements. The following table summarizes the issuances.
In all cases, the value reflects an increase in goodwill for the acquired
company. The Company did not receive any proceeds from the issuance of these
shares. These securities were issued in an offshore transaction in reliance on
Regulation S under the Securities Act.
<TABLE>
<CAPTION>
Vendor Exchangeable Share Class Class N Shares Issued Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TGF Class B 2,258,718 $6,188,900*
------------------------------------------------------------------------------------------------------
TGF Class C 511,261 $1,490,300
------------------------------------------------------------------------------------------------------
DC Foods Class E, series 1 and 2 413,024 $1,761,050
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
</TABLE>
*Value of the contingency was resolved and the goodwill reflected in the
December 31, 1999 financial statements and accounted for as an increase in
Additional Paid In Capital at the time.
In September 2000, the Company determined that the holders of the Class
E Series 5 shares of IMSI were entitled to exchange the Class E Series 5 shares
for a total of 479,069 shares of common stock of the Company. The value of these
shares is $1,520,900, based on the performance of Ultimate during the period to
May 1, 1999 to April 30, 2000 as provided in the share purchase agreement. The
Company is in the process of issuing 479,069 Class N shares of the Company which
are exchangeable (with the Class E Series 5 shares) for an equal number of
shares of common stock of the Company. The value of the contingency was resolved
and the goodwill reflected in the September 30, 2000 financial statements as an
increase to Adjusted Paid-In Capital. The Company is expected to issue these
shares in the fourth quarter of 2000.
22
<PAGE> 24
In September 2000 the Company issued 750,000 shares of common stock of
the Company and 500,000 warrants to purchase shares of common stock in the
future to PAC, Inc. The shares and warrants were issued for consideration
totaling approximately US$1,375,000(net) (CDN$1,993,750). The funds were used
for general working capital purposes and to fund the working capital of Great
American Barbecue Company with whom the Company has an Interim Operating
Agreement. These securities were issued in an exempt transaction under
Section 4(2) of the Securities Act of 1933. For further information on this
transaction see the Company's Report on Form 8-K filed October 4, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule for the nine months ended
September 30, 2000.
99.1* Interim Operative agreement, dated September 20, 2000 by and
between the Company, GABCO, a subsidiary of the Company and
certain shareholders of GABCO
99.2* Securities Purchase Agreement, dated September 20, 2000 by and
between the Company and PAC, Inc.
99.3* Registration Rights Agreement, dated September 20, 2000, by
and between the Company and PAC Inc.
99.4 Promissory Notes issued by International Menu Solutions Inc.
to The Foundation Trust dated October 13, 2000 and October 20,
2000
99.5 Loan Amending Agreement dated September 1, 2000 between the
Company, International Menu Solutions Inc., Southbridge
Investment Partnership No.1, FirstOntario Labour Sponsored
Investment Fund Ltd, and Bank of Montreal Capital Corporation.
(b) Reports on Form 8-K filed during the quarter: None.
--------------
* Incorporated by reference to exhibits filed with the Company's Report on Form
8-K filed October 4, 2000.
23
<PAGE> 25
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 14, 2000
INTERNATIONAL MENU SOLUTIONS CORPORATION
By: /s/ MICHAEL STEELE
----------------------------------------------------
Michael Steele
President and Chief Executive Officer
24
