<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 31, 2000
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL MENU SOLUTIONS CORPORATION
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
NEVADA 2038 91-1849433
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code
Number)
</TABLE>
350 CREDITSTONE ROAD, UNIT 202
CONCORD, ONTARIO, CANADA L4K 3Z2
(416) 366-6368
(Address and telephone number of principal executive offices)
MICHAEL STEELE, PRESIDENT
INTERNATIONAL MENU SOLUTIONS CORPORATION
350 CREDITSTONE ROAD, UNIT 202
CONCORD, ONTARIO, CANADA L4K 3Z2
(Name, address and telephone number of agent for service)
-----------------------------
Copy to:
-----------------------------
STEVEN I. HIMELSTEIN, ESQ.
DORSEY & WHITNEY LLP
250 PARK AVENUE
NEW YORK, NEW YORK 10177
(212) 415-9200
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the securities
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price per Aggregate Registration
Securities to be Registered Registered Share (1) Offering Price Fee
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 18,187,725(2) $1.12 $20,370,252 $5,378
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(c) under the Securities Act, based on the
average of the bid and asked prices for the common stock, $0.001 par value
per share, as reported by the OTC Bulletin Board on August 25, 2000.
(2) To the extent permitted by Rule 416 under the Securities Act, this
Registration Statement also covers any additional shares of our common stock
that we may be required to issue by reason of any adjustment necessary to
reflect any stock split, stock dividend or similar transaction involving our
common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 31, 2000
PROSPECTUS
INTERNATIONAL MENU
SOLUTIONS CORPORATION
18,187,725 Shares
Common Stock
-------------
This prospectus relates to the public offering of up to 18,187,725
shares of our common stock by certain of our shareholders.
Our common stock is traded on the OTC Bulletin Board under the symbol
"MENU." On August 30, 2000, the reported last sale price of our common stock
was US$1.00 per share.
INVESTING IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August [___], 2000
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
page
----
<S> <C>
PROSPECTUS SUMMARY ........................................................................ 1
RISK FACTORS .............................................................................. 4
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS ............................. 10
DIVIDEND POLICY ........................................................................... 11
SELECTED FINANCIAL DATA ................................................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..... 14
BUSINESS .................................................................................. 23
MANAGEMENT ................................................................................ 36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................................ 41
SELLING STOCKHOLDERS ...................................................................... 45
DESCRIPTION OF SECURITIES ................................................................. 48
SHARES ELIGIBLE FOR FUTURE SALE ........................................................... 56
PLAN OF DISTRIBUTION ...................................................................... 57
LEGAL MATTERS ............................................................................. 59
EXPERTS ................................................................................... 59
AVAILABLE INFORMATION ..................................................................... 59
INDEX TO FINANCIAL STATEMENTS ............................................................. F-1
</TABLE>
i
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PROSPECTUS SUMMARY
This summary contains basic information about us and this offering.
Because it is a summary, it does not contain all of the information that you
should consider before investing. You should read this entire prospectus
carefully, including the section entitled "Risk Factors" and our financial
statements and the notes thereto, before making an investment decision.
EXCHANGE RATE INFORMATION
We publish our consolidated financial statements in Canadian dollars.
In this prospectus, except where otherwise indicated, all dollar amounts are
expressed in Canadian dollars, references to CDN$ or $ are to Canadian dollars
and references to US$ are to United States dollars.
The following table sets out the exchange rates for one Canadian dollar
expressed in United States dollars in effect at the end of the following
periods, and the average exchange rates (based on the average of the exchange
rates on the last day of each month in such periods) and the range of high and
low exchange rates for such periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ --------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
Low .......................... 0.70 0.73 0.70 0.64 0.65 0.69
High ......................... 0.76 0.76 0.75 0.72 0.70 0.70
Average ...................... 0.73 0.74 0.73 0.68 0.68 0.70
Rate at period end ........... 0.74 0.73 0.70 0.66 0.69 0.68
</TABLE>
Such rates are based upon the inverse of the noon buying rate in New
York City for cable transfers in foreign currencies, as certified for customs
purposes by the Federal Reserve Bank of New York. The inverse of the noon buying
rate on August 25, 2000 was CDN$1.00 = US$0.67.
WHAT WE DO
Through our subsidiaries, we develop, produce and market a series of
specialty food products for sale to large retail and specialty food chains and
the food service industry. Our mission is to be a leading marketer and producer
of home meal replacement, or HMR, products throughout North America. Our
products are high quality, quickly prepared and cost-effective replacements to
home cooked meals for time starved consumers. We target consumers who desire
restaurant quality meals in the convenience of their homes. Our meals include
single entree meals as well as complete meals consisting of all the necessary
center-of-the-plate, starch and vegetable items in one package. We
cross-merchandise our core products with other products, including hors
d'oeuvres and specialty desserts. Our products are sold in supermarkets as both
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.
As part of our strategy, we seek to acquire businesses that have
desirable products and customers in strategic geographic locations. We believe
that this strategy will enable us to complement our existing product lines,
capitalize on existing brand names and customer loyalty and take advantage of
existing product distribution channels and production capacity. We believe that
merging complementary businesses and adding management, marketing, sales,
product development and logistic expertise will result in enhanced operating
efficiencies and market penetration of the companies we acquire. A major
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<PAGE> 5
component of this strategy is to cross-brand our "Selections" brand name with
the brand name of the acquired company to create a national brand out of a
consolidation of regional brands.
The following table sets forth the name of each of our material
subsidiaries, the jurisdiction of its incorporation and its primary line of
business.
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY LINE OF BUSINESS ORGANIZATION
---------------------------------------------- ---------------------------------------- ------------------
<S> <C> <C>
Huxtable's Kitchens Inc., or Huxtable's Fresh and frozen entrees Delaware
International Menu Solutions Inc., or IMSI Holding company for Canadian Ontario
subsidiaries
Transcontinental Gourmet Foods Inc., or TGF Frozen hors d' oeuvres Ontario
Tasty Selections Inc., or Tasty Selections Muffin and cookie batters and bakery Ontario
products
The Ultimate Cookie Co. Ltd./L'Ultime Biscuit Frozen cookie dough Canada
Cie Inc., or Ultimate
D.C. Food Processing Inc., or D.C. Foods(1) Breaded and battered meat and dairy Ontario
products
Prime Foods Processing Inc., or Prime Foods Frozen entrees, bundled meals and stir Ontario
fry kits.
Seafood Selections, a division of Prime Foods Frozen seafood products(2) Not applicable
Pasta Kitchen, a division of Prime Foods Pasta based meals Not applicable
</TABLE>
(1) In May 1999, we purchased all of the issued and outstanding shares of
1005549 Ontario Limited Inc., or 1005549, the parent company of D.C. Foods.
In December 1999, D.C. Foods and 1005549 amalgamated with D.C. Foods being
the surviving corporation.
(2) Prime Foods recently sold the contracts and intangible assets of Seafood
Selections, and is in the process of selling Seafood Selections' inventory,
to a third party.
Our corporate headquarters is located at 350 Creditstone Road, Unit
202, Concord, Ontario, Canada, L4K 3Z2 and our telephone number is (416)
366-6368. Our World Wide Web homepage is located at www.internationalmenu.com.
Information contained in or linked to our website does not constitute part of
this prospectus.
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<PAGE> 6
SUMMARY FINANCIAL DATA
You should read the financial data set forth below in conjunction with
the sections entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the financial
statements and notes included in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------------------
1998 1999 1999 2000
------------ ------------ ------------ -------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenue $ 6,096,048 $ 48,040,135 $ 13,032,288 $ 32,465,787
Cost of goods sold.............. 4,729,806 38,748,543 11,405,228 27,222,099
Selling expenses................ 610,033 3,680,316 907,096 2,292,855
Administrative expenses......... 1,170,306 6,499,658 1,974,995 5,671,031
Amortization of intangibles..... 67,473 805,705 229,688 788,380
-------- ---------- ---------- ----------
Loss from operations............ (481,570) (1,694,087) (1,484,719) (3,508,578)
-------- ---------- ---------- ----------
Other income (expense) ......... (73,303) (844,035) (282,977) (10,728)
-------- ---------- ---------- ----------
Net loss........................ (554,873) (2,538,122) (1,623,296) (3,497,850)
-------- ---------- ---------- ----------
Net income (loss) per common....
share:
Basic and diluted............. (0.09) (0.19) (0.16) (0.22)
Weighted average number of
common shares outstanding:
Basic and diluted ............ 6,419,141 13,686,558 10,315,837 15,845,561
</TABLE>
<TABLE>
<CAPTION>
AS AT DECEMBER 31, AS AT JUNE 30,
---------------------------- --------------
1998 1999 2000
----------- ------------ --------------
<S> <C> <C> <C>
Current assets............................ $ 5,536,386 $ 22,767,622 $ 22,154,893
Working capital (deficit)................. 1,511,582 3,763,245 (2,474,925)
Total assets.............................. 9,940,977 53,535,258 60,045,378
Cash and cash equivalents................. 1,865,612 4,165,370 4,357,130
Current liabilities....................... 4,024,804 19,004,378 24,629,818
Long-term liabilities..................... 1,640,690 9,769,501 10,137,886
Total stockholders' equity................ 4,275,483 24,761,380 25,277,674
</TABLE>
3
<PAGE> 7
RISK FACTORS
This offering is speculative and involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and the
other information in this prospectus before deciding whether to purchase shares
of our common stock. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently believe
to be immaterial may also adversely affect our business. If any of the following
risks actually occur, our business and operating results could be harmed. This
could cause the trading price of our common stock to decline, and you may lose
all or part of your investment.
RISKS RELATED TO OUR COMPANY
WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR
BUSINESS.
We were incorporated in June 1997 under the laws of the State of Nevada
and began our present operation as a specialty food product producer and
marketer in July 1998. Prior to July 1998, we were in the organizational stages
of our business and carried on no operations. We therefore have a limited
operating history. Our business and prospects must be considered in light of the
difficulties frequently encountered by an early stage business enterprise that
has an evolving business model.
WE ARE PURSUING A BUSINESS STRATEGY OF RAPID EXPANSION THAT IS RISKY AND WE MAY
BE UNABLE TO SUCCESSFULLY INTEGRATE THE COMPANIES THAT WE ACQUIRE.
We are pursuing a business plan of rapid growth and expansion of our
operations. We have acquired several food processing companies both in the
United States and Canada, and we may pursue other strategic acquisitions in the
near future. There can be no assurance that we will be able to address all of
the risks associated with the expansion of our business. Some of these risks
involve:
- integrating newly acquired operations and personnel into
existing operations;
- disrupting our ongoing business;
- diverting resources and management time;
- retaining existing customers of acquired companies; and
- the inability to maintain uniform standards, controls,
procedures and policies.
WE HAVE INCURRED LOSSES TO DATE AND MAY NOT BE PROFITABLE.
We incurred net losses of $554,873 and $2,538,122 for the years ended
December 31, 1998 and 1999, respectively. Our losses to date have adversely
affected our financial condition and liquidity and may make it more difficult to
implement our business plans and strategy. Although our revenue has grown
rapidly in recent periods, such growth is largely attributable to our
acquisitions. Such growth may not continue and may not lead to profits. Even if
we do achieve profitability, we cannot assure you that we can sustain or
increase profitability on a quarterly or annual basis in the future.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL WE WILL REQUIRE TO FUND OUR
OPERATIONS AND FINANCE OUR GROWTH ON TERMS ACCEPTABLE TO US OR AT ALL.
We will need, and are currently seeking, significant additional capital
to fund our business strategy. We cannot assure you that additional funding will
be available to us when we need it or at all, nor can we assure you that the
terms of any such funding will be favorable. If we are unable to obtain
financing when we need it or if available terms are unfavorable, we may delay or
abandon our development and expansion plans. That could have a material adverse
effect on our business, results of
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<PAGE> 8
operations and financial condition. The actual timing and amount of our capital
requirements may be materially affected by various factors, including:
- timing and cost of our expansion into new markets;
- development of new products;
- extent of competition;
- costs of production;
- demand by customers for our products; and
- potential acquisitions.
OUR ABILITY TO MAKE ACQUISITIONS MAY DEPEND ON THE MARKET PRICE OF OUR STOCK.
We have paid a substantial portion of the purchase price for businesses
we acquired by issuing common stock or securities exchangeable for our common
stock. A decline in the market value of our common stock, including as a result
of the risks described below, may make it more difficult to complete similar
acquisitions in the future. In such event, we may also be required to issue
additional shares of our common stock to complete acquisitions, which may
adversely affect the market for our common stock.
WE HAVE LIMITED CONTROL OVER THE PRICE AND SUPPLY OF RAW MATERIALS.
We rely on numerous raw materials, such as meat, seafood, vegetables,
flour, cheese and sugar to manufacture our products. We have no purchase
contracts or principal suppliers. Even though the markets for these commodities
are currently stable and we know of no imminent change in the supply of any such
commodity, we cannot assure you that there will be no fluctuations in the price
and supply of these raw materials in the future. Any increase in price or
shortage of raw materials would have a material adverse effect on our business,
results of operations and financial condition.
OUR ABILITY TO SELL OUR PRODUCTS DEPENDS ON THE RELIABILITY OF THE NETWORKS AND
SERVICES AND EFFORTS OF THIRD PARTY DISTRIBUTORS.
We rely on retailers, such as supermarkets, specialty gourmet stores
and club stores, to sell our products. The success of our business depends in
part upon the maintenance of a strong distribution network. We distribute our
products both directly to retailers under our own label and indirectly to major
club stores and retailers under co-packing arrangements. There can be no
assurance that we will be able to obtain additional co-packing or distribution
agreements or arrangements in the future on satisfactory terms or in a timely
manner. Inability to enter into satisfactory co-packing or distribution
arrangements may inhibit our ability to implement our business plan or to
establish markets necessary to develop our products successfully.
WE OWN SEVERAL REGISTERED TRADEMARKS, BUT THERE IS NO GUARANTEE THAT THE
VALIDITY OF THE TRADEMARKS WILL NOT BE CHALLENGED.
We own several registered trademarks and service marks. We will
continue to register marks of our products with the Canadian Intellectual
Property Office or the United States Patent and Trademark Office when deemed
appropriate. There is no assurance that the registration will be accepted or
that the existing registered marks will not be challenged by third parties. A
finding of trademark infringement by a court or regulatory agency may result in
an injunction or monetary damages and may have an adverse effect on our
business, results of operations and financial condition.
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<PAGE> 9
WE RELY ON A NUMBER OF KEY PERSONNEL WHO COULD BE DIFFICULT TO REPLACE.
Our success depends largely upon the continued services of our
executive officers, key management and other personnel. If we lose the services
of one or more of our current executive officers or other key employees, it
could have a material adverse effect on our business, results of operations and
financial condition. In particular, we rely on our President and Chief Executive
Officer, Michael Steele, and other executive officers, who possess experience in
the food industry. Our success also depends on our ability to identify, hire and
retain additional highly skilled sales, service and technical personnel. The
demand for qualified personnel with experience in the food industry is high and
competition for their services is intense. Our failure to recruit or retain key
personnel could have a material adverse effect on our business, results of
operations and financial condition.
OUR OPERATIONS ARE SUBJECT TO NUMEROUS GOVERNMENTAL REGULATIONS IN BOTH THE
UNITED STATES AND CANADA, AND ANY FAILURE OF COMPLIANCE WOULD INCREASE OUR COSTS
AND LIMIT OUR OPERATIONS
The manufacturing of specialty food products in Canada and the United
States is subject to stringent government regulations. The manufacturing of any
of our products in the United States will require compliance with the following
agencies:
- Environmental Protection Act, for environmental pollution,
labeling, sanitary conditions and product contamination;
- the Occupational Safety and Health Act, for equipment and work
area safety; and
- the Federal Food, Drug and Cosmetic Act, for labeling,
sanitary conditions and product contamination.
In the United States, the Food Safety and Inspection Service, or FSIS,
requires that all federally inspected meat and poultry plants producing in the
United States or importing into the United States adopt Hazard Analysis and
Critical Control Points, or HACCP, systems. These systems include science-based
process controls to prevent and reduce the significant food safety hazards that
may arise in a plant's particular processes and products. Implementation of the
HACCP certification is mandatory for all federally registered establishments in
Canada exporting to the United States. Thus far, Prime Foods and Huxtable's are
HACCP certified, and D.C. Foods is currently in the process of being certified.
We also are subject to similar regulations in Canada. The Canadian Food
Inspection Agency, or CFIA, inspects all processed food and food processing
facilities to monitor ingredients, processes and production to ensure that the
facilities meet certain manufacturing requirements. Inspectors have the power to
close down a production facility if the plant does not meet its stringent
requirements. The correct ingredients and nutritional information are required
to be clearly stated on the packages when fresh or frozen food is sold for
retail. The CFIA may also monitor and test ingredients to ensure that all values
listed on the packages are accurate and correct.
We cannot assure you that we will be able to obtain or maintain all
regulatory approvals, such as HACCP certification, for any of our subsidiaries
or products. If any of our products fails to obtain or maintain requisite
governmental approvals, it will delay or preclude us from manufacturing or
marketing our products. Furthermore, 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 affect our ability to develop or market new products.
6
<PAGE> 10
ANY QUALITY CONTROL PROBLEMS WITH REGARD TO OUR PRODUCTS COULD RESULT IN LOSSES.
We have stringent quality control guidelines for our production staff.
However, if an employee does not follow proper production procedures, or
violates acceptable food industry health standards, we may receive a significant
amount of negative publicity surrounding our products, sales of our products may
suffer and we may suffer lawsuits and regulatory action. In addition, our
current insurance policies may not sufficiently cover our losses if such events
occur.
WE MAY INCUR LOSSES AS A RESULT OF THE RISKS ASSOCIATED WITH NEW PRODUCT
DEVELOPMENT.
We are currently exploring new products as an ongoing part of our
business activities. As with all new products, there are risks associated with
the creation, production, distribution and marketing of such new product lines.
We may not be able to generate levels of new product recognition and awareness
necessary to meet sales expectations and growth. If we fail to generate such
recognition and awareness, our business may be hurt significantly, in part
because we will have focused some of our limited resources on an activity which
will provide no revenue or return. We may not be able to recoup the funds on
such new product development or the lost time and opportunity.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MARKET OUR PRODUCTS TO THE PUBLIC.
Our success depends largely on our ability to effectively market our
products to the public. Even though our revenues have grown in the past few
years, there is no assurance that our marketing efforts will be successful to
the extent required to maintain a profitable business.
OUR REVENUES MAY SUFFER IF OUR SUPPLIERS ARE UNABLE TO FULFILL OUR REQUIREMENTS.
The production of our products depends on our ability to obtain raw
materials and other supplies in a timely manner. Any disruption in the
manufacturing or shipment of these supplies could have a material adverse effect
on our business, results of operations and financial condition.
OUR REVENUES MAY SUFFER IF GENERAL ECONOMIC CONDITIONS WORSEN.
Our revenues and our ability to generate earnings in the future may be
affected by general economic factors, such as excessive inflation, currency
fluctuations and employment levels, resulting in a temporary or longer-term
overall decline in demand for our products. Therefore, any significant downturn
or recession in the United States or Canada could have a material adverse effect
on our business, results of operations and financial condition.
CHANGES IN THE VALUE OF THE U.S. DOLLAR AGAINST THE CANADIAN DOLLAR MAY AFFECT
OUR OPERATING RESULTS.
Fluctuations in the U.S. dollar against the Canadian dollar could
result in unanticipated fluctuations in our financial results, which are
denominated and reported in Canadian dollars.
RISKS RELATED TO OUR INDUSTRY
THE FOOD INDUSTRY IS GENERALLY COMPETITIVE, AND RAPID TECHNOLOGICAL CHANGES IN
THE FOOD INDUSTRY COULD GIVE OUR COMPETITORS SIGNIFICANT MARKET ADVANTAGE.
The industry for fresh and frozen specialty foods is highly
competitive. Our products compete directly with traditional supermarket non-HMR
products 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
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<PAGE> 11
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 or which are more focused on changing tastes and
preferences than ours. 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 or result in significant price
erosion, which could have a material adverse effect on our business, results of
operations and financial condition.
WE ARE SUBJECT TO OTHER GENERAL RISKS OF THE FOOD INDUSTRY.
Our products, like other food products, are subject to nutritional and
health related concerns, federal, state and local food processing controls,
consumer liability claims and risk of product tampering and mislabeling.
OUR CONTINUED GROWTH IS DEPENDENT ON THE GROWTH OF THE FOOD SERVICE MARKET.
Our continued growth and efforts to achieve profitability are largely
dependent on our analysis of the viability and expected growth of the food
service markets. Any erroneous analysis of the viability of such markets, or
increased competition, could jeopardize our success and profitability.
CHANGES IN FEDERAL REGULATORY STANDARDS MAY NEGATIVELY IMPACT OUR PROFITABILITY.
Even though we adhere to strict quality control and inspection
standards, our products and production processes are subject to regulatory
requirements in both the United States and Canada. Any new restrictions or
standards or changes in existing restrictions or standards currently imposed on
us and our products could potentially lead to alterations in our current
production methods. Such changes could lead to increased short-term or long-term
expenditures by us and negatively affect our profitability or our business.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid cash dividends on our common stock in the past and we
do not anticipate paying cash dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings for the operation and expansion of
our business.
RISKS RELATED TO THIS OFFERING
A LARGE PERCENTAGE OF OUR STOCK IS OWNED BY RELATIVELY FEW PEOPLE, INCLUDING
OFFICERS AND DIRECTORS.
As of August 15, 2000, one stockholder, Southbridge Investment
Partnership No.1, or Southbridge, beneficially owned a total of approximately
4,212,699 shares of common stock. Southbridge's shares constitute approximately
29.8% of our outstanding common stock and 24.8% of our outstanding voting stock.
In addition, our officers and directors beneficially owned a total of
approximately 2,687,455 voting shares, or approximately 15.4%, of our
outstanding voting stock. If you purchase shares covered by this prospectus, you
may be subject to certain risks due to the concentrated ownership of our voting
stock. For example, these stockholders could, if they were to act together,
affect the outcome of stockholder votes which could, among other things, affect
elections of directors, delay or prevent a change in control or other
transaction that might be beneficial to you as a stockholder.
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<PAGE> 12
OUR STOCK PRICE IS LIKELY TO BE VOLATILE.
The trading price of our common stock is likely to be volatile. The
stock market in general, and the market for specialty foods providers and
marketers in particular, has experienced volatility. This volatility has often
been unrelated to the operating performance of particular companies. Other
factors that could cause the market price of our common stock to fluctuate
substantially include:
- publicity of developments related to our business competitors
or industry groups;
- fluctuations in our results of operations;
- shortfall in our results compared to analysts' expectations
and change in analysts' recommendations or productions;
- sales of substantial amounts of our equity securities in the
marketplace;
- regulatory developments affecting food industry; and
- general conditions in the food industry or economy as a whole.
THE MARKET PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE NUMBER OF SHARES
THAT ARE ELIGIBLE FOR FUTURE SALE.
We have registered the resale of 18,187,725 shares of our common stock,
including shares issuable in the future, under this prospectus. In addition,
5,304,328 shares of our common stock were freely tradable as of August 15, 2000.
Furthermore, approximately 3,158,989 shares outstanding in addition to those
registered under this prospectus are "restricted shares" as defined in Rule 144
under the Securities Act. Such shares are or will be eligible for resale,
subject to the holding period volume and manner of sale limitations of Rule 144.
A substantial number of additional shares of common stock are likely to be
issued upon conversion, exchange or exercise of securities we have issued or
rights we have granted in connection with acquisitions and financings. We have
granted demand or piggyback registration rights covering most of such additional
shares. Absent any contractual limitations, the holders of these rights could
cause a significant number of shares of our common stock to be registered and
sold in the public market. We cannot be sure what effect sales under this
prospectus or future sales of shares or the availability of shares for future
sale will have on the market price of the common stock. The market price of our
common stock could drop due to sales of large numbers of shares in the market
during or after this offering or the perception that sales of large numbers of
shares would occur. These factors could also make it more difficult to raise
capital through an offering of equity securities. In the case of certain shares
offered hereunder, we may be required to maintain the effectiveness of the
registration statement of which this prospectus is a part for as long as
approximately six years.
THE MARKET FOR OUR STOCK IS LIMITED.
Our stock is traded on the OTC Bulletin Board. Trading activity has
fluctuated and at times been limited. We cannot guarantee that a consistently
active trading market for our stock will continue, especially while we remain on
the OTC Bulletin Board.
SHAREHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM OUR ISSUANCE OF SHARES
BASED ON FORMULAS.
If the market price for our common stock decreases, the number of
shares which may be issued to holders of convertible notes and exchangeable
shares and other rights where the shares issuable are based on formulas based in
part on future market price will increase. Shareholders will experience
significant dilution if, as the result of a declining market price of our common
stock, we are forced to issue a greater number of shares.
9
<PAGE> 13
THE RESALE OF OUR SHARES MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK.
The resale by the selling securityholders of shares under this
prospectus or the substantial number of additional shares which will be issuable
to the selling securityholders or others in the future upon exchange of
securities or pursuant to other rights will increase the number of our publicly
traded shares, which could lower the market price of our common stock. In
addition, the mere prospect of such sales could by itself lower the market price
for our common stock.
DISCLOSURES RELATING TO LOW PRICED STOCKS MAY NEGATIVELY AFFECT LIQUIDITY.
Our equity securities are subject to Rule 15g-9 of the U.S. Securities
Exchange Act of 1934. This rule imposes additional sales practice requirements
for broker-dealers which sell penny stocks to persons other than established
customers and accredited investors as defined in Regulation D under the
Securities Act of 1933. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
SEC regulations define a "penny stock" to be any equity security not
registered on a national securities exchange or for which quotation information
is disseminated on Nasdaq that has a market or exercise price of less than
US$5.00 per share, subject to certain exceptions. Unless exempt, the rules
require delivery, prior to a transaction in a penny stock, of a disclosure
schedule prescribed by the SEC relating to the penny stock market. There are
disclosure requirements relating to commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, there is a requirement for monthly statements disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. Consequently, such rule may adversely
affect the ability of broker-dealers to sell our securities and may adversely
affect the ability of purchasers in this offering to sell any of the securities
acquired hereby in the secondary market.
SPECIAL CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain our projections of the future operating results of
our operations or of our financial condition or state other forward-looking
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The risk factors listed in
this section, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, operating
results and financial condition.
10
<PAGE> 14
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the OTC Bulletin Board under the
symbol "MENU" since July 20, 1998. Prior to our amalgamation with IMSI, our
common stock was quoted in the pink sheets under the symbol "ANMH." The
following table sets forth the high and low bids in U.S. dollars to purchase our
common stock as quoted on the OTC Bulletin Board beginning July 20, 1998. The
quoted bid prices are not necessarily indicative of the prices at which shares
were actually sold because (1) the bid prices are inter-dealer prices, without
retail mark-up, mark-down or commission and (2) the bid prices may be for
transactions that were proposed but not actually completed.
<TABLE>
<CAPTION>
COMMON STOCK BIDS
(US$)
---------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
1998:
Third Quarter (from July 20, 1998)........ 1-1/2 1/2
Fourth Quarter............................ 1-5/8 13/16
1999:
First Quarter............................. 2-21/64 1-3/16
Second Quarter............................ 3-5/16 1-51/64
Third Quarter............................. 4 2-13/16
Fourth Quarter............................ 3-17/64 2-3/16
2000:
First Quarter............................. 3-1/64 1-3/4
Second Quarter............................ 2-7/16 1-1/16
</TABLE>
As of August 15, 2000 we believe there were approximately 100 record
holders of our common stock. On August 24, 2000, the last sale price of our
common stock as reported on the OTC Bulletin Board was US$1.00.
DIVIDEND POLICY
We have never paid a dividend on our stock and do not anticipate paying
any dividend in the foreseeable future. We currently intend to retain our
earnings for the operations and expansion of our business.
11
<PAGE> 15
SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to, and you
should read it in conjunction with, our financial statements and related notes
contained elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected financial data
presented below is not necessarily indicative of our future results of operation
or financial performance. We derived the selected financial information as of
and for the years ended December 31, 1998 and 1999 from our audited financial
statements appearing in this prospectus. We derived the information for the six
months ended June 30, 1999 and 2000 and as of June 30, 2000 from our unaudited
financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------------------
1998 1999 1999 2000
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................... $ 6,096,048 $ 48,040,135 $ 13,032,288 $ 32,465,787
Expenses:
Costs of goods sold ................. 4,729,806 38,748,543 11,405,228 27,222,099
Selling expenses .................... 610,033 3,680,316 907,096 2,292,855
Administrative expenses ............. 1,170,306 6,499,658 1,974,995 5,671,031
Amortization of intangibles ......... 67,473 805,705 229,688 788,380
------------ ------------ ------------ ------------
Total expenses .................. 6,577,618 49,734,222 14,517,007 35,974,365
------------ ------------ ------------ ------------
Loss from operations ................... (481,570) (1,694,087) (1,484,719) (3,508,578)
------------ ------------ ------------ ------------
Other income (expense):
Gain on Sale of Asset ............... -- -- -- $ 935,000
Interest revenue .................... 24,763 34,828 -- --
Interest expense .................... (98,066) (878,863) (282,977) (924,272)
Income (loss) before income taxes ...... (544,873) (2,538,122) (1,767,696) (3,497,850)
------------ ------------ ------------ ------------
Net income (loss) ...................... (544,873) (2,538,122) (1,623,296) (3,497,850)
Net (loss) per common share:
Basic and diluted ...................... $ (0.09) $ (0.19) $ (0.16) $ (0.22)
Weighted average shares outstanding:
Basic and diluted ...................... 6,419,141 13,686,558 10,315,837 15,845,561
</TABLE>
12
<PAGE> 16
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
---------------------------------------------- ------------
1997 1998 1999 2000
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............... $ 821,940 $ 5,536,386 $ 22,767,622 $ 22,154,893
Working capital (deficit).... 184,734 5,916,173 3,763,245 (2,474,925)
Total assets................. 2,066,780 9,940,977 53,535,258 60,045,378
Current liabilities.......... 637,206 4,024,804 19,004,378 24,629,818
Long-term debt............... 518,400 1,640,690 9,769,501 10,137,886
Stockholders' equity......... 2,066,780 4,275,483 24,761,380 25,277,674
</TABLE>
13
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For accounting purposes, the following information reflects our results
of operations as the surviving corporation in the reverse acquisition described
in Note 2 of our audited consolidated financial statements. Except as otherwise
indicated, all amounts presented in this Management's Discussion and Analysis
and elsewhere in this prospectus are presented in Canadian dollars, our
functional currency.
Where we reference EBITDA, EBITDA is defined as earnings before
interest, taxes, depreciation, amortization and interest. EBITDA is a primary
measure upon which we allocate resources to our operations, and the basis upon
which we value acquisitions and determine the ultimate purchase prices of
certain acquisitions. EBITDA is a non-GAAP measure of profitability and
therefore is not presented in our external financial statements.
We have completed several acquisitions. Accordingly, we have prepared a
pro forma statement of operations for the year ended December 31, 1999 to
reflect acquisitions that occurred during fiscal 1999. You should read the pro
forma financial statements beginning on page F-39 in conjunction with "Results
of Operations" and our audited consolidated financial statements and notes
thereto included elsewhere in this prospectus. The pro forma statement of
operations for the year ended December 31, 1999 assumes that all significant
acquisitions completed after December 31, 1998 occurred on January 1, 1999.
Results of operations of acquired companies are included in our audited
financial statements from the date of acquisition.
Furthermore, on June 30, 2000 we sold assets of our Seafood Selections
division. As described in the "Business" section elsewhere in this prospectus,
the timing of the payment to us of the $935,595 purchase price for the contracts
and intangible assets sold will depend on the purchaser's net paid invoices for
products of the Seafood Selections business. If minimum payments of $50,000 in
the first year following closing, $100,000 in the second year and $150,000 in
the third year are not made, the purchaser must pay the balance within ten days
after the end of the respective period. Any remaining portion of the $935,595 is
due on June 30, 2004. In addition to the purchase of contracts and goodwill, the
purchaser is required to purchase the Seafood Selections inventory by February
28, 2001. We estimate that the purchase price of the inventory will total
approximately $1,600,000.
Following discussions with the SEC staff, we have restated our December
31, 1998 balance sheet and statement of operations to reflect changes in the
accounting treatment of exchangeable shares issued by IMSI in certain
acquisitions. As a result of such accounting changes, we have restated amounts
related to goodwill from acquired businesses and goodwill amortization charges.
In addition, we have eliminated minority interests and any allocation of loss
thereto.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999.
Revenue. Revenue for the six months ended June 30, 2000 increased
$19,433,499 or 149.1% to $32,465,787 from $13,032,288 during the same period in
1999. The growth in revenue can be attributed to our 1999 acquisitions:
- Tasty Selections in April 1999,
- D.C. Foods in May 1999,
- Ultimate in October 1999, and
14
<PAGE> 18
- Huxtable's in November 1999.
In addition we began to realize revenues generated from our sales personnel
developing new sales opportunities and expanding our customer base beyond those
of the customer bases of companies we acquired. During the six months ended June
30, 2000, sales in TGF, Pasta Kitchens and Prime Foods were all higher than for
the same period in 1999. Sales in D.C. Foods and Ultimate were also higher than
historically. Sales in Seafood Selections were lower as we filled large initial
stocking orders in this period in 1999 while 2000 sales were primarily regular
order sales. During this period we eliminated certain products from our product
group, including some fresh direct store delivery bakery products in Tasty
Selections. Overall, Tasty Selection's sales remained relatively unchanged for
the second quarter over the first quarter.
Cost of Goods Sold/Gross Margin. Cost of goods sold for the six months
ended June 30, 2000 increased to $27,222,099 up $15,816,871 or 138.7% from
$11,405,228 for the same period in 1999. As a percentage of revenue, cost of
goods sold represented 83.8% of revenue for the six months ended June 30, 2000,
compared to 87.5% for the same period in 1999. The change in absolute dollars is
largely attributable to the 1999 acquisitions. The reduced cost as a percentage
of revenue can be attributed in part to a more diverse group of products. We
also continued to lower our cost of goods sold as a percentage of revenue due to
efficiencies resulting from certain capital expenditures made in the last half
of 1999 and the rationalization of certain lower margin product lines in our
divisions, including certain fresh direct store delivery products in our bakery
division.
The sales cycle for some of our products typically reflects lower sales
during the first two quarters resulting in partial underabsorbtion of some
fixed overhead costs. Therefore, during this period margins are lower than the
overall percentage for the year. Also, a larger percentage of our revenues
during this period are related to the sales by D.C. Foods, which is
characterized by larger sales volume and lower margin than the rest of our
units.
Selling Expenses. Selling expenses increased $1,385,759 to $2,292,855,
or 7.1% or revenue, for the six months ended June 30, 2000 compared to $907,096,
or 6.9% of revenue, for the same period in 1999. The increase for the six months
ended June 30, 2000 is primarily attributable to the 1999 acquisitions. We
increased selling expenses beyond those of the combined costs of the existing
and acquired manufacturing units as a result of the corporate involvement in the
promotion of each unit's products and our Selections line, and the introduction
of our new products to the market. We began incurring costs in the execution of
this sales and marketing strategy in the second quarter and early third quarter
of 1999, therefore these costs were not incurred at the increased level until
part way through and after the 1999 six month period.
Administrative Expenses. Administrative expenses increased $3,696,036
to $5,671,031, or 17.5% of revenues, for the six months ended June 30, 2000
compared to $1,974,995, for the same period in 1999. The increase in absolute
dollars is due largely to the 1999 acquisitions. In addition, we have 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, investor relations
and product marketing. We began incurring costs in the execution of our
administrative strategy in the second quarter and early third quarter of 1999,
therefore these cost levels fully were not reflected in the 1999 six month
period. These costs include the establishment of corporate offices and the
implementation of information, production and management integration strategies.
Amortization of Goodwill and Other Intangibles. Amortization of
intangibles increased to $788,380, or 2.4% of revenues, for six months ended
June 30, 2000 compared to $229,688, or 1.8% of revenue, in the same period of
1999. The increase of $558,692 in the expense for intangibles
15
<PAGE> 19
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 our strategy to achieve better brand recognition
through uniformity in the quality of product presentation. In addition, the
value of the intangibles increased during the six month period ended June 30,
2000 due to the settlement and determination of certain acquisition earnout
amounts in the first and second quarters of 2000.
Loss from Operations. Our loss from operations increased $2,023,859 to
$3,508,578, or 10.8% of revenues, for the six months ended June 30, 2000 over
the loss of $1,484,719, or 11.4% of revenues, in the same period in 1999. The
increase in the loss is primarily due to significant increases in product
development, marketing, amortization of intangibles and new administrative costs
incurred to execute our growth strategy.
Financing Costs. Net interest expense increased $641,295 to $924,272
for the six months ended June 30, 2000 as compared to $282,977 for the same
period in 1999. The increase is due primarily to the combined operating line
financing for our units, including all of the acquisitions, and to interest
charges with respect to long-term debt, including our convertible debt, capital
lease obligations associated with new capital equipment acquired during 1999,
and the loan obtained in June 2000. In addition, our operating line was higher
during the six months ended June 30, 2000 as compared to the same period in
1999.
Gain on Sale of Assets. We sold certain intangible assets, recipes, and
trademarks of the Seafood Selections division. Under the terms agreement, we
sold the recipes and trademarks for $935,585 payable over four years. In return
the purchaser 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% with
the initial payments to be used to paydown any unpaid balance due at the end of
the fourth year. All right and title to the recipes and trademarks transfer only
upon payment in full of the purchase amount. In addition, the purchasers agreed
to buy our Seafood Selections inventory up to February 28, 2001 at which time
the purchasers agreed to pay for any inventory not previously purchased to that
date.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue for the year ended December 31, 1999 increased
$41,944,000 or 688% to $48,040,000 from $6,096,000 during the same period in
1998. We attribute the growth in revenue primarily to the acquisitions of the
Pasta Kitchen business, TGF and Norbakco in late 1998, the acquisitions of Tasty
Selections and D.C. Foods in April and May 1999 and the acquisitions of Ultimate
and the Huxtable's foods business in October and November 1999. In addition, our
Seafood Selections division, established in late 1998 and assets of which were
sold in June 2000, commenced sales in March 1999. Our 1999 revenues were
significantly skewed to the fourth quarter. Sales in the fourth quarter
accounted for approximately 54% of our annual sales. Fourth quarter revenues
were approximately $28,200,000, bolstered by the strong sales in TGF and
Huxtable's in meeting the year 2000 celebration demands for hors d'oeuvres and
holiday meals.
Cost of Goods Sold/Gross Margin. Cost of goods sold for the year ended
December 31, 1999 increased to $38,749,000, an increase of $34,019,000 or 719%
from $4,730,000 for the same period in 1998. Cost of goods sold represented
80.7% of revenue for 1999 compared to 77.5% for the same period in 1998. The
change in absolute dollars is primarily a result of the previously mentioned
acquisitions and the establishment of the Seafood Selections division. We
attribute the increased cost as a percentage of revenue to the following:
- a more diverse group of products and product mix. In 1998, the
cost of sales were heavily skewed by the inclusion of TGF for
the month of December, which is TGF's highest margin
16
<PAGE> 20
month. TGF accounted for $2,319,000 or 38% in sales for 1998
at a significantly higher margin than the other divisions
comprising the business at the end of 1998;
- an increase in depreciation expense, as we engaged in an
aggressive capital expansion program in certain divisions in
1999 to increase efficiencies and capacities;
- some product cost inefficiencies in Tasty Selections and
certain other subsidiaries and divisions during the capital
expansion period, including higher labor and raw material
costs;
- higher than expected outside storage and transportation costs
incurred during 1999 to store and transfer inventory in both
the anticipation of sales related to our penetration of the
United States marketplace, and the build-up of inventory in
TGF to meet sales demands for the millennium celebrations; and
- the inclusion of D.C. Foods during 1999 impacts the cost of
goods sold, as D.C. Foods is a high volume/low margin producer
of value added battered meat and dairy products.
Selling Expenses. Selling expenses increased $3,070,000 to $3,680,000,
or 7.6% of revenue, for the year ended December 31, 1999, compared to $610,000
or 10.0% of revenue, for the same period in 1998. The increase in absolute
dollars is primarily due to acquisitions in 1998 and 1999. In 1999, our 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 our Selections line, the introduction
of new products to the market, and the establishment of a western corporate
sales office in Calgary, Alberta.
Administrative Expenses. Administrative expenses increased $5,329,000
to $6,499,000 or 13.5% of revenue for the year ended December 31, 1999 from
$975,000 or 15.9% of revenue for the same period in 1998. The increase in
absolute dollars is primarily due to the acquisitions in 1998 and 1999. In
addition, we have 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 of 1999, we
established offices in Calgary, Alberta and hired personnel in Maryland and
California, which contributed to the increased cost as a percent of revenue.
Amortization of Intangibles. Amortization of intangibles increased to
$806,000 or 1.7% of revenue for the year ended December 31, 1999 compared to
$67,000 or 1.1% of revenue for the same period in 1998. The growth of $739,000
in the expense for intangibles amortization is a result of increased purchased
goodwill and intangibles associated with acquired businesses and the
amortization of certain expenditures on packaging and artwork in conjunction
with the launch of products with new customers and the branding of existing
products in accordance with our strategy for better brand recognition through
uniformity in the quality of product presentation.
Loss from Operations. Our loss from operations increased $1,212,000 to
$1,694,000 or 3.5% of revenue for the year ended December 31, 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 spur our growth. In addition, certain of our sales initiatives which we
expected to result in sales in the second and third quarters of 1999 did not
result in sales until late in the fourth quarter of 1999. The Seafood Selections
division, which we subsequently sold in July 2000, incurred losses during the
17
<PAGE> 21
second and third quarter of 1999 as it continued its sales efforts aimed at
producing sales in the fourth quarter. Overall, we showed positive earnings
before interest, taxes, depreciation and amortization, or EBITDA in 1999. EBITDA
consists of net loss before interest, income taxes, depreciation and
amortization and financing expenses. It is a measure commonly used in the food
products industry and is presented to assist in understanding our operating
results. However, it is not intended to represent cash flow or results of
operations in accordance with generally accepted accounting principles.
Financing Costs. Net interest expense increased $771,000 to $844,000
for the year ended December 31, 1999 compared to $73,000 for the same period in
1998. The increase is due primarily to our acquisitions and to interest charges
on long-term debt, including convertible debt and capital lease obligations
associated with new capital equipment acquired during 1998 and 1999.
18
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased from $4,165,370 at December 31,
1999 to $4,357,130 at June 30, 2000. Our working capital decreased from $184,734
at December 31, 1999 to a deficit of $2,474,925 at June 30, 2000. Of our cash
and cash equivalents at June 30, 2000, $200,000 represents funds required to be
maintained as security for certain of our long term debt, and $4,000,000
represents funds required to be maintained by us as part of our banking facility
agreement with the Bank of Nova Scotia at the time. The latter funds are to be
utilized to pay down the facility upon the completion of the legal documentation
for our new credit facility with the Bank of Nova Scotia. Bank credit facilities
utilized at June 30, 2000 totaled approximately $9,500,000, inclusive of the
$4,000,000 pledged cash. Total credit facilities available at June 30, 2000 were
$10,000,000.
Historically, our business cycle involves a significant investment in
working capital during the first six to nine months of the year in anticipation
of our late third quarter and fourth quarter sales. We continued to build or
maintain high levels of inventories in TGF, Prime Foods and Seafood Selections.
Inventories are expected to decline in October for TGF consistent with its sales
cycle, as sales increase for Prime. In addition, we have continued to incur
increased product development and other costs associated with:
- building management, infrastructure and information systems,
- corporate governance and reporting obligations,
- seeking strategic acquisitions, and
- investor relations, and obtaining new sources of financing.
The operations of D.C. Foods, Ultimate and Pasta Kitchens have had a
positive cash flow from operations during the first six months of 2000 which
funded their operations and contributed to the costs in IMSI.
In addition to funds from operations, as described below, we obtained
additional funds from the loans entered into with Southbridge Investment
Partnership No. 1, First Ontario Labour Sponsored Investment Fund Ltd., and Bank
of Montreal Capital Corporation to fund our working capital and capital
expansion. The amount, net of transaction costs, received from the transaction
was approximately $4,000,000.
19
<PAGE> 23
In August 2000, IMSI agreed to enter into new credit facilities with
the Bank of Nova Scotia. The new credit facility, which will replace our
existing facility with the Bank of Nova Scotia, consists of:
- an operating line of up to $10,000,000. The operating line may
be utilized by direct advances, bankers' acceptances or
standby letters of credit. The direct advances bear interest
at the Bank of Nova Scotia's prime rate plus -1/2% or the Bank
of Nova Scotia's base rate plus -1/2%. The operating line is
repayable on demand.
- a revolving term facility to purchase equipment in the maximum
amount of $3,500,000. The term facility may be utilized by
term promissory notes with a maximum term of five years and
bears interest at the Bank of Nova Scotia's prime rate plus 1
-1/4%. The term facility may be secured by leases or
conditional sales contracts. IMSI must also maintain certain
insurance coverage on the assets financed.
- a non-revolving facility of up to $1,500,000. This credit may
be utilized by term promissory notes with a term of five years
and bearing interest at the Bank of Nova Scotia's prime rate
plus 1 -1/2%. This facility may also be utilized by way of
equipment leases bearing interest at the Bank of Nova Scotia's
prime rate plus 1 -1/2% to finance up to 70% of the equipment
value. This facility may be secured with leases or conditional
sales contracts. IMSI must also maintain insurance coverage on
the asset financed.
As general security for all the credit facilities listed above, IMSI
provided general assignments of all of the assets of IMSI, book debts and life
insurance on the life of Michael Steele. We and each of Prime Foods, TGF, Tasty
Selections, D.C. Foods, Huxtable's, and Ultimate have provided unlimited
guarantees of the indebtedness of IMSI supported by general assignments of all
of our and their assets. In addition, we provided to The Bank of Nova Scotia a
postponement and assignment of any amount owing to it from time to time by IMSI.
As of August 15, 2000, we utilized an aggregate of $9,712,000 of the
operating line, $3,200,000 of the revolving term facility and none of the
non-revolving facility.
Southbridge Investment Partnership No. 1, First Ontario Labour
Sponsored Investment Fund Ltd., and Bank of Montreal Capital Corporation - Loan.
On June 5, 2000, we 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 borrowed
$4,500,000. We are entitled to prepay this loan without penalty. Interest is
payable monthly at a rate of 12% per annum. The interest rate on any unpaid
portion increases to 24% per annum on September 1, 2000 and 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. The loan is secured by our assets and the
assets of our subsidiaries. We received approximately $4,000,000 after deduction
of fees and commissions. The loan matures on February 28, 2001.
First Ontario Fund and Bank of Montreal Capital Corporation -
Convertible Loan. On May 10, 1999, we entered into a loan agreement with First
Ontario Fund, or First Ontario, and Bank of Montreal Capital Corporation, or
BOMCC, for a $4 million financing. BOMCC funded $1.5 million of the loan and
First Ontario funded $2.5 million. The financing was secured by general security
granted by each of IMSI and us, a guarantee and general security agreement from
each of IMSI's subsidiaries, a mortgage on 620 Colby Drive, Waterloo, Ontario,
and the pledge of our common shares in IMSI. The loan matures on April 15, 2003.
The interest rate on the loan is currently 13% per annum. The loan is
convertible into securities of IMSI and the issuer and we issued the lenders
warrants to purchase common stock, as described in the section entitled
"Description of Securities."
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Business Development Bank of Canada - Mortgage. In November 1997, Prime
Foods received a mortgage from the Business Development Bank of Canada, or BDC,
in the amount of $550,000. The principal is repayable in monthly installments of
$3,200. Interest is also payable monthly. 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, a
general security agreement executed by Prime Foods, a guarantee executed by
Michael Steele and Jim Quinchard, a guarantee for the full amount of the loan by
IMSI and an assignment of shareholders' loans owed by Prime Foods to IMSI. As of
June 30, 2000, $518,000 was outstanding on this mortgage.
Business Development Bank of Canada - Equipment Loans. In May 1997, TGF
received a loan of $660,000 from BDC. The principal is scheduled to be repaid in
ten installments of $66,000. Interest is payable monthly at 1.25% above BDC's
daily floating base rate. The loan is secured by a first charge on all personal
property of TGF and guaranteed by Victor Fradkin, Larry Hoffman, Rhys Quin and
Len Shiffman. The loan will mature on January 23, 2002. As of June 30, 2000,
$264,000 was outstanding on this loan.
In March 1998, TGF received an additional loan from BDC in the amount of
$440,000. The principal is repaid in installments of increasing amounts.
Interest is payable monthly at 0.75% above BDC's daily floating rate. The loan
is secured by a charge on all personal property of TGF and guaranteed by Victor
Fradkin, Rhys Quinn, Larry Hoffman and Len Shiffman. The loan will mature on
January 23, 2003. As of June 30, 2000, $270,000 was outstanding on this loan.
Royal Bank of Canada. In September 1996, 1005549 received a mortgage from
Royal Bank of Canada, or RBC, with a note for $700,000. In June 2000, D.C. Foods
and RBC entered into a renewal of this facility requiring monthly payments of
$6,810. The note is due and payable on demand. The interest is RBC's prime rate
plus 0.75%. As of June 30, 2000, $590,738 was outstanding on this mortgage.
In addition, in September 1996, D.C. Foods received a loan of $200,000
from RBC. This loan was renewed in June 2000. It is repayable in monthly
installments of $4,010 and matures on September 9, 2001. Interest is payable
monthly at RBC's prime rate plus 1%. As of June 30, 2000 $54,160 was outstanding
on this loan.
In June 2000, D.C. Foods received from RBC a line of credit in the amount
of $1,500,000. Interest is determined at rates applicable at the time of the
advance. As of June 30, 2000, $955,921 was outstanding on this loan.
As general security for the loans by RBC, $200,000 of cash security was
granted to RBC, a mortgage on the real property located at 35 Northland Road,
Waterloo, Ontario in the principal amount of $900,000, and a guarantee and
postponement of claim in the principal amount of $500,000 was granted by IMSI to
RBC.
We will need, and are currently seeking, significant additional capital to
fund our business strategy. Additional capital will be necessary to fund current
operating losses and acquisitions we may seek to make, including our proposed
acquisition of assets of Great American Barbecue Company. There can be no
assurance that additional funding will be available to us when we need it or at
all, nor can we assure you that the terms of any such fundings will be
favorable. If we are unable to obtain such financing, we will be unable to
pursue our acquisition strategy as vigorously as planned.
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BUSINESS
OVERVIEW
International Menu Solutions Corporation is a holding company. Through our
subsidiaries, we develop, produce and market a series of specialty food products
for sale to large retail and specialty food chains and the food service
industry. Our mission is to be a leading marketer and producer of home meal
replacement, or HMR, products throughout North America. Our products are high
quality, quickly prepared and cost-effective replacements to home cooked meals
for time starved consumers. We target consumers who desire restaurant quality
meals in the convenience of their homes. Our meals include single entree meals
as well as complete meals consisting of all the necessary center-of-the-plate,
starch and vegetable items in one package. We cross-merchandise these core
products with other products, including hors d'oeuvres and specialty desserts.
Our products are sold in supermarkets as both 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.
GROWTH STRATEGY
Our strategy involves pursuing growth in the following areas:
Acquisition of Businesses. We plan to continue to identify and seek to
acquire businesses that have desirable products and customers in strategic
geographic locations. This will allow us to:
- complement our existing product lines;
- capitalize on existing brand names and customer loyalty; and
- take advantage of existing product distribution channels and
production capacity.
Cross-Branding Our Brand Name. We add our "Selections" brand name to
the brand name of the companies we acquire. This allows us to create a
national brand out of a consolidation of regional brands.
International Line of Restaurant Quality Meals. Our meal components can be
mixed and matched by consumers to create an international or ethnic line of
restaurant quality complete meals.
Product Development. We have the ability to manufacture products in
accordance with a retailer's request. Therefore, we can create lines of food
products for individuals and retailers to satisfy certain demands. We also seek
to develop new products in response to consumer tastes and dining trends. We
also seek to enhance the presentation, taste and packaging of our products and
those products of businesses we acquire.
Distribution Network. We acquire strategic distribution channels through
acquisitions. We also seek relationships with retailers to ensure distribution
of our products. We also distribute our products directly under our own name and
indirectly to major club stores and retailers under co-packing agreements.
Company Background and Development
We incorporated under the laws of the State of Nevada on June 24, 1997 as
ANM Holdings Corporation. We are authorized to issue an aggregate 25,000,000
shares of common stock, par value $0.001 per share, and 10,000,000 Class N
shares, par value of $0.001 per share. The Class N shares are non-equity
participating and are entitled to one vote per Class N share, voting together as
one class with the common stock.
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Under prior management, our original mission was to offer quality clinical
research facilities providing our customers with a cost effective and efficient
method for conducting clinical research. The business became inactive after our
predecessors were unable to achieve their business goals. Subsequently, we
changed our business to its present focus on HMR products.
As part of the new strategy, we changed our name to International Menu
Solutions Corporation on July 15, 1998. On July 16, 1998 our subsidiary
amalgamated pursuant to the Business Corporations Act (Ontario) with
International Menu Solutions Inc., an Ontario corporation. The surviving company
in the amalgamation was called International Menu Solutions Inc., or IMSI. As a
result of the amalgamation the holders of the outstanding shares of common stock
of pre-amalgamation, IMSI received 4,000,000 Class X shares of the
post-amalgamation IMSI and 4,000,000 of our Class N voting, non-equity shares.
In connection with the amalgamation, IMSI's management assumed our management.
Our principal subsidiaries include:
- Huxtable's Kitchens Inc., or Huxtable's, a corporation organized
under the laws of the State of Delaware on October 29, 1999.
Huxtable's produces and sells fresh and frozen entrees and complete
meals; and
- IMSI, a corporation incorporated under the laws of the Province of
Ontario on September 26, 1997. IMSI is a holding company that does
business through its subsidiaries discussed below
IMSI's subsidiaries include:
- Transcontinental Gourmet Foods Inc., or TGF, a corporation
incorporated under the laws of the Province of Ontario on January
27, 1983. TGF produces frozen hors d'oeuvres;
- Tasty Selections Inc., or Tasty Selections, a corporation
incorporated under the laws of the Province of Ontario on July 8,
1996. Tasty Selections was amalgamated, or merged, on September 30,
1999 with Norbakco, a corporation incorporated under the laws of the
Province of Ontario on August 25, 1995. Tasty Selections
manufactures muffin and cookie batters as well as baked cakes and
danishes;
- The Ultimate Cookie Co. Ltd./L'Ultime Biscuit Cie Inc., or Ultimate,
a corporation incorporated under the laws of Canada on March 1,
1990. Ultimate produces high end frozen cookie doughs;
- D.C. Food Processing Inc., or D.C. Foods, a corporation incorporated
under the laws of the Province of Ontario on December 2, 1994. D.C.
Foods merged with 1005549 on December 31, 1999. D.C. Foods
manufactures breaded and battered meat and dairy products; and
- Prime Foods Processing Inc., or Prime Foods, a corporation
incorporated under the laws of the Province of Ontario on March 27,
1990. Prime Foods has two divisions: Pasta Kitchen and Seafood
Selections. Prime Foods produces frozen entrees, bundled meals and
stir fry kits. Prime Foods sold Seafood Selection's contracts and
intangible assets to Seafood Selections Inc. on June 30, 2000 and is
in the process of selling its inventory to the same entity.
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The following chart sets forth our principal subsidiaries and operating
companies.
[FLOW CHART OMITTED]
We are a legal entity separate and distinct from our subsidiaries.
Accordingly, our right and thus the right of our creditors 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. To the extent that our
claims as a creditor against our subsidiaries may be recognized, our claims may
in certain circumstances be subordinate to claims of others. In addition, as a
holding company, a principal source of our unconsolidated revenues and funds is
dividends and other payments from our subsidiaries. IMSI currently requires the
consent of the Bank of Nova Scotia and other lenders to pay cash dividends or to
make other withdrawals or advances to individual shareholders, but is permitted
to pay dividends and make advances to us.
ACQUISITIONS BY IMSI PRIOR TO THE AMALGAMATION
Acquisition of Prime Foods. On November 5, 1997, IMSI acquired all of the
outstanding shares of Prime Foods. IMSI paid cash consideration of $665,000,
which included IMSI's purchase of certain promissory notes held by affiliates of
the shareholders of Prime Foods and the purchase of property located at 620
Colby Drive, Waterloo, Ontario by Prime Foods.
ACQUISITIONS AFTER THE AMALGAMATION
Acquisition of Pasta Kitchen. On October 9, 1998, Prime Foods acquired the
business carried on by 1218951 Ontario Inc. under the trade name Pasta Kitchen.
Prime Foods purchased all of the assets of Pasta Kitchen for a total of
$640,000. We issued 55,042 shares of our common stock in August 2000 to satisfy
the remaining portion of the purchase price.
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Acquisition of TGF and Norbakco. On November 30, 1998, we acquired all the
outstanding shares of TGF and 59% of the shares of Norbakco, a sister
corporation of TGF. We purchased such shares for a cash payment of $1,000,000 at
closing and additional cash payments totaling $499,881 paid in December 1999 and
January 2000. The balance of the purchase price was paid by the issuance of
three classes of stock of IMSI:
- 300,000 Class B shares,
- 100,000 Class C shares, and
- 59,000 Class D shares.
The Class B shares are exchangeable for 2,258,718 shares of our common
stock. We currently estimate that the Class C and Class D shares will be
exchangeable for approximately 510,000 shares and 500,000 shares, respectively,
of our common stock, based on the formulas described in "Description of
Securities" elsewhere in this prospectus. We anticipate issuing 2,258,718 shares
of our Class N shares, which are voting, non-equity shares, to holders of the
Class B shares. Once we finalize the number of shares of common stock the Class
C and Class D shares will convert into, we will also issue to each holder an
equivalent number of our Class N Shares, which are voting, non-equity shares.
Holders of Class B, Class C or Class D shares must surrender an equivalent
number of Class N shares upon exchange of the Class B, Class C or Class D
shares.
On May 17, 1999, we acquired the remaining 41% equity interest in
Norbakco. In payment, we issued 53,000 Class X shares of IMSI, an option to
purchase for a nominal price 53,000 shares of our Class N shares, and the
assumption of liability for certain shareholder loans made to Norbakco in the
aggregate amount of $180,000. As long as the option for the Class N shares has
not been exercised by the holders, one Class X share is exchangeable for one
share of our common stock. Once the option holder exercises the Class X shares
an equivalent number of Class N shares must be surrendered for one share of our
common stock.
Acquisition of Tasty Selection. On April 15, 1999, we purchased all of the
issued and outstanding shares of Tasty Selections, a manufacturer of muffin and
cookie batters. We acquired Tasty Selections for cash consideration of
$1,000,000, 442,750 Class X shares of IMSI and 442,750 of our Class N shares. On
September 30, 1999, Tasty Selections was amalgamated with Norbakco. At the time
of the purchase we, along with IMSI and Tasty Selections, entered into a
non-competition and confidentiality agreement with Allan Greenspoon, the
president of Tasty Selections, to protect the goodwill of Tasty Selections. In
consideration of Mr. Greenspoon's covenants, we and IMSI agreed to issue to Mr.
Greenspoon a number of shares of our common stock determined, at the election of
Mr. Greenspoon, within 30 days of receiving notice of the completion of our
audited financial statements for the year ended December 31, 2001, based on
either:
- 4 times EBITDA for IMSI's Canadian bakery operations for the year
ended December 31, 2001, less $2,160,000; or
- 3 times EBITDA for IMSI's Canadian bakery operations for the year
ended December 31, 2002, less $2,160,000.
In either case, the number of shares is determined by dividing such figure by
the weighted average closing price for the shares of our common stock for the
twenty trading days prior to the last day of the year selected.
In the event of Mr. Greenspoon's death or permanent disability or if his
employment is terminated for cause prior to December 31, 2001, then the number
of shares issued shall be determined based on the twelve-month period prior to
such event rather than a year selected by Mr. Greenspoon.
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Acquisition of D.C. Foods. On May 10, 1999, we purchased all of the
issued and outstanding shares of 1005549, the parent company of D.C. Foods.
D.C. Foods is a manufacturer of value-added breaded and battered meat and
dairy products. In December 1999, D.C. Foods and 1005549 were amalgamated
with the continuing company being D.C. Foods. The purchase price consisted
of the following components:
- $6,345,000;
- an amount equal to the greater of adjusted EBITDA of D.C. Foods (as
defined in the share purchase agreement) for the period December 7,
1998 to December 31, 1999 and zero; and
- an amount equal to the greater of four times adjusted EBITDA for the
one year period ending March 31, 2002 or December 31, 2002, minus
the sum of
- $6,000,000, and
- an amount equal to the greater of adjusted EBITDA of D.C.
Foods for the period December 7, 1998 to December 31, 1999
and zero, and
- zero.
The first component of the purchase price was satisfied as follows:
- $4,000,000 in cash;
- $500,000 through the issuance of 190,476 Class X shares of IMSI and
an equal number of Class N shares; and
- $1,845,000 by the issuance of 702,857 Class X shares of IMSI and an
equal number of Class N shares.
We satisfied the second component of the purchase price by the issuance of
250,000 Class E Series 1 shares and 250,000 Class E Series 2 shares. We
satisfied the last component of the purchase price by the issuance of 250,000
Class E Series 3 shares and 250,000 Class E Series 4 shares of IMSI.
The Class E Series 1 and Class E Series 2 shareholders are entitled to
approximately 420,000 shares of our common stock based on the performance of the
division from December 7, 1998 to December 31, 1999. The shareholders of the
Class E Series 1 and 2 shares are entitled to purchase, for nominal
consideration, approximately 420,000 of our Class N shares. In the event that
the shareholders acquire the Class N shares, then upon the exchange of the Class
E Series 1 or 2 shares by the shareholder, the corresponding number of Class N
shares shall be surrendered by the shareholder. The Class E Series 3 and Series
4 shareholders will be entitled to exchange such securities for shares of common
stock determined based upon the performance of the division in future periods
ending in 2002 as described under the caption "Description of Securities"
elsewhere in this prospectus.
The shareholders of 1005549 were granted a put option with respect to the
250,000 Class E Series 1 shares and 250,000 Class E Series 2 shares that were
issued in connection with this acquisition. This put option is exercisable as of
the date the adjusted EBITDA of D.C. Foods is determined. All of the
shareholders must exercise the put option concurrently. The put option requires
us, upon exercise, to purchase the Class E Series 1 and Series 2 shares for an
amount equal to the adjusted EBITDA of D.C. Foods.
Acquisition of Ultimate. On October 18, 1999, we purchased all of the
issued and outstanding shares of Ultimate, a Montreal-based bakery, for a
purchase price equal to:
- payment of $208,278 in cash;
- $250,000 Class E Series 5 shares of IMSI; and
- $250,000 Class E Series 6 shares of IMSI.
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The Class E Series 5 shareholders will be entitled to exchange such
securities for 479,069 shares of common stock based upon the performance of
Ultimate in the period ended April 30, 2000. The Class E Series 6 shareholders
will be entitled to exchange such securities for common stock based upon the
performance of Ultimate in 2002 The Class E Series 5 and Series 6 shareholders
are entitled to an equivalent number of Class N shares, which will be
surrendered at the time of conversion of the Class E Series 5 and Series 6
shares.
Acquisition of Assets of Huxtable's Foods, L.L.C. On November 12, 1999,
our wholly-owned subsidiary, Huxtable's, purchased substantially all of the
operating assets, including the brand name "Huxtable's Kitchen," of Huxtable's
Foods, L.L.C., or Huxtable's LLC, located in Vernon, California. Huxtable's LLC
provided a wide range of fresh and frozen entrees in the Southern California
market. The purchase price paid for such assets equals the sum of the following:
- US$3,080,000 in cash, plus
- earn-out payments, determined as follows:
- an amount, referred to as the Stub Payment, not to exceed four
times 1999 adjusted EBITDA for Huxtable's, which multiple
shall be selected by Huxtable's LLC;
- an amount, referred to as the First Year Payment, equal to the
2000 adjusted EBITDA; and
- a final payment described below.
Huxtable's LLC has the right to elect to have the final
payment based upon the 2001 adjusted EBITDA or the 2002
adjusted EBITDA. In the event that Huxtable's LLC elects to
have the final payment based upon the 2001 adjusted EBITDA,
then Huxtable's LLC shall receive the following:
- five times the 2001 adjusted EBITDA; less
- the Stub Payment to the extent that such deduction would
not reduce the 2001 Final Payment below US$7,500,000;
less
- the First Year Payment.
In the event that Huxtable's LLC elects to have the final payment based
upon the 2002 adjusted EBITDA, then Huxtable's LLC shall receive instead an
amount equal to the following:
- the 2001 adjusted EBITDA, referred to as the Second Year
Payment, to be paid after being determined; plus
- five times the 2002 adjusted EBITDA; less
- the Stub Payment to the extent that the such deduction would
not reduce the amount equal to five times the 2002 adjusted
EBITDA, below US$7,500,000; less
- the First Year Payment, plus the Second Year Payment.
In the event that the aggregate purchase price amount paid to Huxtable's
LLC is less than 80% of the gross margin in the final payment year, plus two
times the adjusted EBITDA for the final payment year, then we shall pay to
Huxtable's LLC an the 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 LLC, as calculated, in accordance with GAAP consistently
applied and past practice and based upon financial information taken from
audited financial statements of Huxtable's LLC. For the purpose of the adjusted
EBITDA calculations, we excluded certain items relating to the acquisition of
Huxtable's LLC.
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We paid the initial cash portion of the purchase price through:
- a cash payment of US$2,880,000; and
- a cash payment of US$200,000 paid into escrow pending the adjustment
of certain expenses during the period November 1, 1999 to November
12, 1999 and to provide for the payment of one-half of the
California sales taxes eligible upon purchase of the assets.
The escrow funds were released to us following completion of the analysis
with sufficient funds withheld to cover sales taxes and other agreed upon
charges.
We will pay the remainder of the purchase price in either cash or shares
of our common stock based upon the terms and conditions of the asset purchase
agreement.
We issued 956,178 shares of common stock in satisfaction of the Stub
Payment. We currently estimate that we will issue approximately 550,000 shares
as the First Year Payment.
Proposed Acquisition of Assets of Great American Barbecue Company of St.
Louis Missouri. On July 14, 2000 we entered into an Agreement and Plan of
Reorganization with Great American Barbecue Company, or GABC, a Missouri
corporation. GABC owns a 55,000 square foot food processing facility in Weimar,
Texas and produces smoked or barbecue meat products. The Agreement and Plan of
Reorganization sets forth the proposed terms of our acquisition of substantially
all of GABC's assets. The closing of this transaction is subject to our senior
lenders approving the transaction, our obtaining at least US$1 million of
additional financing and our board of directors approving the transaction, among
other conditions. As of August 31, 2000 such conditions have not been fully
satisfied and we are unable to determine the probability of satisfying such
conditions. Under the agreement, the purchase price would consist of the
following components:
- 1.5 million shares of our common stock;
- the assumption of certain liabilities of GABC; and
- an earnout, equal to five times EBITDA for the first full twelve
months following closing, less US$1,700,000.
The earnout would be paid in our common stock valued at the average closing
price during the tenth to twelve full months following closing, but in no event
less than US$2.00 or greater than US$5.00 per share.
Following the closing, GABC would dissolve and the remaining assets of
GABC along with the right to receive our common stock would be distributed to
the shareholders of GABC. We would grant piggyback registration rights with
respect to the common stock we issue.
Under the terms of the agreement, GABC may terminate the agreement after
July 29, 2000 if certain conditions are not satisfied by us. Although we failed
to fully satisfy these conditions, we continue to negotiate with GABC.
DISPOSITION OF ASSETS OF SEAFOOD SELECTIONS DIVISION
Seafood Selections was established as a division of Prime Foods in October
1998. We sold certain assets of this division, including purchase orders,
recipes and goodwill, to a newly incorporated company called Seafood Selections
Inc. on June 30, 2000. The purchase price was $935,595 payable in monthly
payments equal to:
- 3% of net paid invoices of sales of existing "Seafood Selections"
labeled products;
- 2% of net paid invoices of sales of existing Seafood Selections
products sold on a private label basis; and
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- 1% of net paid invoices of sales of new Seafood Selections labeled
products developed by the purchaser.
If minimum payments of $50,000 in the first year following closing,
$100,000 in the second year and $150,000 in the third year are not made, the
purchaser must pay the balance within ten days after the end of the respective
period. Any remaining portion of the $935,595 is due on June 30, 2004.
Upon payment in full of the purchase price, we will transfer the recipes
for our Seafood Selections products and intellectual property rights to the
purchaser.
In addition to the purchase of contracts and goodwill, the purchaser is
purchasing the Seafood Selections inventory by February 28, 2001. We estimate
that the purchase price of the inventory will be approximately $1,600,000.
PRINCIPAL 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. We identify food service and restaurant eating
trends and develop these foods into a retail format. We sell our products in
supermarkets, and to the food service industry 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.
We believe that the market for HMR products is rapidly expanding.
Historically, consumers have for some time purchased "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.
We then cross-merchandise these products with our other products, including hors
d'oeuvres and specialty desserts.
PRODUCT DEVELOPMENT STRATEGY
Our products are developed in response to consumer demand 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 certain retailers' design teams to
create lines of food products to be sold under either our label or the
retailer's label. Otherwise, our meals are manufactured and sold directly to
retailers or 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
to retailers with known brand names through a co-branding approach. We believe
that co-branding our products with known brands will create brand awareness of
our products since our name appears on the label of the known brand. 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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- Retailer Branding - The retailer owns the brand and we provide
co-packing services.
- Co-Branding - We use the retailer's name brands or locally
recognizable brands in conjunction with our own brand or label.
- Control Branding - We provide complete meal solution programs under
our 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 our label 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 under various local and international theme
canopies and from restaurant menus. We currently focus on the following food
service themes:
- 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 our
wholly owned subsidiaries. These brands include:
- Royal Selection - A line of frozen meal entrees.
- International Selection - A line of frozen meal entrees.
- Pasta Kitchen - a line of pasta-based heat and serve meals.
- Thornhill Bakery, Meli's Bakery, and Margie's Sweets - A line of
fresh and frozen desserts.
- Jonathan T's and TGF - A line of frozen hors d'oeuvres.
- Huxtable's Kitchen - A line of fresh and frozen entrees and complete
meals.
- 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. We also re-brand or cross-brand products acquired on acquisitions of
new divisions or change or merge acquired brands to add the "Selections" name,
such as Jonathan T. Selections or Fresh Selections. As a result, we anticipate
that retailers will be able to choose various menu components which parallel
restaurant menus.
We utilize our own direct sales force to 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. 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. In certain cases we 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.
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PRODUCT DISTRIBUTION STRATEGY
We distribute our products in various ways to our customers. We distribute
our products directly to major retailers through either our own delivery
vehicles or third party vehicles. We also distribute the products 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
Currently our largest customer is Price Costco. Sales in Canada and the
United States for the year-ended December 31, 1999 to this customer were
$6,700,000, which represented 13.7% of our sales. We believe we have a good
relationship with Price Costco and anticipate that we will expand our business
with this customer; however, we have no long-term commitments with this company.
The loss of Price Costco as a customer could have a material adverse effect on
our revenues and financial position.
STRATEGIC RELATIONSHIPS
In November 1999, we entered into a manufacturing and supply agreement
with Otter Valley Foods Inc. for Otter Valley to provide additional production
capacity to support us. This agreement is for three years and automatically
renews from year to year unless terminated in writing by either party with 60
days prior notice to the end of the current term.
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 currently stable and no
change in their supply is imminent.
COMPETITION
The specialty food industry is highly competitive. Our products compete
with traditional supermarket HMRs, such as frozen dinners, gourmet deli counters
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, we cannot assure you that we will be
able to compete successfully or that our 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.
We believe 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 themes 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 products 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 cross brand these brands with the "Selections" name to build
national brand presence. Our larger competitors who seek to develop brands from
inception typically
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<PAGE> 35
develop a national strategy, which requires significantly more planning and
coordination across diverse geographic and cultural regions. We can quickly
develop regionally specific strategies as we minimize the necessity for larger
cross-geographic and 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 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
customers' needs.
We 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 using private labels or
co-branding our products to access retailer space. In addition, by acquiring
existing brands through the acquisition of businesses, we can leverage off of
the acquired businesses' existing relationships with retailers to add new or
redesigned products and avoid slotting fees that we might otherwise have to pay
if we were to introduce the same products without such relationships.
We believe that our capability to offer products that are fresh,
nutritious, economical and aesthetically appealing to the consumer makes us 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
We own the following registered trademarks and service marks in Canada and
the United States:
<TABLE>
<CAPTION>
CANADA UNITED STATES
------ -------------
<S> <C>
Poppa Jimis(R) Huxtable's Kitchen(R)
Poppa Jimis Deli & Design(R)
Royal Selections & Design(R)
Pasta Kitchen(R)
Jonathan T(R)
Lite 'N Tasty(R)
Tasty Gourmet Brand(R)
</TABLE>
We currently have several trademark applications pending in Canada. 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.
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<PAGE> 36
GOVERNMENTAL REGULATION
The production, distribution and sale of our products are subject to
various federal, provincial state and local laws promulgated in the United
States and Canada.
United States
In the United States the entity setting standards is the United States
Food and Drug Administration, or FDA, which sets standards on health and safety
issues and labeling. The inspection of meat and poultry plants is carried out by
the United States Food Safety and Inspection Service, or FSIS. FSIS requires
that all federally inspected meat and poultry plants producing in the United
States or importing into the United States adopt Hazard Analysis and Critical
Control Points program, or HACCP, to ensure that they have controls in place to
prevent and reduce the significant food safety hazards that may arise.
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 the United States. The deadline for being HACCP certified or
in the process of being so certified was January 25, 2000.
Prime Foods and Huxtable's are currently HACCP certified, while D.C. Foods
is currently in the process of being certified.
We are subject to regulation by federal, state and local governmental laws
in the United States. These include: the Environmental Protection Act or EPA;
the Occupational Safety and Health Act or OSHA; the Federal Food, Drug and
Cosmetic Act; United States Department of Agriculture and state and local
building codes. In particular, in the United States, state labor laws and OSHA
regulate the working conditions in our plants. EPA as well as state and
municipal legislation and bylaws govern all aspects of hazardous products,
discharge and other environmental issues. In addition, 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 our knowledge, we comply
with state and federal laws necessary to distribute food products in the United
States.
Canada
We are subject to regulation by federal, provincial and local governmental
laws in Canada. These include: Canada Agricultural Products Act, Consumer
Packaging and Labelling Act, Fish Inspection Act, and the Food and Drug Act. In
addition, we are subject to other federal, provincial and local labor, transport
and environmental regulations.
In Canada, the Canadian Food Inspection Agency, or CFIA, ensures that food
processing plants meet numerous health and safety standards, as well as other
commercial standards such as approved labeling. CFIA 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 federally registered establishments
having their own inspection legend. Seafood inspection is covered under the
Quality Management Program, or QMP, which is an enhanced inspection program that
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
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<PAGE> 37
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 frequently visit as often as daily to monitor systems,
ingredients, processes and production. 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. The provincial Department
or Labour and Worker's Compensation Boards play an active role in monitoring
health and safety in the workplace. The Department of Environment, as well as
various provinces, regulate environmental matters applicable to us. 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. We believe that our 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 August 15, 2000 we had approximately 510 employees, of which
approximately 475 were full-time employees. We believe relations with employees
are good.
PROPERTIES
Our headquarters is located at 350 Creditstone Road, Suite 202, Concord,
Ontario. The lease for this 5,110 square feet space commenced March 1, 1999 and
terminates in February 2002. We have an option to renew for one additional term
of three years. In March 2000, we leased an additional 4,614 square feet at 350
Creditstone Road. The lease on this additional space also terminates in February
2002. We have a right to renew this lease for one additional three year term.
Prime Foods. Prime Foods' 15,000 square foot frozen food facility is
located at 620 Colby Drive, Waterloo, Ontario. Prime Foods owns the property. In
December 1997, Prime Foods began to operate this facility to produce frozen
entrees, bundled meals and stir fry kits for the HMR market in the United States
and Canada.
Pasta Kitchen. Pasta Kitchen's fresh commissary-style kitchen is a 10,000
square foot facility located at 26 Milford Avenue, Toronto, Ontario. This lease
expired in May 2000 and Pasta Kitchen is currently on a month to month lease. In
January 2000 Pasta Kitchen, with Tasty Selections, leased additional production
facilities at 350 Creditstone Road. The lease on the new 22,550 square feet
facility will expire in February 2005.
34
<PAGE> 38
TGF. TGF's 39,000 square foot facility is located at 610 Oster Lane,
Concord, Ontario. The lease expires in December 2002. We have an option to
renew for one additional five year term.
Tasty Selections. Tasty Selections' 34,000 square foot facility is located
at 350 Creditstone Road, Unit D, Concord, Ontario. The lease expires in February
2005. Tasty Selections has an option to renew the lease for two additional five
year terms. Tasty Selections leased an additional 9,106 square feet and 22,550
square feet located at 350 Creditstone Road in June 1999 and January 2000,
respectively. Both of these leases also expire in February 2005. The lease on
the 22,550 square feet facility has an option to renew for two additional five
year terms.
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 was acquired by us in the 1005549 acquisition.
Huxtable's. Huxtable's 54,000 square foot facility is located at 2100
East 49th Street, Vernon, California. The lease expires in October 2004.
LEGAL PROCEEDINGS
We and our subsidiaries experience routine litigation in the normal
conduct of our business. We do not believe that any such pending litigation will
have, individually or in the aggregate, a material adverse effect on our
business or financial condition.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Our directors are elected at the annual meeting of stockholders and hold
office until their successors are elected and qualified. Our 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 our officers or
directors or those of our subsidiaries.
Our directors and executive officers 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, Treasurer and Director
Len Shiffman 41 Director
Mark Preston 39 Vice President, Corporate Controller
Chris Hamm 36 Vice President - Finance and
Administration
Alan Fleury 43 General Manager
</TABLE>
Michael Steele has served as our President and as a director since July
16, 1998. He also served as our Secretary from July 16, 1998 to December 2,
1998. He also holds the positions of director and executive officer with IMSI,
Prime Foods, D.C. Foods, Tasty, International USA and TGF. Prior to joining us,
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.
35
<PAGE> 39
G.E. Creber has served as a director and as our Secretary since
December 2, 1998. He was also appointed as our Treasurer as of July 25,
2000. 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 our director 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.
Mark Preston has been our Vice President, Corporate Controller since
March 1999. From August 1996 to March 1999, prior to joining us, he served
as Controller at Normerica Building Systems Inc. From November 1993 to May
1996 he served as Controller/Operations Manager at Halozone Technologies.
Mr. Preston has also several years experience in financial/business
consulting. Mr. Preston holds a BA, MAcc, and CA.
Chris Hamm has been our Vice President, Finance and Administration since
May 2000 and is responsible for all operational finance and administrative
functions. Mr. Hamm was Vice President, Finance for North American Baking, Inc.,
a leading private label cracker manufacturing company from July 1997 to May
2000. He also held several senior positions at Beatrice Foods from July 1995 to
June 1997, including cost accountant, plant manager and bakery manager. Mr. Hamm
is a Certified General Accountant.
Alan Fleury has been our General Manager since January 2000. He has
extensive experience in capital financing, acquisition assessment and
reengineering of food industry companies. Mr. Fleury possesses over twenty years
of food industry experience encompassing both retail and manufacturing
operations. From March 1995 to January 2000, Mr. Fleury was a partner in CR
Capital Corporation, an investment organization specializing in acquisitions and
mergers. Mr. Fleury was responsible for the total financing and management of
various specialty food industry companies. Successful operating initiatives
included Beatrice Foods, North American Baking, and Upper Crust Productions. Mr.
Fleury also held senior management roles with Canada Bread (Dough Delight) from
March 1993 to March 1995 and Oshawa Foods from January 1991 to March 1993. He
holds a BA in Economics from UMO and an M.B.A. in General Management from LSSU
in Michigan.
SIGNIFICANT EMPLOYEES OF OUR SUBSIDIARIES
Victor Fradkin has served as President of TGF since 1983. After founding
TGF, he developed manufacturing practices to mass-produce fillo dough and fillo
hors d'oeuvres, which has allowed TGF to grow into a major producer of these
specialty products in Canada.
Allan Greenspoon has served as President of Tasty Selections since
1996. Since October 18, 1999, he has also served as President and director of
Ultimate. From 1987 to 1995, prior to joining Tasty Selections, 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 1991. From
1987 to 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.
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<PAGE> 40
Robert Curik has served as Vice President of D.C. Foods since 1991.
From 1989 to 1991, prior to co-founding D.C. Foods, he served as Operations
Manager at Stillmeadow Farms in Elora, Ontario. Mr. Curik has nearly 20 years of
experience in the food processing industry.
Michael Eskenazi has served as Founder and President of Ultimate since
1991. From 1985 to 1999 he was President and Founder of F&N Cookie Ltd. Mr.
Eskenazi has approximately 15 years of experience.
Cliff Marquart has served as Chief Executive Officer of Huxtable's
L.L.C. from 1996 to November 1999 and has served as president of Huxtable's from
November 1999. He has extensive experience in grocery brand marketing and
development, including at Stokely, Bongrain's Fluere d'Lait Foods Company, and
Morning Star Group.
EXECUTIVE COMPENSATION
The following tables set forth the compensation paid by us during the
years ended December 31, 1999, 1998 and 1997 for Michael Steele, our President.
No other executive officer received a total annual salary and bonus in excess of
US$100,000 during the fiscal year ended December 31, 1999.
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<PAGE> 41
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------------- ----------------------------------------------
SECURITIES
NAME OTHER ANNUAL UNDERLYING LTIP ALL OTHER
AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/ PAYOUT COMPENSATION
POSITION YEAR (CDN$) (CDN$) (CDN$) SARs(#) (CDN$) (CDN$)
-------------------- ------ ----------- ----------- ------------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Steele, 1999 240,000 75,000 0 0 0
President and 1998 150,000 0 0 625,000 0
Director 1997 0 0 0 0 0
</TABLE>
OPTION/SAR GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
NUMBER % OF TOTAL
OF SECURITIES OPTIONS/SARS EXERCISE OR
UNDERLYING OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION
NAME SARs (#) FISCAL YEAR (US $/SHARE) DATE
------------------------ ------------------- ----------------- ------------------------ ------------------
<S> <C> <C> <C> <C>
Michael Steele 625,000 75.8% US$0.70 (CDN$1.02) August 2008
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999 AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SAR'S
SHARES OPTIONS/SAR's AT FY-END ($)
ACQUIRED ON VALUE AT FY-END (#) EXERCISABLE/
NAME EXERCISE # REALIZED ($) EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE
----------------------- ---------------- ---------------- ------------------------------ --------------------
<S> <C> <C> <C> <C>
Michael Steele 0 0 250,000/375,000 807,500/1,212,250
</TABLE>
COMPENSATION OF DIRECTORS
We currently do not pay any cash compensation to our non-employee
directors. Directors are eligible to participate in our stock option plan
described below. Directors who are also our employees receive no additional
compensation for their services as directors. During the fiscal year ended 1998,
each of G.E. Creber and Len Shiffman, two of our directors, received options to
purchase 100,000 shares of our common stock at an exercise price of US$0.70 per
share and US$1.50 per share, respectively.
EMPLOYMENT AGREEMENT
In August 1998, we entered into an employment agreement with Michael
Steele. Under this agreement, Mr. Steele is employed as our President and Chief
Executive Officer for an annual salary of US$160,000, plus benefits. Mr. Steele
is also entitled to an annual cash bonus equal to five percent of our EBIDTA. In
addition, Mr. Steele is entitled to an annual stock option grant of five percent
of the aggregate number of our issued and outstanding common shares and Class N
shares as at December 31 of the year then ended, less the aggregate number of
options previously granted to Mr. Steele during the year
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<PAGE> 42
then ended. If Mr. Steele's employment is terminated for any reason other than
for cause, the non-renewal of the agreement, or the voluntary termination by Mr.
Steele, Mr. Steele is entitled to two years' salary, plus the present value of
the bonus that Mr. Steele would have received for the current fiscal year had
his employment continued, plus the present value, as determined by the Chairman,
of certain benefits Mr. Steele would have received for the next two years had
his employment continued.
STOCK OPTION PLAN
On August 10, 1998, our board of directors approved an executive
incentive stock option plan applicable to all of our officers and directors. The
board authorized the granting of options covering up to 2,500,000 shares of our
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 our 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 earlier termination of employment. As of June 30,
2000, options covering 825,000 shares of common stock were issued of which
725,000 options have an exercise price of US$0.70 per share and 100,000 options
have an exercise price of US$1.50 per share. None of these options have been
exercised.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
Under the Nevada General Corporation Law, or NGL, we are permitted 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 our officer,
director, employee, or agent, 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 that he or she reasonably believed to be in or not
opposed to our, or our subsidiaries', best interests and, in the case of a
criminal action, he or she had no reasonable cause to believe that his or her
conduct was unlawful. We are required under the NGL 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. Our By-laws provide for the
indemnification of our officers and directors to the fullest extent permitted by
the NGL. In addition, our Articles of Incorporation provide that no director or
officer shall be personally liable to us or our 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.
We carry directors' and officers' liability insurance in the amount of
$10,000,000. Our deductible is $25,000.
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<PAGE> 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Southbridge Investment Partnership No. 1, or Southbridge, is a
principal shareholder in our company. In the past two years, we have entered
into several transactions with Southbridge and its affiliate as described below.
On April 16, 1999, Southbridge Inc., an affiliate of Southbridge, purchased
1,523,810 shares of our common stock and 400,000 warrants to purchase an
additional 400,000 shares of our common stock. 200,000 warrants are exercisable
at an exercise price of $2.25 per share and the remainder is exercisable at
$2.625 per share. Under a subscription agreement that Southbridge Inc. entered
into with us, Southbridge Inc. is entitled to nominate one representative to our
board of directors. On October 22, 1999, Southbridge Equities Inc. purchased
1,555,556 special warrants of IMSI for an aggregate consideration of
approximately US$4,700,000. The special warrants are currently exercisable
without additional compensation for 2,022,222 shares of our common stock. Under
another subscription agreement, we granted Southbridge Equities Inc. the right
to nominate one additional director for a total of two directors. Southbridge
Equities Inc. is entitled to nominate additional directors if there is an
increase in the numbers of our directors so as to maintain Southbridge's
representation on our board of directors.
On November 4, 1999, Southbridge Equities Inc., an affiliate of
Southbridge, purchased additional 266,667 shares of our common stock from third
parties. Southbridge Inc. and Southbridge Equities subsequently transferred
their securities and rights to Southbridge. Southbridge holds registration
rights covering the securities its related entities purchased from us and is a
selling stockholder under this prospectus. On June 5, 2000, we entered into a
loan agreement for an aggregate $4,500,000 with Southbridge as one of the
lenders.
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<PAGE> 44
SECURITY OWNERSHIP
The following table sets forth certain information regarding the
beneficial ownership of our voting stock, as of August 15, 2000, of:
- each person known by us to beneficially own 5% or more of such
shares;
- each of our directors and our executive officer named in the
Summary Compensation Table; and
- all of our 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. Except as otherwise
indicated, the address of each of the persons in this table is as follows: 350
Creditstone Road, Unit 202, Concord, Ontario. The shares of our common stock
differ from our Class N shares. Both have the right to one vote per share;
however, our Class N shares are non-equity shares. The Class N shares provide
the right to vote at meetings of our shareholders for holders of certain classes
of shares of IMSI that may be exchanged for shares of our common stock. As of
August 15, 2000, there were 13,749,614 shares of common stock outstanding,
assuming exercise of special warrants by Southbridge to purchase 2,022,222
shares of common stock, and 2,820,629 Class N shares outstanding. Such common
stock figure does not include:
- 2,820,629 shares issuable upon exchange of Class X shares of
IMSI, together with surrender of outstanding Class N shares.
- 2,737,787 shares of common stock currently issuable upon
exchange of Class B and Class E Series 5 Stock of IMSI.
- Shares of common stock to become issuable in the future upon
exchange of outstanding securities or pursuant to rights we or
IMSI issued, including Class C, D and E Series 1, 2, 3, 4 and
6 Stock of IMSI, based on calculations to be completed after
August 15, 2000.
- 1,737,962 shares issuable upon exercise of outstanding options
and estimated options we are obligated to issue.
- 650,000 shares issuable upon exercise of outstanding warrants.
- 1,526,717 shares we estimate are or will become issuable upon
conversion of outstanding notes.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
SHARES BENEFICIALLY OWNED
-------------------------------------------------------
COMMON PERCENTAGE
NAME OF BENEFICIAL OWNER SHARES CLASS N TOTAL OWNED(1)
-------------------------------- ------------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Michael Steele(2) 375,000 1,513,712 1,888,712 11.2%
G.E. Creber(3) 280,000 - 280,000 1.7%
Len Shiffman(4) 40,000 451,743 491,743 2.9%
Victor Fradkin (5) 128,000 903,487 1,031,487 5.9%
Southbridge Partnership No. 1(6) 4,212,699 - 4,212,699 24.8%
All Executive Officers and
Directors as a group (6
persons) (7) 722,000 1,965,455 2,687,455 15.4%
</TABLE>
--------------------
(1) Based on 13,749,614 shares of common stock and 2,820,629 Class N shares
outstanding. Beneficial ownership is determined in accordance with
rules of the Securities and Exchanges Commission and includes voting
power and/or investment power with respect to securities. Shares
subject to options, warrants or exchangeable securities currently
exercisable or exchangeable or exercisable or exchangeable
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<PAGE> 45
within 60 days of June 30, 2000 are deemed outstanding for computing
the number and the percentage of outstanding shares beneficially owned
by the person holding such options, warrants or exchangeable
securities, but are not deemed outstanding for computing the percentage
beneficially owned by any other person.
(2) Includes 375,000 shares of common stock subject to options.
(3) Consists of 240,000 shares of common stock currently outstanding and
40,000 shares of common stock subject to the exercise of options.
(4) Consists of 40,000 shares of common stock subject to the exercise of
options Mr. Shiffman holds or is entitled to and 451,743 Class N shares
Mr. Shiffman is entitled to receive as owner of 60,000 Class B shares
of IMSI.
(5) Consists of 128,000 shares of common stock currently outstanding and
903,487 Class N shares Mr. Fradkin is entitled to receive as owner of
120,000 Class B shares of IMSI on December 1, 1999.
(6) Includes 2,022,222 shares of common stock to be issued upon exercise of
special warrants and 400,000 shares of common stock issuable upon the
exercise of warrants. The address of Southbridge Investment Partnership
No. 1 is 150 Water Street, Cambridge, Ontario N1R 3E2.
(7) Includes the shares described in notes 2, 3 and 4 above.
SECURITY OWNERSHIP OF IMSI
The following tables set forth the beneficial ownership of each class
of equity securities of IMSI, as of June 30, 2000, by (i) each of IMSI's
directors and the executive officer of IMSC named in the Summary Compensation
Table; and (ii) all of IMSI'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 Road, Unit 202,
Concord, Ontario.
CLASS X SHARES
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
----------------------------------------------- -------------------------- ----------------
<S> <C> <C>
Michael Steele 1,513,712 53.7%
All executive officers and directors as a group 1,513,712 53.7%
</TABLE>
--------------------
(1) Based on an aggregate of 2,820,629 Class X shares outstanding as of
August 15, 2000.
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<PAGE> 46
CLASS B SHARES
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
----------------------------------------------- ------------------ ----------
<S> <C> <C>
Len Shiffman 60,000 20%
All executive officers and directors as a group 60,000 20%
</TABLE>
--------------------
(1) Based on an aggregate of 300,000 Class B shares outstanding as of
August 15, 2000.
CLASS C SHARES
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
----------------------------------------------- ------------------ ----------
<S> <C> <C>
Len Shiffman 20,000 20%
All executive officers and directors as a group 20,000 20%
</TABLE>
--------------------
(1) Based on an aggregate of 100,000 Class C shares outstanding as of
August 15, 2000.
CLASS D SHARES
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED(1)
----------------------------------------------- ------------------- ----------
<S> <C> <C>
Len Shiffman 10,000 17%
All executive officers and directors as a group 10,000 17%
</TABLE>
--------------------
(1) Based on an aggregate of 59,000 Class D shares outstanding as of August
15, 2000.
To our knowledge, there are no arrangements which may result in a
change of control other than the exercise of Special Warrants by Southbridge to
receive 2,022,222 shares of common stock.
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<PAGE> 47
SELLING STOCKHOLDERS
The following table sets forth the number of shares beneficially owned
by each of the selling stockholders as of August 15, 2000 and our estimated
allocation among such selling stockholders of the 18,187,725 shares registered
for sale under this prospectus. Since certain of the shares registered will be
issued in the future upon exchange, exercise or conversion of existing
securities, or pursuant to existing rights, where the calculation of shares of
common stock issuable is based on formulas, we have estimated as of August 15,
2000 the allocation of such common stock among the selling stockholders. We
reserve the right to reallocate such shares based on variances in actual
calculations. Except for our estimated calculations, all information contained
in the table below is based upon information provided to us by the selling
stockholders, and we have not independently verified this information. Actual
calculations may vary materially from our estimates based on performance of
businesses we acquired and/or our future common stock price. We are not able to
estimate the amount of shares that will be held by the selling stockholders
after the completion of this offering because the selling stockholders may offer
all or some of their shares and because there currently are no agreements,
arrangements or understandings with respect to the sale of their shares, except
as described below. The selling stockholders are not making any representation
that any shares covered by the prospectus will be offered for sale. The selling
stockholders reserve the right to accept or reject, in whole or in part, any
proposed sale of shares.
<TABLE>
<CAPTION>
NO. OF SHARES NO. OF SHARES
NAME BENEFICIALLY OWNED (1) REGISTERED (1)
------------------------------------------------------ ------------------------- -----------------------
<S> <C> <C>
Victor Fradkin* 1,031,487(2)(3) 1,356,978(2)(4)
Rhys Quin 451,743(5) 678,488(5)(6)
Len Shiffman* 491,743(7) 737,488(7)(8)
Larry Hoffman* 543,743,(9)(10) 754,759(9)(11)
Katherine Kan* 154,962(12) 154,962(12)
Allan Greenspoon* 287,788(13) 1,038,788(13)(14)
Southbridge Investment Partnership No. 1 4,212,699(15) 4,212,699(15)
Donald Kilimnik* 446,667(16) 995,847(16)(17)
Deborah Kilimnik -- 254,153(18)
Robert Curik* 446,666(19) 995,846(19)(20)
Anjela Curik -- 254,153(21)
Michael Eskenazi* 174,028(22) 174,028(22)
Gina Eskenazi 305,040(23) 305,040(23)
Yellowstone Equity Partners Ltd. 309,860(24) 609,615(25)
Austin Ventures IV-B, L.P. 249,869(24) 491,590(25)
AV IV Holdings, Inc. 119,102(24) 234,320(25)
Cliff Marquart 110,332(24)(26) 197,392(25)
Roger Mercier 30,425(24) 59,858(25)
Michael E. Humphrey 15,891(24) 33,114(25)
Stephen Horn 1,147(24) 2,257(25)
Huxtable's Comestibles, Inc. 76,284(24) 150,080(25)
Kenneth F. Hayes 17,756(24) 34,933(25)
Karen M. Mitchell 17,756(24) 34,933(25)
Robert G. Farris 17,756(24) 34,933(25)
1218951 Ontario Limited 55,042(27) 55,042(27)
Bank of Montreal 666,269(28) 666,269(28)
First Ontario Labour Sponsored Investment Fund Ltd. 1,110,448(29) 1,110,448(29)
G.E. Creber* 280,000(30) 300,000(30)(31)
Michael Steele* 1,888,712(32) 2,013,712(32)(33)
Thomas D. Beynon, in Trust 30,000(34) 30,000(34)
Jim Guinchard 16,000(35) 32,000(35)(36)
Robert Caldwell Capital Corporation 80,000(37) 80,000(37)
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
NO. OF SHARES NO. OF SHARES
NAME BENEFICIALLY OWNED (1) REGISTERED (1)
------------------------------------------------------ ------------------------- -----------------------
<S> <C> <C>
First Marathon Securities Limited, in trust Sandra J. 40,000(38) 40,000(38)
Campbell
First Marathon Securities, in trust Stewart Campbell 40,000(39) 40,000(39)
Edward Ziraldo 24,000(40) 24,000(40)
</TABLE>
-------------------
* Each of these persons is an officer or director of either us or one of
our subsidiaries. Michael Steele, G. E. Creber and Len Shiffman are our
officers and directors. Michael Steele is also a director and officer
of IMSI, TGF, Prime Foods, D.C. Foods, Tasty Selections and Huxtable's.
Allan Greenspoon is a director and officer of Ultimate and Tasty
Selections. Katherine Kan is an officer of Tasty Selections. Michael
Eskenazi is an officer of Ultimate. Victor Fradkin and Len Hoffman are
officers of TGF. Robert Curik and Donald Kilimnik are officers of D.C.
Foods. Mr. Kilimnik's brother is to be nominated as our Director as the
designee of Robert Curik, Anjela Curik, Donald Kilimnik and Deborah
Kilimnik.
(1) Beneficial ownership is determined in accordance with rules of the SEC
and includes voting power and/or investment power with respect to
securities. Shares subject to options, warrants or exchangeable
securities currently exercisable or exchangeable or exercisable or
exchangeable within 60 days of August 15, 2000 are deemed outstanding
for computing the number of outstanding shares beneficially owned by
the person holding such options, warrants or exchangeable securities.
We have not registered, and the figures in this table do not include,
shares issuable upon exchange of Class E Series 3, 4 and 6 shares of
IMSI and shares issuable to the sellers of Huxtable's LLC as the final
earn-out payment based on 2002 results.
(2) Includes 903,487 shares issuable upon the exchange of 120,000 Class B
shares of IMSI.
(3) Includes 128,000 shares purchased in private placements.
(4) Includes 373,491 shares, the approximate number of shares we estimate
will become issuable upon the exchange of 40,000 Class C shares and
20,000 Class D shares of IMSI, and 80,000 shares issuable upon the
exercise of options.
(5) Includes 451,743 shares issuable upon the exchange of 60,000 Class B
shares of IMSI.
(6) Includes 186,745 shares, the approximate number of shares we estimate
will become issuable upon the exchange of 20,000 Class C shares and
10,000 Class D shares of IMSI, and 40,000 shares issuable upon the
exercise of options.
(7) Includes 451,743 shares issuable upon the exchange of 60,000 Class B
shares of IMSI and 40,000 shares issuable upon the exercise of options.
(8) Includes 186,745 shares, the approximate number of shares we estimate
will become issuable upon the exchange of 20,000 Class C shares and
10,000 Class D shares of IMSI, 40,000 shares issuable upon the exercise
of options by Lauderdale Capital Corp., an entity of which Len Shiffman
is the principal shareholder, and 20,000 shares issuable upon the
exercise of additional options by Len Shiffman.
(9) Includes 451,743 shares issuable upon the exchange of 60,000 Class B
shares of IMSI.
(10) Includes 92,000 shares purchased on the public market.
(11) Includes 263,016 shares, the approximate number of shares we estimate
will become issuable upon the exchange of 20,000 Class C shares and
19,000 Class D shares of IMSI, and 40,000 shares issuable upon the
exercise of options.
(12) Consists of 103,308 shares currently outstanding and 51,654 shares
issuable upon the exchange of Class X shares of IMSI.
(13) Includes 191,858 shares currently outstanding and 95,931 shares
issuable to Alrae Investments Inc., an entity of which Allan Greenspoon
is the principal shareholder, upon the exchange of Class X shares of
IMSI.
(14) Includes an estimate of 750,000 shares issuable to Allan Greenspoon
pursuant to a confidentiality and non-compete agreement.
(15) Consists of 1,790,447 shares currently outstanding, 400,000 shares
issuable upon the exercise of warrants and 2,022,222 shares issuable
upon the exercise of special warrants.
(16) Includes 446,667 shares issuable upon the exchange of Class X shares.
(17) Includes 549,180 shares, the approximate number of shares we estimate
will be issuable upon the exchange of 250,000 Class E Series 1 shares
and 142,913 Class E Series 3 shares of IMSI.
(18) Consists of 254,153 shares, the approximate number of shares we
estimate will be issuable upon the exchange of 107,087 Class E Series 3
shares of IMSI.
45
<PAGE> 49
(19) Includes 446,666 shares issuable upon the exchange of Class X shares.
(20) Includes 549,180 shares, the approximate number of shares we estimate
will be issuable upon the exchange of 250,000 Class E Series 2 shares
and 142,913 Class E Series 4 shares of IMSI.
(21) Consists of 254,153 shares, the approximate number of shares we
estimate will be issuable upon the exchange of 107,087 Class E Series 4
shares of IMSI.
(22) Consists of shares issuable upon the exchange of 90,816 Class E Series
5 shares of IMSI. We have been advised that through inadvertance, we
received wrong direction regarding the issuance of shares and we are
in the process of correcting this with Mr. and Mrs. Eskenazi.
(23) Consists of shares issuable upon the exchange of 159,184 Class E Series
5 shares of IMSI. We have been advised that through inadvertance, we
received wrong direction regarding the issuance of shares and we are
in the process of correcting this with Mr. and Mrs. Eskenazi.
(24) Consists of shares for partial earn-out payment in connection with our
acquisition of assets of Huxtable's LLC.
(25) Consists of the shares referred to in note 24 plus the approximate
number of shares we estimate will become issuable for the first
additional earn-out payment in connection with our acquisition of
assets of Huxtable's LLC.
(26) Includes 10,000 shares issuable upon the exercise of options.
(27) Consists of shares issued in connection with our acquisition of Pasta
Kitchen.
(28) Consists of 572,519 shares issuable upon the conversion of a promissory
note and 93,750 shares issuable upon the exercise of warrants
(29) Consists of 954,198 shares issuable upon the conversion of a promissory
note and 156,250 shares issuable upon the exercise of warrants.
(30) Includes 240,000 shares plus 40,000 shares subject to options.
(31) Includes shares issuable upon the exercise of additional options to
purchase 20,000 shares.
(32) Includes 1,513,712 shares issuable upon the exchange of Class X shares
owned by 1254859 Ontario Limited, an entity of which Michael Steele is
the principal shareholder, and 375,000 shares issuable upon the
exercise of options.
(33) Includes shares issuable upon the exercise of additional options to
purchase 125,000 shares of our common stock.
(34) Consists of 6,000 shares currently outstanding and 24,000 shares
issuable upon the exchange of Class X shares of IMSI.
(35) Includes shares issuable upon the exercise of options to purchase
16,000 shares of our common stock.
(36) Includes shares issuable upon the exercise of additional options to
purchase 16,000 shares of our common stock.
(37) Consists of 80,000 shares issuable upon the exchange of Class X shares
of IMSI.
(38) Consists of 40,000 shares issuable upon the exchange of Class X shares
of IMSI.
(39) Consists of 40,000 shares issuable upon the exchange of Class X shares
of IMSI.
(40) Consists of 24,000 shares issuable upon the exchange of Class X shares
of IMSI.
This prospectus also covers any additional shares of common stock that
become issuable in connection with the shares being registered by reason of any
stock dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration which results in an increase in
the number of our outstanding shares of common stock.
46
<PAGE> 50
DESCRIPTION OF SECURITIES
Pursuant to our articles of incorporation, we are authorized to issue
25,000,000 shares of common stock with a par value of $0.001 per share and
10,000,000 shares of Class N stock with a par value of US$0.001 per share. Due
to the large number of shares of common stock we will be obligated to issue in
the future upon exercise, exchange or conversion of other securities or pursuant
to other rights we have granted, we will need to increase our authorized shares.
We plan to present a proposal to our stockholders to increase our authorized
shares of common stock to 50,000,000 shares during 2000. We also plan to amend
our articles of incorporation to allow for Class N share to be issued to others
besides the Class X shareholders.
Common Stock. As of August 15, 2000, there were 11,727,392 shares of
common stock outstanding, which were held by 100 holders of record. All shares
of common stock issued and outstanding are validly issued, fully paid and
non-assessable. An additional 2,022,222 shares will be issued by October 22,
2000 upon exercise of special warrants as described below.
Each holder of common stock is entitled to one non-cumulative vote,
either in person or by proxy, at meetings of shareholders. Therefore, holders of
more than 50% of the issued and outstanding shares of common stock and Class N
shares can elect all of our directors.
Class N Shares. As of August 15, 2000 there were a total of 2,820,629
Class N shares issued and outstanding. The Class N shares are non-equity shares.
The holders of Class N shares are entitled to identical voting rights as the
holders of common stock. The Class N shares are issued to shareholders of IMSI
who have shares of IMSI that are exchangeable into shares of our common stock so
that such shareholders of IMSI have voting rights at meetings of our
shareholders. The holders of the Class N shares have no rights of participation
on our liquidation or winding up.
As of August 15, 2000, the following Class N shares were subject to
issuance:
- 2,258,718 to holders of Class B shares of IMSI; and
- approximately 420,000 to holders of Class E Series 1 and
Series 2 shares of IMSI.
Additional Class N shares will be subject to issuance once we determine the
number of shares of our common stock which will be issuable in exchange for
Class C shares, Class D shares and Class E Series 3, 4, 5 and 6 shares of IMSI.
The holders of the Class B shares, the Class C shares, the Class D shares and
the Class E shares are entitled to receive a number of Class N shares based upon
the number of shares of our common stock for which each of the Class B shares,
the Class C shares, the Class D shares and the Class E shares may be exchanged
as determined in accordance with the share attributes of each such class. There
is no publicly traded market for the Class N shares.
WARRANTS AND OPTIONS AND OTHER RIGHTS
Options to be Granted in Connection with Acquisition of 1005549 and
Tasty Selections. In connection with the acquisitions of D.C. Foods and Tasty
Selections, we committed to issue options pursuant to employment agreements with
certain selling shareholders. In each case, the exercise price of the options
granted shall be the market price of our common stock on the date that our
audited consolidated financial statements are approved by the board of directors
following the period with respect to which the options relate. Each employee is
to be granted a base number of options for each fiscal period during the term of
the respective employment agreements. The term of the employment agreements
range from four to five years. While the individual is employed with us, the
number of options granted following each fiscal period is determined as follows:
47
<PAGE> 51
- if less than 85% of the performance target for the employee is
achieved, then no options are granted to the employee.
- 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; or
- if greater than 100% of the performance target for the
employee is achieved, then we will increase the base number of
options granted on a proportionate basis for the relevant
fiscal period.
Since all of the employees achieved between 85% and 100% of their
respective performance targets for the fiscal period ending December 31, 1999,
we expect to grant a total of 150,000 options upon adoption of a new stock
option plan.
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 our financing in July 1998, we granted options
to purchase 250,000 shares of our common stock to each of Brokton International,
Ltd., Dover IX Investment Limited, IPO International Ltd. and Tinamilu Holdings
Inc. The options are exercisable for US$1.00 per share. As of March 31, 2000,
options for 400,000 of such options have been exercised. Although the original
termination date of these options has passed, we are considering extending the
exercise date or reissuing the options.
Options to Robert Caldwell Capital Corporation. In consideration of our
financings completed in April and May 1999 we granted to Caldwell options to
purchase up to 144,762 shares of our common stock at an option price of US$1.75
per share. Although the original termination date of these options has passed,
we are considering extending the exercise date or reissuing the options.
Options to Baybak and Company, Inc. In consideration of services
provided to us by Michael Baybak and Company, Inc., or Baybak, we granted Baybak
options to purchase 125,000 shares of our common stock, which shall expire on
December 31, 2001. 50,000 of such options are exercisable at an exercise price
of $1.31 per share and the remaining 75,000 options are exercisable at an
exercise price of $2.19 per share.
Options to Barbara Druxerman. We granted Barbara Druxerman, the Vice
President of Product Development of TGF, options to purchase 3,000 shares of our
common stock at an exercise price of $2.91 per share. Such options vest as to
20% on the ninety-first day following the commencement of her employment with
TGF and 20% each on the first, second, third and fourth anniversary date of Ms.
Druxerman's commencement of employment.
Warrants to Bank of Montreal Capital Corporation and First Ontario
Fund. Upon the completion of a financing in May 1999, we granted 156,250
warrants to First Ontario and 93,750 warrants to BMOCC to acquire shares of
common stock, with each such warrant entitling the holder to purchase one share
of common stock at the following prices:
- 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.,
subscribed for 1,555,556 Special Warrants of IMSI for an aggregate consideration
of approximately US$4,700,000. Each Special Warrant originally entitled
Southbridge Equities, upon exercise thereof without any further consideration,
to receive one Class X share of IMSI. Such Special Warrants are immediately
exercisable. If the warrants are not exercised by October 22, 2000 or earlier,
under certain circumstances, they will be deemed to have been exercised. The
Special Warrants are subject to customary anti-dilution adjustment provisions.
Due to our failure to achieve certain financing and other targets, the Special
Warrants are currently exercisable to receive 2,022,222 shares of our common
stock rather than 1,555,556 Class X shares.
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<PAGE> 52
In connection with such subscription, we entered into additional
agreements with Southbridge Equities which, among other things, provides
registration rights. The Special Warrants of Southbridge Equities were
subsequently transferred to a related entity, Southbridge Investment Partnership
No. 1.
Warrants to Southbridge Inc. On April 16, 1999 Southbridge Inc.
subscribed for 1,523,810 shares of our common stock at $2.625 per share of
common stock. As part of the subscription agreement we granted to Southbridge
400,000 warrants, which entitle it to purchase up to 200,000 shares of common
stock at the price of $2.25 per common share and 200,000 shares of common stock
at the price of $2.625 per common share. All of these warrants expire on April
16, 2001. Southbridge Inc.'s rights to the warrants were subsequently
transferred to Southbridge Investment Partnership No. 1, a related entity.
Options to the vendors of TGF. We granted options to the vendors of
TGF, pro rata to their common shareholdings in TGF. The maximum number of common
shares is to be determined as follows: the amount of the adjusted EBITDA in
excess of $1,000,000 for the twelve months ending December 31, 1999 divided by
the lesser of US$2.00, or the average closing share price of our common stock
for the ten trading days prior to February 28, 2000. The vendors must elect to
purchase such common shares during the one year period following the
determination of the number of shares of common stock available under the option
formula. We currently estimate that the number of shares of common stock
available to be exercised by the shareholders will be approximately 200,000
shares.
Options to Third Party Financial Advisors. On October 27, 1999, in
consideration for assistance in connection with certain equity financing
transactions, we granted options to purchase 50,000 shares of our common stock.
The exercise price is $4.36 per share. All options expire on October 27, 2000.
On October 27, 1999, we granted options to purchase an additional
100,000 shares of our common stock to other financial advisors. The exercise
price for 50,000 such options is US$2.25 per share, all of which have vested and
are exercisable through June 30, 2001. The exercise price on the remaining
50,000 options is US$3.00 per share, of which 25,000 are vested and are
exercisable through December 31, 2000 and the remaining 25,000 options vest
after December 31, 2000 and are exercisable through December 31, 2001.
Options to Cliff Marquart. On November 12, 1999, in consideration of
Cliff Marquart serving as President of Huxtable's, we granted him options to
acquire 50,000 shares of our common stock. The options have an exercise price of
$4.35 per share. The options vest as to 10,000 shares on November 12, 1999 and
an additional 10,000 shares, on each of the four succeeding anniversaries of
such date.
Option to David Arosh and Margaret Arosh. On May 17, 1999, in
connection with the purchase of Norbakco, we granted options to acquire 5,000
shares of our common stock to each of David Arosh and Margaret Arosh. The
options are exercisable through May 15, 2002 at US$ 2.00 per share.
Rights to Former Members of Huxtable's LLC. The former members of
Huxtable's LLC have the right to receive shares of our common stock based upon
adjusted EBITDA for the twelve month periods ended December 31, 2000, 2001 and
possible 2002 in accordance with the terms of the agreement.
SECURITIES OF IMSI
The following securities of IMSI are issued and outstanding. There is
no public trading market for any of the following securities.
Common Stock. IMSI has issued and outstanding 10,000 shares of common
stock which are all held by us.
49
<PAGE> 53
Class X Stock. IMSI has issued and outstanding 2,820,629 Class X shares
which are exchangeable on the basis of one Class X share and one of our Class N
shares for one share of our common stock. Class X shares are non-participating
and non-voting.
Class B Shares. IMSI has issued and outstanding 300,000 Class B shares.
Class B shares are non-participating and non-voting shares except on any future
modification or changes in the Class B share characteristics. Based on TGF's
EBITDA for the twelve month period ended February 28, 1999, it has been
determined and agreed that the Class B shares may be exchanged for 2,258,718
shares of our common stock.
The shareholders of the Class B shares are entitled to a number of
Class N shares equal to the number of shares of our common stock 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, a number of Class N
shares equal to the number of shares of our common stock that will be issued
shall be surrendered by the holder.
Class C Shares. IMSI has issued and outstanding 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 our common stock determined
as follows:
- TGF's adjusted EBITDA for the twelve month period ended
February 28, 2001, minus the adjusted EBITDA of TGF for the
twelve month period ended February 28, 2000; and
- divided by the lesser of $2.92 or the average closing price
for our common shares for the 10 days prior to February 28,
2000.
We currently estimate that the Class C shares will be exchangeable for
approximately 510,000 shares of our common stock.
The shareholders of the Class C shares are entitled to a number of
Class N shares equal to the number of shares of our common stock 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, a number of Class N
shares equal to the number of shares of our common stock that will be issued
shall be surrendered by the holder.
Class D Shares. IMSI has issued and outstanding 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 our common stock determined
as follows:
- TGF's adjusted EBITDA for the twelve month period ended
February 28, 2001, minus the adjusted EBITDA of TGF for the
twelve month period ended February 28, 2000;
- divided by the lesser of $2.92 or the average closing price
for our common shares for the 10 days prior to February 28,
2001.
We currently estimate that the Class D shares will be exchangeable for
approximately 500,000 shares of our common stock.
The shareholders of the Class D shares are entitled to a number of
Class N shares equal to the number of shares of our common stock 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
50
<PAGE> 54
shares of our common stock which the Class D share may be exchanged, a number of
Class N shares equal to such number of shares of our common stock shall be
surrendered to us.
Class E Series 1 and Series 2 Shares. IMSI has issued and outstanding
250,000 Class E Series 1 shares and 250,000 Class E Series 2 shares. Class E
Series 1 and Series 2 shares are non-participating and non-voting except in
respect of any future modification or changes in the Class E Series 1 and Series
2 shares.
Each of the Class E Series 1 Shares and Class E Series 2 shares are
exchangeable into a number of shares of our common stock determined as follows:
- 50% of the adjusted EBITDA of 1005549 and D.C. 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 if one of the following Acceleration
Events occurs:
- the death, permanent disability or termination of
employment, without cause, of either Donald Kilimnik
or Robert Curik;
- Michael A. Steele is not our Chief Executive Officer;
or
- a take-over bid for IMSC resulting in a single
shareholder acquiring more than 50% of the issued and
outstanding shares of IMSC;
- divided by the current market price of one share of our common
stock determined as at December 31, 1999, or such earlier
date.
We estimate that the Class E Series 1 and Series 2 shares are exchangeable for
approximately 420,000 shares of our common stock.
The shareholders of the Class E Series 1 and Series 2 shares are
entitled to a number of Class N shares equal to the number of shares of our
common stock for which the Class E Series 1 and Series 2 shares may be
exchanged. In the event that the shareholders acquire the Class N shares, then
upon a Class E Series 1 or Series 2 share being exchanged for the number of
shares of our common stock for which the Class E Series 1 or Series 2 share may
be exchanged, a number of Class N shares equal to such number of shares of our
common stock shall be surrendered to us.
Class E Series 3 and Series 4 Shares. IMSI has 250,000 shares of Class
E Series 3 shares and 250,000 shares of Class E Series 4 shares issued and
outstanding. Class E Series 3 and Class E Series 4 shares are non-participating
and non-voting except on any future changes in the Class E Series 3 and Series 4
share characteristics.
Each of the Class E Series 3 Shares and Class E Series 4 shares are
exchangeable into a number of shares of our common stock determined as follows:
- the amount being 50% of each of four times the adjusted EBITDA
of 1005549 and D.C. Foods for the period ending March 31, 2002
or December 31, 2002 or an earlier date at the election of the
Series 3 shareholders if an Acceleration Event occurs,
- minus $6,000,000, and
- an amount equal to the greater of the adjusted EBITDA
of 1005549 and DC Foods for the period from and
including December 7, 1998 to and including December
31, 1999, and zero;
51
<PAGE> 55
- divided by the current market price of one share of our common
stock determined as at March 31, 2002 or December 31, 2002, or
such earlier date.
The shareholders of the Class E Series 3 and Series 4 shares are
entitled to a number of Class N shares equal to the number of shares of our
common stock for which the Class E Series 3 and Series 4 shares may be
exchanged. In the event that the shareholders acquire the Class N shares, then
upon a Class E Series 3 or Series 4 share being exchanged for the number of
shares of our common stock for which the Class E Series 3 or Series 4 share may
be exchanged, a number of Class N shares equal to such number of shares of our
common stock shall be surrendered to us.
Class E Series 5 and Series 6 shares. IMSI has 250,000 shares of Class
E Series 5 shares and 250,000 shares of Class E Series 6 shares issued and
outstanding. Class E Series 5 and Series 6 shares are non-participating and
non-voting except on any future changes in the Class E Series 5 and Series 6
share characteristics.
Class E Series 5 shares are exchangeable into a number of shares of our
common stock determined as follows:
- four times the adjusted EBITDA of Ultimate for the one year
period ending April 30, 2000;
- plus approved research and development tax credits;
- less the net book value of Ultimate as at April 30, 2000.
The above are referred to as the April Amount.
It has been determined that the Class E Series 5 shares will be
exchangeable for 479,069 shares of our common stock.
Class E Series 6 shares are exchangeable into a number of shares of our
common stock determined as follows:
- 25% of the aggregate of:
- net sales in the calendar year 2002 of cookie dough
or cookies by Ultimate and Tasty Selections;
- the amount of net sales in the year 2002 of any
products under the trademarks of or licensed to
Ultimate;
- the amount of net sales in the year 2002 in the
Province of Quebec of Tasty Selections products; and
- 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;
- plus approved research and development tax credits, not paid
in the April Amount;
- minus the April Amount;
The shareholders of the Class E Series 5 and Series 6 shares are
entitled to a number of Class N shares equal to the number of shares of our
common stock for which the Class E Series 5 and Series 6
52
<PAGE> 56
shares may be exchanged. In the event that the shareholders acquire the Class N
shares, then upon a Class E Series 5 or Series 6 share being exchanged for the
number of shares of our common stock for which the Class E Series 5 or Series 6
share may be exchanged, a number of Class N shares equal to such number of
shares of our common stock shall be surrendered to us.
Options. IMSI granted options to James Guinchard, the President and a
Director of Prime Foods, to purchase 40,000 Class X shares of IMSI at an option
price of US$0.625, 16,000 of which have vested. The options for the remaining
24,000 Class X shares have been cancelled. Mr. Guinchard's employment ended on
May 11, 2000. As of June 30, 2000, 5,000 of these options have been exercised.
The remaining 11,000 vested options are exercisable until May 11, 2001, the
anniversary of the termination of Mr. Guinchard's employment.
Convertible Loan and Warrants. On May 10, 1999, we and IMSI entered
into a loan agreement with First Ontario and BOMCC for a $4 million financing.
BOMCC funded $1.5 million of the loan and First Ontario funded $2.5 million. The
financing was secured by general security granted by each of IMSI and us, a
guarantee and general security agreement from each of IMSI's subsidiaries, a
mortgage on 620 Colby Drive, Waterloo, Ontario, and the pledge of our common
shares in IMSI.
The loan matures on April 15, 2003. The interest rate on the loan is
currently 13% per annum. 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. In
addition, the holder has the right to acquire a number of Class N shares equal
to the number of Class X shares received. IMSI has the option to require the
conversion into Class X shares and Class N shares at any time during the term of
the loan if:
- our common stock trades on a major North American stock
exchange approved by the lenders,
- our common stock has a cumulative trading volume during a
twenty day period of the greater of 300,000 shares, or five
percent of the number of issued shares of common stock that
are not subject to any escrow or resale restrictions set out
in the Securities Act (Ontario), and
- the weighted average trading price during such twenty day
period is not less than the United States Dollar equivalent of
CDN$5.50.
One Class X and one Class N share together would be exchangeable for
one share of our common stock.
Concurrently with the completion of such financing, we granted 156,250
warrants to First Ontario and 93,750 warrants to BMOCC to acquire shares of
common stock, which warrants are described above.
Liquidation Rights of IMSI Securities. None of the securities of IMSI
have the right to participate in the event we liquidate or wind up. However, the
Class X shares, the 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 our common
stock. In the event that a liquidation event occurs prior to the determination
of the number of shares of common stock 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 shareholders of IMSI are entitled to receive one share of
our common stock for each Class X share held by such shareholder. Upon exchange,
the former holders of IMSI securities shall have the same right to participate
in a liquidation or winding up as all the other holders of our common stock.
53
<PAGE> 57
REGISTRATION RIGHTS
We are subject to registration rights agreements with each of
Southbridge and certain persons that acquired our securities or securities of
IMSI in connection with our acquisition of each of Huxtable's, Ultimate, D.C.
Foods, and TGF and Great American. Under these agreements, if we propose to
register shares of our common stock under the Securities Act, these holders are
entitled to notice of such registration and are entitled to include shares of
their common stock in the registration statement, subject to certain conditions
and limitations. Some of these shareholders may also require us to effect the
registration of their securities under the Securities Act of 1933, as amended,
in the first instance at our expense, subject to certain conditions and
limitations. In addition, we have entered into a registration right agreement
with certain of our stockholders who were not covered by a registration rights
agreement, granting such stockholders registration rights pertaining only to
this registration statement. 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 of our subsidiaries
or divisions, the market price of our common stock and other contingencies not
currently known by us.
RIGHT OF FIRST REFUSAL
In connection with the Southbridge financing and the acquisitions of
each of TGF, Tasty Selections, D.C. Foods and Ultimate, we have acquired a right
of first refusal with respect to the sale of shares of IMSI, our common stock or
Class N shares by the parties receiving such shares as part of the consideration
under the relevant share or asset purchase agreement.
54
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
We have registered the resale of 18,187,725 shares of our common stock,
including shares which will become issuable in the future, under this
prospectus. Upon resale, such shares will become freely tradable. In addition,
5,304,328 shares of our common stock were freely tradable on August 15, 2000.
Furthermore, approximately 6,423,064 shares outstanding are "restricted shares"
as defined in Rule 144 under the Securities Act. Such shares are or will be
eligible for resale, subject to the holding period volume and manner of sale
limitations of Rule 144. Under Rule 144, subject to the satisfaction of certain
other conditions, a person, including our affiliate who has beneficially owned
restricted shares of common stock for at least one year, is permitted to sell in
a brokerage transaction, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or if the common stock is quoted on Nasdaq or a stock exchange,
the average weekly trading volume during the four calendar weeks preceding the
sale. Rule 144 also permits a person who presently is not and who has not been
our affiliate for at least three months immediately preceding the sale and who
has beneficially owned the shares of common stock for at least two years to sell
such shares without regard to any of the volume limitations as described above.
A substantial number of additional shares of common stock are likely to
be issued upon conversion, exchange or exercise of securities we have issued or
rights we have granted in connection with acquisitions and financings. We have
granted demand or piggyback registration rights covering most of such additional
shares. Absent any contractual limitations, the holders of these rights could
cause a significant number of shares of our common stock to be registered and
sold in the public market. We cannot be sure what effect sales under this
prospectus or future sales of shares or the availability of shares for future
sale will have on the market price of the common stock. The market price of our
common stock could drop due to sales of large numbers of shares in the market
during or after this offering or the perception that sales of large numbers of
shares would occur. These factors could also make it more difficult to raise
capital through an offering of equity securities. In the case of certain shares
offered hereunder, we may be required to maintain the effectiveness of the
registration statement of which this prospectus is a part for as long as five
years.
55
<PAGE> 59
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the selling
stockholders listed above under "Selling Stockholders." As used in this
prospectus, the term "selling stockholders" includes pledgees, transferees or
other successors-in-interest selling shares received from the selling
stockholders as pledgors, borrowers or in connection with other non-sale-related
transfers after the date of this prospectus. This prospectus may also be used by
transferees of the selling stockholders, including broker-dealers or other
transferees who borrow or purchase the shares to settle or close out short sales
of shares of common stock. The selling stockholders will act independently of us
in making decisions with respect to the timing, manner, and size of each sale or
non-sale related transfer. We will not receive any of the proceeds of this
offering.
This prospectus covers the selling stockholders' resale of up to
18,187,725 shares of common stock.
The selling stockholders may sell their shares of common stock directly
to purchasers from time to time. Alternatively, they may from time to time offer
the common stock to or through underwriters, broker-dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling stockholders or the purchasers of such securities
for whom they may act as agents. The selling stockholders and any underwriters,
broker-dealers or agents that participate in the distribution of common stock
may be deemed to be "underwriters" within the meaning of the Securities Act and
any profit on the sale of such securities and any discounts, commissions,
concessions or other compensation received by any such underwriter,
broker-dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The common stock may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the common stock may be affected by means of one or more of the
following transactions (which may involve cross or block transactions):
- on any national securities exchange or quotation service on
which the common stock may be listed or quoted at the time of
sale,
- in the over-the-counter market,
- in the transactions otherwise than on such exchanges or
services or in the over-the-counter market, or
- through the purchase and sale of over-the-counter options.
In connection with sales of the common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the common stock in the course of hedging the
positions they assume. The selling stockholders may also sell common stock short
and deliver common stock to close out such short positions, or loan or pledge
common stock to broker-dealers that in turn may sell such securities.
At the time a particular offering of the common stock is made, a
prospectus supplement, if required, will be distributed which will set forth the
aggregate amount of common stock being offered and the terms of the offering,
including the name or names of any underwriters, broker-dealers or agents, any
discounts, commissions and other terms constituting compensation from the
selling stockholders and any discounts, commissions or concessions allowed or
real lowed or paid to broker-dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the common stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers.
56
<PAGE> 60
The selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the common stock by the
selling stockholders. The foregoing may affect the marketability of such
securities.
Pursuant to the various registration rights agreements with the selling
stockholders who received their shares of common stock in connection with the
above acquisitions, expenses of registration of the common stock will be paid by
us, including, without limitation, SEC filing fees; provided, however, that the
selling stockholders will pay all underwriting discounts and selling
commissions, if any. The selling stockholders will be indemnified by us against
certain civil liabilities, including certain liabilities under the Securities
Act, or will be entitled to contribution in connection therewith. We will be
indemnified by the selling stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
In addition, any common stock covered by this prospectus that qualifies
for sale pursuant to Rule 144, Rule 144A or any other available exemption from
registration under the Securities Act may be sold under Rule 144 Rule 144A or
such other available exemption rather than pursuant to this prospectus. There is
no assurance that any selling stockholder will sell any or all of the common
stock, and any selling stockholder may transfer, devise or gift such common
stock by other means not described herein.
57
<PAGE> 61
LEGAL MATTERS
The validity of the shares to be offered by this prospectus will be passed upon
for us by _____________________, special Nevada counsel.
EXPERTS
Our financial statements as of December 31, 1999 and 1998, and for each
of the years in the two year period ended December 31, 1999, included in this
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act
and, accordingly, file reports, proxy statements and other information with the
SEC. These reports, proxy statements and other information filed with the SEC
are available for inspection and copying at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a site on
the World Wide Web at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that filed electronically with the
SEC.
We have filed with the SEC a registration statement under the
Securities Act on Form SB-2 to register with the SEC the securities offered by
this prospectus. This prospectus is a part of that registration statement. As
allowed by SEC rules, this prospectus does not contain all of the information
contained in the registration statement or the exhibits to that registration
statement.
58
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
INTERNATIONAL MENU SOLUTIONS CORPORATION
ANNUAL FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditors' report F-4
Audited consolidated balance sheets as of December 31, 1999 and 1998 F-5
Audited consolidated statements of operations for the years ended December 31, 1999 and 1998 F-6
Audited consolidated statement of stockholders' equity for the years ended December 31, 1999 F-7
and 1998
Audited and consolidated statements of cash flows for the years ended December 31, 1999 and F-8
1998
Notes to consolidated financial statements F-9
UNAUDITED INTERIM FINANCIAL STATEMENTS
Unaudited consolidated balance sheets as of June 30, 2000 F-30
Unaudited consolidated statements of operations for the six month periods ended June 30, 2000 F-31
and 1999
Unaudited consolidated statements of cash flow for the six month periods ended June 30, 2000 F-32
and 1999
Notes to unaudited consolidated financial statements F-33
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF INTERNATIONAL MENU SOLUTIONS CORPORATION
Unaudited pro forma statement of operations for the year ended December 31, 1999 F-39
Notes to unaudited pro forma consolidated financial statements F-40
TRANSCONTINENTAL GOURMET FOODS INC.
Auditors' report. F-44
Audited balance sheets as at February 28, 1998 and 1997 and unaudited balance sheet as at F-45
November 30, 1998
Audited statement of retained earnings for the years ended February 28, 1998 and 1997 and F-46
unaudited statement of retained earnings for the nine month period ended November 30, 1998
</TABLE>
F-1
<PAGE> 63
<TABLE>
<S> <C>
Audited statements of income for the years ended February 28, 1998 and 1997 and unaudited F-47
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 F-48
statement of cash flow for the nine months ended November 30, 1998.
Notes to financial statements F-49
1188980 ONTARIO LTD. (Operating as Tasty Batters) (the predecessor company to Tasty
Selections Inc.)
Auditors' report F-58
Audited balance sheet as of June 30, 1998 and unaudited balance sheet as of March 31, 1999. F-59
Audited statement of income and retained earnings for the year ended June 30, 1998 and F-60
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 F-61
cash flow for the nine months ended March 31, 1999.
Notes to financial statements. F-62
1005549 ONTARIO LIMITED (100% owner of D.C. Food Processing Inc.)
Report of Independent Auditors F-66
Audited consolidated balance sheets as of December 6, 1998 and December 7, 1997 F-67
Audited consolidated statements of earnings for the years ended December 6, 1998 and December F-68
7, 1997
Audited consolidated statements of stockholders' equity for the years ended December 6, 1998 F-69
and December 7, 1997
Audited consolidated statements of cash flows for the years ended December 6, 1998 and F-70
December 7, 1997
Notes to consolidated financial statements F-71
Unaudited consolidated balance sheet as of March 7, 1999 and March 8, 1998 F-80
Unaudited consolidated statement of operations for the three month period ended March 7, 1999 F-81
and March 8, 1998
Unaudited consolidated statement of cash flow for the three month period ended March 7, 1999 F-82
and March 8, 1998
</TABLE>
F-2
<PAGE> 64
<TABLE>
<S> <C>
Notes to unaudited financial statements F-83
HUXTABLE'S FOODS L.L.C.
Independent auditors' reports F-87 & 88
Audited balance sheet as of December 31, 1998 F-89
Audited statements of operations for the year ended December 31, 1998 and 1997 F-90
Audited statement of members' capital for years ended December 31, 1998 and 1997 F-91
Audited statements of cash flows for the years ended December 31, 1998 and 1997 F-92
Notes to consolidated financial statements F-94
Unaudited balance sheet as of September 30, 1999 and 1998 F-103
Unaudited statement of operation for the nine months ended September 30, 1999 and 1998 F-104
Unaudited statement of cash flows for the nine months ended September 30, 1999 and 1998 F-105
Notes to unaudited consolidated financial statements F-106
</TABLE>
F-3
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
To the Stockholders of International Menu Solutions Corporation
We have audited the consolidated balance sheets of International Menu Solutions
Corporation as at December 31, 1999 and 1998 and the consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. 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 Canadian 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of International Menu Solutions
Corporation as at December 31, 1999 and 1998 and the results of its operations
and its cash flows for the years then ended in accordance with accounting
principles generally accepted in the United States.
The accompanying financial statements for the year ended December 31, 1998 have
been restated as described in Note 2b.
/s/ Deloitte & Touche LLP
Chartered Accountants
Kitchener, Ontario
March 3, 2000
F-4
<PAGE> 66
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
Restated
(Note 2b)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,165,370 $ 1,865,612
Accounts receivable, net of allawance for
doubtful accounts of $138,485 and $Nil 11,824,618 2,270,251
Inventories 5,981,081 1,299,890
Prepaid expenses 796,553 100,633
------------ ------------
22,767,622 5,536,386
CAPITAL ASSETS, NET 15,026,634 3,617,196
INTANGIBLE ASSETS, NET 15,741,002 787,395
------------ ------------
TOTAL ASSETS $ 53,535,258 $ 9,940,977
============ ============
LIABILITIES
CURRENT LIABILITIES
Bank operating loans $ 9,803,977 $ 1,100,849
Accounts payable 5,239,600 2,072,485
Accrued liabilities 3,123,712 477,940
Current portion of capital lease obligations 421,131 94,486
Current portion of long-term debt 415,958 279,044
------------ ------------
19,004,378 4,024,804
CAPITAL LEASE OBLIGATIONS 1,395,588 297,387
LONG-TERM DEBT 3,620,513 1,250,303
CONVERTIBLE DEBENTURES 4,000,000 --
DEFERRED INCOME TAXES 753,400 93,000
------------ ------------
TOTAL LIABILITIES 28,773,879 5,665,494
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class N voting, non-participating stock - US$0.001 par
value; 10,000,000 shares authorized; 3,110,795 and
3,190,642 shares issued 4,467 4,586
Common stock - US$0.001 par value; 25,000,000 shares
authorized; 10,476,048 and 5,884,838
shares issued 15,051 8,164
Additional paid-in capital 28,044,175 4,871,951
Accumulated other comprehensive loss (154,974) --
Deficit (3,147,340) (609,218)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,761,379 4,275,483
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,535,258 $ 9,940,977
============ ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 67
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31, December 31,
1999 1998
------------ ------------
Restated
(Note 2b)
<S> <C> <C>
REVENUE $ 48,040,135 $ 6,096,048
------------ ------------
COSTS AND EXPENSES
Cost of goods sold 38,748,543 4,729,806
Selling expenses 3,680,316 610,033
Administrative expenses 6,499,658 1,170,306
Amortization of intangibles 805,705 67,473
------------ ------------
49,734,222 6,577,618
------------ ------------
LOSS FROM OPERATIONS (1,694,087) (481,570)
------------ ------------
OTHER INCOME (EXPENSE)
Interest revenue 34,828 24,763
Interest expense (878,863) (98,066)
------------ ------------
(844,035) (73,303)
------------ ------------
LOSS BEFORE INCOME TAXES (2,538,122) (554,873)
INCOME TAXES -- --
------------ ------------
NET LOSS $ (2,538,122) $ (554,873)
============ ============
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.19) $ (0.09)
============ ============
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 13,686,558 6,419,141
============ ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 68
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
Preferred Class N Common
Shares Amount Shares Amount Shares
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997 700,000 $280,320 4,000,000 $5,800 1,678,000
Issuance of common shares 3,397,300
Fair value of brokers'
options
Fair value of warrants
issued in private
placement
Redemption of Class A (700,000) (280,320)
preferred shares
Share exchange (809,538) (1,214) 809,538
Net loss
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998,
Restated (Note 2b) -- -- 3,190,462 4,586 5,884,838
Share exchange (1,468,750) (2,203) 1,468,750
Exercise of brokers' options 400,000
Issuance of exchangeable shares
by IMSI in connection
with the acquisition of
businesses 1,389,083 2,084
Issuance of common shares
in connection with
financings 2,722,460
Issuance of special warrants
by IMSI in connection
with a financing
Translation adjustments
Net loss
----------- ----------- ----------- ----------- -----------
Balances, December 31, 1999 -- $ -- 3,110,795 $ 4,467 10,476,048
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other Total Total
Paid-In Comprehensive Accumulated Stockholders' Comprehensive
Amount Capital Loss Deficit Equity Loss
----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 $1,854 $ 664,997 -- $ (41,797) $ 911,174 $ (41,797)
===========
Issuance of common shares 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
Fair value of warrants
issued in private
placement (1,622,900) (1,622,900)
1,622,900 1,622,900
Redemption of Class A (12,548) (292,868)
preferred shares
Share exchange 1,214 --
Net loss (554,873) (554,873) (554,873)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 8,164 4,871,951 -- (609,218) 4,275,483 $ (554,873)
===========
Share exchange 2,203 --
Exercise of brokers' options 600 602,815 603,415
Issuance of exchangeable shares
by IMSI in connection
with the acquisition of
businesses 9,833,157 9,835,241
Issuance of common shares
in connection with
financings 4,084 5,876,252 5,880,336
Issuance of special warrants
by IMSI in connection
with a financing 6,860,000 6,860,000
Translation adjustments (154,974) (154,974) (154,974)
Net loss (2,538,122) (2,538,122) (2,538,122)
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1999 $ 15,051 $28,044,175 $ (154,974) $(3,147,340) $24,761,379 $(2,693,096)
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 69
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,538,122) $ (554,873)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 2,073,682 143,621
Loss on disposal of capital assets 1,696 --
Changes in operating assets and liabilities
Accounts receivable (7,245,692) (489,189)
Inventories (1,387,397) 408,787
Prepaid expenses (538,894) (21,271)
Accounts payable 678,338 7,568
Accrued liabilities 1,395,545 --
------------ ------------
(7,560,844) (505,357)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (3,066,792) (216,397)
Proceeds from disposal of capital assets 214,380 --
Additions to intangible assets (667,486) (14,332)
Acquisitions, net of cash acquired (10,851,971) (2,671,529)
------------ ------------
(14,371,869) (2,902,258)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of shares, net of issuance costs 6,483,751 4,212,050
Issuance of special warrants of IMSI, net of issuance costs 6,860,000 --
Net proceeds from bank loans 8,703,128 1,202,348
Convertible debentures issued, net of issuance costs 3,640,976 --
Proceeds from long-term debt 415,260 --
Payment of long-term debt and capital lease principal (1,494,197) (147,577)
Payment of advances of shareholders from
acquired businesses (376,447) --
Redemption of Class A preferred stock of IMSI -- (292,868)
------------ ------------
24,232,471 4,973,953
------------ ------------
NET CHANGE IN CASH AND
CASH EQUIVALENTS 2,299,758 1,566,338
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,865,612 299,274
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,165,370 $ 1,865,612
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 878,863 $ 98,066
============ ============
Cash paid during the period for income taxes $ -- $ --
============ ============
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE> 70
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Corporation develops, markets and produces a series of specialty food
products aimed at the North American Home Meal Replacement ("HMR") market
segment.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
principles generally accepted 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
"Corporation" or "IMSC") and its wholly owned operating subsidiaries,
International Menu Solutions Inc. ("IMSI"), Prime Foods Processing Inc.
("PFPI"), Transcontinental Gourmet Foods Inc. ("TGF"), 1005549 Ontario
Limited ("D.C. Foods"), Tasty Selections Inc. ("Tasty Selections"),
Ultimate Cookie Co., Ltd. ("Ultimate") and Huxtable's Kitchens Inc.
("Huxtables").
On July 16, 1998, the Corporation (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 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 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 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".
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 20,235
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 stockholders' equity $13,780,652 $9,940,977
</TABLE>
c) Foreign currency translation
i) Translation of foreign subsidiaries' accounts
Assets and liabilities of the Corporation's foreign subsidiaries are
translated from their functional currencies to Canadian dollars 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 of foreign subsidiaries are recorded in comprehensive
income as a separate component of stockholders' equity.
ii) Translation of foreign currency transactions
Transactions incurred in currencies other than the functional currency
are converted to 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 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.
c) 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-9
<PAGE> 71
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f) Capital assets
Capital assets are recorded at cost. Depreciation is provided at the
following rates:
<TABLE>
<S> <C>
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
</TABLE>
g) Intangible assets
Intangible assets are recorded at cost. Amortization periods and methods
are as follows:
<TABLE>
<S> <C>
Packaging artwork 3 to 5 years, straight-line
Deferred financing costs Over term of debt instrument
Brands 15 to 20 years, straight-line
Recipes 10 to 15 years, straight-line
Manufacturing systems and technology 10 to 15 years, straight-line
Customer lists 7 to 10 years, straight-line
Assembled workforce 7 to 10 years, straight-line
Information systems and procedures 5 years, straight-line
Licenses and quotas 10 years, straight-line
Goodwill Up to 20 years straight-line
</TABLE>
h) Asset impairment
The Corporation 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 Corporation 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-10
<PAGE> 72
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 from those
estimates and assumptions.
l) Recently issued accounting pronouncements
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 Corporation currently does not make significant use of derivative
instruments. Management is in the process of determining the impact of
SFAS No. 133 on the consolidated financial statements.
3. ACQUISITIONS
Year ended December 31, 1999
During the year ended December 31, 1999, the Corporation acquired the
businesses in the table below which have been accounted for using the
purchase method (in thousands):
<TABLE>
<CAPTION>
Tasty Selections (1) D.C. Foods (2) Ultimate (3) Huxtable's (4)
-------------- ------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Acquisition date April 15, 1999 May 10, 1999 October 15, 1999 November 12, 1999
Purchase price
including acquisition costs $ 2,220 $ 6,533 $ 252 $ 4,880
------------------------------------------------------------------------------------------------------------
Assigned to fair values
of net assets acquired:
Current assets 1,383 1,857 377 3,777
Capital assets 494 4,891 198 1,602
Brands 100 -- 155 275
Recipes 35 -- 88 331
Manufacturing systems
and technology -- 1,150 -- 397
Customer lists 450 325 109 368
Assembled workforce 165 425 29 360
Information systems and
procedures 75 80 9 88
Licenses and quotas -- 285 -- --
Goodwill 953 1,311 -- --
Current liabilities (677) (1,571) (713) (2,062)
Long-term liabilities (758) (2,220) -- (256)
------------------------------------------------------------------------------------------------------------
$ 2,220 $ 6,533 $ 252 $ 4,880
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE> 73
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
(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 Selections 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 (see Note 11).
(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
1005549 Ontario Limited 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 (see Note 11). The value of each series
of Class E shares will be recorded as additional purchase price once
the earnings contingencies are resolved.
(3) IMSI acquired all of the issued and outstanding shares of the
Ultimate Cookie Co. Inc.("Ultimate"), a Montreal based bakery.
Pursuant to the terms of the purchase agreement, the purchase price
was satisfied 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. The
Class E Series shares were issued to the selling shareholders of
Ultimate and are exchangeable into common shares of the Corporation
(see Note 11). The value of each series of Class E shares will be
recorded as additional purchase price once the earnings contingencies
are resolved.
(4) IMSC, through its wholly-owned subsidiary Huxtable's Kitchens Inc.
(Huxtable's Kitchens"), purchased substantially all of the assets of
Huxtable's Foods, L.L.C., a Delaware limited liability company
("Huxtable's") located in Vernon, California. Huxtable's is a
provider of a wide range of fresh and frozen entrees located in
California. Pursuant to the purchase agreement, US$3,280,000
(CDN$4,880,000) was paid in cash. Additional payments in cash or
shares of common stock of the Corporation will be made based upon the
future earnings levels of the subsidiary and 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 valued at $2.63 per Class X share, the issue by the
Corporation of 53,000 Class N Shares and the purchase from the selling
shareholders shareholder loans made to Norbakco in the amount of
$180,000. This transaction resulted in an increase in the purchase price
of TGF/Norbakco of $139,125.
Goodwill arising from the above acquisitions is being amortized
straight-line over a 20 year period.
F-12
<PAGE> 74
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
Unaudited supplemental pro forma results of operations
The following table presents unaudited pro forma revenue, net loss and
loss per share as if the Corporation had acquired all of Tasty Batters,
D.C. Foods, Ultimate and Huxtable's at the beginning of each of the
periods presented on (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenue $ 71,642 $ 48,085
Net loss (3,760) (1,081)
Net loss per share $ (0.27) $ (0.14)
-------- --------
-------- --------
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.
</TABLE>
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. Pasta
Kitchen met the revenue targets during 1999. In December 1999,
$100,000 of cash was paid to the former owner of Pasta Kitchen. The
remainder of $240,000 has been accrued by the Corporation and will
be paid by the issuance of 55,042 shares of common stock during
2000. As a result of the revenue contingencies being resolved, the
Corporation adjusted the purchase price and goodwill balance related
to Pasta Kitchen by $340,000 in 1999.
(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, 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 (see Note 11).
F-13
<PAGE> 75
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
The Corporation paid the former owners of TGF approximately $360,000,
net of shareholder loans, during 1999 pursuant to the net book value
calculation. In addition, based upon the earn-out formula related to
the year ended February 28, 1999, the holders of Class B shares in
IMSI may now receive 2,258,718 common shares, valued at $6,188,900
($2.74 (US$1.81) per share), of the Corporation upon conversion of
all of the Class B shares. As a result of the net book value
calculation and the first earn-out period, the purchase price and
goodwill related to TGF/Norbakco was increased by $6,548,900.
Unaudited supplemental pro forma results of operations
The following table presents unaudited pro forma revenue, net loss and
loss per share as if the Corporation had acquired all of TGF, Norbakco
and Pasta Kitchen at the beginning of each of the period presented
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended
December 31, 1998
-----------------
<S> <C>
Revenue $ 13,014
Net income (loss) (478)
Net income (loss) per share $ (0.07)
==========
</TABLE>
The preceeding 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.
F-14
<PAGE> 76
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Cost
Land $ 355,800 $ 120,000
Building 2,010,619 854,524
Leasehold improvements 1,848,936 104,671
Plant equipment 11,344,842 2,383,349
Office equipment 449,473 225,973
Computer equipment 363,642 31,285
----------- -----------
16,373,312 3,719,802
----------- -----------
Accumulated depreciation
Building 122,871 43,687
Leasehold improvements 81,218 1,230
Plant equipment 1,045,139 49,503
Office equipment 28,496 5,006
Computer equipment 68,954 3,180
----------- -----------
1,346,678 102,606
----------- -----------
$15,026,634 $ 3,617,196
=========== ===========
</TABLE>
The net book value of assets recorded under capital leases totaled
$3,119,093 (December 31, 1998 - $367,490), net of accumulated
depreciation of $1,500,789 (1998 - $5,694).
F-15
<PAGE> 77
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Cost
Packaging artwork $ 1,000,040 $ 210,000
Deferred financing costs 359,024 --
Brands 530,000 --
Recipes 454,000 --
Manufacturing systems and technology 1,547,000 --
Customer lists 1,252,000 --
Assembled workforce 979,000 --
Information systems and procedures 261,000 --
Licences and quotas 285,000 --
Goodwill 10,007,589 630,271
----------- -----------
16,674,653 840,271
----------- -----------
Accumulated amortization
Packaging artwork 153,051 36,936
Deferred financing costs 60,000 --
Brands 9,200 --
Recipes 10,300 --
Manufacturing systems and technology 55,500 --
Customer lists 74,800 --
Assembled workforce 67,800 --
Information systems and procedures 25,400 --
Licences and quotas 19,000 --
Goodwill 458,600 15,940
----------- -----------
933,651 52,876
----------- -----------
$15,741,002 $ 787,395
=========== ===========
</TABLE>
6. BANK OPERATING LOANS
The Corporation and its subsidiaries have utilized an aggregate of
approximately $9,500,000 of authorized lines of credit totaling
$10,000,000 (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% or 7.5% at December 31, 1999
except for borrowings secured by mandatory cash deposits totalling
$4,000,000, in which case interest is calculated at prime plus 1/2 or
7.0% at December 31, 1999. 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. The credit facility agreement also
provides for 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-16
<PAGE> 78
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
7. CAPITAL LEASE OBLIGATIONS
The Corporation has acquired various processing equipment and vehicles
under capital leases expiring 2004. Monthly principal payments vary from
$524 to $5,550. Capital leases are recorded by discounting payments based
on the lower of the Corporation's incremental borrowing rate or the
interest rate inherent in the lease.
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Within 12 months $ 656,825 $ 131,378
12 to 24 months 573,703 127,665
25 to 36 months 560,105 103,275
37 to 48 months 244,599 100,050
49 to 60 months 104,273 11,242
---------- ----------
Gross value of minimum lease payments 2,139,505 473,610
Less amount representing interest 322,786 81,737
---------- ----------
1,816,719 391,873
Less principal amounts due in one year 421,131 94,486
---------- ----------
$1,395,588 $ 297,387
========== ==========
</TABLE>
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<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% or 9.5% (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 $ 518,400
BDC - Equipment loan
Repayable in two principal instalments during December and January of each
year for a 5 year term. Interest is payable monthly at 1.25% above BDC's
daily floating base rate or 9.75% (10.00% at December 31, 1998). The loan is
secured by a first charge on all personal property of TGF 635,000 832,000
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% or 11.0%
(9.25% at December 31, 1998). The loan is secured by a first charge over the
assets financed -- 133,128
---------- ----------
Balance to carry forward 1,153,400 1,483,528
---------- ----------
</TABLE>
F-17
<PAGE> 79
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
Balance carried forward $1,153,400 $1,483,528
Bank of Nova Scotia - Term loan
Repayable in monthly installments of $1,500 for a period of 39 months -- 45,819
Interest is payable monthly at the Bank of Nova Scotia prime rate plus 2.5%
or 11.0% (9.25% at December 31, 1998). The loan is secured by a general
security agreement over all present and future personal property
Bank of Nova Scotia - Equipment advances
Temporary equipment loans with no current repayment terms. Interest is 2,150,217 --
payable monthly on the outstanding balance at the Bank of Nova Scotia prime
rate plus 1.75% or 8.25% at December 31, 1999. The loans are secured by the
underlying assets
Royal Bank - Small business loans
Repayable in monthly installments of $3,100 and $687. Interest is payable 52,676 --
monthly at the Royal Bank prime rate plus 1.5% and 2.5% respectively or 8%
and 9% at December 31, 1999. The loans are due November 2000 and December
2001. The loans are secured by a first charge on the fixed assets of the
Ultimate Cookie Co. and subordination of claims of the former directors of
the Ultimate Cookie Co. in the amount of $50,000
Royal Bank of Canada - Mortgage
Repayable in monthly installments of $6,500 and matures September 2011 606,319 --
Interest is payable monthly at the Royal Bank prime rate plus 1% or 7.5% at
December 31, 1999. The loan is secured by a collateral mortgage of $900,000
on property at 35 Northland Road, Waterloo, Ontario
Royal Bank of Canada - Loan
Repayable in monthly installments of $4,010 and matures September 2001 73,859
Interest is payable monthly at the bank's prime rate plus 0.75%. The loan is
secured by a collateral mortgage of $150,000 on property at 35 Northland
Road, Waterloo, Ontario
---------- ----------
4,036,471 1,529,347
Less amount due within one year 415,958 279,044
---------- ----------
$3,620,513 $1,250,303
========== ==========
</TABLE>
F-18
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
8. LONG-TERM DEBT (CONTINUED)
Principal payments required are due as follows:
<TABLE>
<CAPTION>
<S> <C>
In 12 months $ 415,958
12 to 24 months 362,377
25 to 36 months 277,400
37 to 48 months 171,400
49 to 60 months 116,400
Thereafter 2,692,936
----------
$4,036,471
==========
</TABLE>
9. CONVERTIBLE DEBENTURES
On May 10, 1999, the Corporation's subsidiary IMSI issued $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 Class X 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, 1999. Approximately $360,000 was paid by IMSI in respect of
fees and commissions related to the debentures.
10. COMMITMENTS
The Corporation is committed under operating leases for business premises
and equipment with terms expiring at various dates through 2005. As of
December 31, 1999, the minimum annual payments required under the lease
agreements were as follows:
<TABLE>
<CAPTION>
<S> <C>
In 12 months $ 943,241
13 to 24 months 889,110
25 to 36 months 774,805
37 to 48 months 423,624
49 to 60 months 325,411
Thereafter 51,790
----------
$3,407,981
==========
</TABLE>
11. SHAREHOLDER'S 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.
F-19
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY (CONTINUED)
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.
As of December 31, 1999 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 830,000 Class N shares in
connection with such conversion based upon management's estimates that
approximately 3,030,000 shares of common stock of the Company will be
issued to the former shareholders of TGF 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 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
Exchangeable shares of IMSI). Based upon management's estimate, the
Company will be required to reserve an additional 2,300,000 Class N
shares in connection with the conversion rights of the holders of Class E
shares. 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 Corporation, 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$2.92) or the current market price of
one share of common stock of the Company determined at February 28, 2000.
F-20
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY (CONTINUED)
Class D shares. IMSI has issued 59,000 Class D shares. The Class D shares
are non-participating and non-voting except in respect of any future
modification or changes in the Class D share characteristics. The Class D
shares are exchangeable into a number of shares of common stock of the
Company such number of shares to be determined by calculating the EBITDA
of TGF for the twelve month period ended February 28, 2001 minus the
adjusted EBITDA of TGF for the twelve month period ended February 28,
2000; then by dividing that amount by the Canadian dollar equivalent at
February 28, 2001 of the lesser of US$ 2.00 (CDN$ 2.92) or the current
market price of one share of common stock of the Company determined at
February 28, 2001.
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 share
characteristics. The Class E Series 1 and 2 shares, collectively, 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 the EBITDA of D.C. Foods for the period from and
including December 7, 1998 to and including December 31, 1999, divided
by the current market price of one share of common stock of the Company
determined as at December 31, 1999.
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. The Class E Series 3 and 4 shares, collectively,
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 EBITDA of D.C. Foods for the period ending
March 31, 2002 or December 31, 2002 (such period to be selected by the
Series 3 and 4 shareholders in their absolute discretion), minus (A)
$6,000,000 and (B) an amount equal to the greater of (i) the Adjusted
EBITDA of D.C. 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, as determined by
the Series 3 or 4 shareholders.
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
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.
F-21
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY (CONTINUED)
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 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.
Capital stock transactions
Year ended December 31, 1999
On April 16, 1999, the Corporation executed a subscription agreement with
an investor to issue 1,523,810 common shares for proceeds of
approximately $3,810,000, net of issuance costs of $190,000.
On October 22, 1999, IMSI sold by private placement 1,555,556 special
warrants ("Special Warrants") for an aggregate consideration of
approximately $7.0 million (US$4.7 million). Each Special Warrant
entitles the holder, upon exercise thereof without any further
consideration, to receive one Class X 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 Class X
shares of IMSI 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 Class X 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 Class X shares of IMSI
to refer to the common stock of the Corporation.
During 1999, 1,468,750 Class N and 1,468,750 Class X shares of IMSI were
exchanged for common shares of the Corporation.
Year ended December 31, 1998
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. For accounting purposes, the transaction was treated as a
reverse acquisition of ANM by IMSI. In conjunction with the reverse
acquisition transaction, the Corporation created and authorized
10,000,000 Class N shares, and issued 4,000,000 Class N shares to the
former 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 Corporation on a
one for one basis at the option of the holder until 2013, at which time
the Corporation can force conversion of the Class N shares.
F-22
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
11. SHAREHOLDERS' EQUITY (CONTINUED)
During 1998, 809,538 Class N and 809,538 Class X shares of IMSI were
exchanged for common shares of the Corporation.
Private placement financing
During the period November 17 to November 28, 1998, the Corporation 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 Corporation. The
warrants expired 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 ($2,550,000 CDN).
On May 30, 1999, all of the holders of the warrants described above
exercised their rights to acquire common shares of the corporation,
resulting in US $1,398,110 (CDN $2,070,700) of proceeds to the
Corporation.
12. OPTIONS GRANTED TO NON-EMPLOYEES
Brokers' options
In conjunction with the share issuance and reverse acquisition of ANM in
July 1998, the Corporation 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 Corporation at a
price of US$1.00, commencing February 1, 1999 and expiring July 1, 1999.
On May 27, 1999, the Corporation agreed to extend the expiry date with
respect to the brokers' options issued July 15, 1998. 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. During 1999, 400,000
brokers' options were exercised for proceeds of approximately $603,000.
Consultant options
On January 1, 1999, the Corporation issued 125,000 options to a
consultant. The options were granted at an option price of $0.90 per
share for the first 50,000 options. The remaining 75,000 options were
granted at an exercise price of $1.50. All options expire on December 31,
2001.
13. STOCK OPTION PLAN
On August 10, 1998, the Board of Directors of the Corporation approved a
stock option plan (the "Option Plan") applicable to the Corporation's
officers and directors and authorized 2,500,000 common shares to be
granted. Pursuant to the Option Plan, options are granted at an amount
not less than the then-current fair market value of the common shares of
the Corporation. Options may generally be exercised in equal proportions
during the years following the first to fifth anniversary of the date of
grant and expire on the tenth anniversary or upon termination of
employment.
F-23
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
13. STOCK OPTION PLAN (CONTINUED)
A summary of the activity in the Option Plan since inception is set forth
below:
<TABLE>
<CAPTION>
Options
Available Number of Weighted Average
For Grant Options Exercise Price (US$)
--------- ------- --------------------
<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
Authorized --
Granted -- --
--------- ------- -----
Balance at December 31, 1999 1,675,000 825,000 $0.80
--------- ------- -----
Exercisable at December 31, 1997 -- $ --
Exercisable at December 31, 1998 $ --
Exercisable at December 31, 1999 290,000 $0.76
========= ======= =====
</TABLE>
The following table summarizes information concerning currently
outstanding options at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Options Contractual Exercise Options Exercise
Exercise price (US$) Outstanding Life Price (US$) Exercisable Price (US$)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.70 - $1.50 825,000 8.6 years $ 0.80 290,000 $ 0.76
----------- ----------- ----------- ----------- -----------
825,000 290,000
=========== =========== =========== =========== ===========
</TABLE>
The Corporation has not yet established a stock option plan for
employees. However, since inception the Corporation has granted a total
of 93,000 in stock options to three employees in connection with their
employment agreements. All of these options are outstanding and have a
weighted average exercise price of US$1.93. Generally, these option
grants have a 10 year term and vest equally over a 5 year period. As of
December 31, 1999, 16,600 of the options were exercisable at a weighted
average exercise price of US$1.55.
14. STOCK BASED COMPENSATION
The Corporation 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 Corporation 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 325%, 0%, 5.25 years and 5.5%,
respectively, for the year ended December 31, 1998. Weighted average
assumptions for stock price volatility, dividend yield, expected life of
stock options and risk free interest rate were 55%, 0%, 5.15 years and
5.5%, respectively, for the year ended December 31, 1999.
F-24
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
14. STOCK BASED COMPENSATION (CONTINUED)
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 loss and
net loss per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended
December 31,
1999 1998
------------- -------------
<S> <C> <C>
Net loss
As reported $ (2,538,122) $ (554,873)
Pro forma $ (2,811,895) $ (622,884)
Net loss per share, basic and diluted
As reported $ (0.19) $ (0.09)
Pro forma $ (0.21) $ (0.10)
</TABLE>
The weighted average grant date fair value of stock options granted
during the years ended December 31, 1999 and 1998 was $3.45 and $1.89,
respectively.
15. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Current $ - $ -
Deferred
- -
-------- --------
$ - $ -
======== ========
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax liabilities
Difference between tax and accounting
basis of assets $ (840,700) $ (167,000)
----------- -----------
Deferred income tax assets
Expenses not currently deductible 176,000 --
Net operating losses 1,872,000 680,000
Valuation allowance (1,784,700) (606,000)
----------- -----------
Deferred income tax asset,
net of valuation allowance 87,300 74,000
----------- -----------
Net deferred income tax asset (liability) $ (753,400) $ (93,000)
=========== ===========
</TABLE>
F-25
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
15. INCOME TAXES (CONTINUED)
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,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Combined Canadian basic federal
and provincial tax rates 44.6% 44.6% 44.6%
----------- ----------- -----------
Recovery based on the above rates $(1,132,000) $ (244,900) $ (18,600)
Increase (decrease) in income taxes
resulting from the following:
Permanent differences including
goodwill amortization 359,000 15,200 1,900
Canadian manufacturing credits 203,000 (34,100) 3,200
Change in valuation allowance 570,000 288,000 13,500
Other -- (24,200) --
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Corporation and its subsidiaries have income tax losses totaling
$4,794,000 to apply against future years' taxable income. The losses, if
not utilized, expire as follows:
<TABLE>
<S> <C>
2000 $ 21,000
2001 66,000
2002 34,000
2003 248,000
2004 449,000
2005 745,000
2006 3,231,000
----------
$4,794,000
==========
</TABLE>
F-26
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
16. NET LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Net loss per share
Numerator
Net loss available to common shareholders $ (2,538,122) $ (554,873)
------------ ------------
Denominator
Weighted average shares outstanding 13,686,558 6,419,141
------------ ------------
$ (0.19) $ (0.09)
============ ============
</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 basic loss per share and
weighted average outstanding common shares calculations.
17. CONTINGENCY
The Corporation is defending a legal action in which the plaintiff has
asserted a claim of approximately $200,000 for breach of contract. The
likelihood of loss, if any, is not determinable and no accrual for this
item has been recorded as of December 31, 1999.
18. FINANCIAL INSTRUMENTS
Fair value
At December 31, 1999 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.
Foreign exchange risk
Foreign exchange risk is the risk that changes in exchange rates will
affect the Corporation's operating results. The Corporation has a foreign
exchange risk with respect to expenditures in United States dollars. The
Corporation periodically enters into foreign exchange contracts to
minimize this risk. The operation of the foreign subsidiary in the United
States is carried out in its respective currency and currency
fluctuations will impact the operating results.
Cash and cash equivalents, accounts receivable, accounts payable, and
long-term debt include the following amounts in US dollars, $4,433,000
(1998 - $16,287), $4,686,000 (1998 - $542,026), $2,780,000 (1998 -
$79,451), $156,000 (1998 - $nil), respectively, which have been
translated to Canadian dollars at the exchange rate in effect at the
balance sheet date.
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 Corporation sells product to large supermarket chains and
specialty food retailers. Substantially all customers pay within 10 days
of product delivery.
F-27
<PAGE> 89
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
19. SEGMENTED INFORMATION
The Corporation operated in four business segments for the years ended
December 31, 1999 and 1998 and one business segment in 1997. Information
regarding the Corporation's activities on a segmented bases includes the
term of earnings measurement of "EBITDA" which refers to earnings from
before interest, income taxes, depreciation and amortization. EBITDA 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>
1999 Desserts Fresh Frozen Corporate Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue $ 9,513,618 $ 2,610,723 $ 36,953,840 $ (1,038,046) $ 48,040,135
Inter-segment
revenue -- -- 1,754,788 -- 1,754,788
EBITDA 356,613 268,328 3,482,196 (3,727,542) 379,595
Interest expense (158,374) (19,536) (489,075) (211,878) (878,863)
------------ ------------ ------------ ------------ ------------
Identifiable assets 4,325,600 17,006,203 21,419,519 43,986,269 1,234,947
Goodwill 838,155 578,729 8,102,224 -- 9,519,108
------------ ------------ ------------ ------------ ------------
Total assets 5,163,755 1,813,676 25,108,427 21,419,519 53,505,377
------------ ------------ ------------ ------------ ------------
Capital expenditures 992,610 480,381 1,318,311 275,490 3,066,792
Depreciation and
amortization $ 300,990 $ 71,476 $ 1,470,902 $ 230,314 $ 2,073,682
============ ============ ============ ============ ============
</TABLE>
F-28
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
--------------------------------------------------------------------------------
19. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998 Desserts Fresh Frozen Corporate Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 269,377 $ 352,312 $ 5,474,359 $ -- $ 6,096,048
Inter-segment
revenue -- -- -- -- --
EBITDA 22,078 34,985 642,687 (1,034,637) (334,887)
Interest expense (4,755) (712) (80,066) (12,533) (98,066)
----------- ----------- ----------- ----------- -----------
Identifiable assets 1,425,724 727,402 5,502,572 1,670,948 9,326,646
Goodwill -- 232,979 381,352 -- 614,331
----------- ----------- ----------- ----------- -----------
Total assets 1,425,724 960,381 5,883,924 1,670,948 9,940,977
----------- ----------- ----------- ----------- -----------
Capital expenditures (19,743) 3,093 105,891 127,156 216,397
Depreciation and
amortization $ 9,447 $ 13,083 $ 104,221 $ 16,870 $ 143,621
=========== =========== =========== =========== ===========
</TABLE>
In 1999, there were no external customers that exceeded 10% of total
revenues (1998 - three customers accounted for 51% of the total
revenues).
During the year ended December 31, 1999 sales to customers outside Canada
totaled approximately $17,731,000 (1998 - $1,017,500).
F-29
<PAGE> 91
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June 30,
2000
------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,357,130
Accounts receivable 5,898,788
Inventories 10,231,464
Prepaid expenses 1,667,511
------------
22,154,893
CAPITAL ASSETS, NET 16,862,518
INTANGIBLE ASSETS, NET 20,167,967
LONG TERM RECEIVABLE 860,000
------------
TOTAL ASSETS $ 60,045,378
------------
LIABILITIES
CURRENT LIABILITIES
Bank operating loans $ 12,394,797
Accounts payable 4,686,876
Accrued liabilities 1,999,054
Current portion of capital lease obligations 511,946
Current portion of long-term debt 5,037,145
------------
24,629,818
CAPITAL LEASE OBLIGATIONS 1,791,619
LONG-TERM DEBT 3,592,867
CONVERTIBLE DEBENTURE 4,000,000
DEFERRED INCOME TAXES 753,400
------------
TOTAL LIABILITIES 34,767,704
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class N voting, non-participating stock - US$0.001 par
value; 10,000,000 shares authorized; 2,815,629 shares issued 4,041
Common stock - US$0.001 par value; 25,000,000 shares
authorized; 11,727,392 shares issued 16,857
Additional paid-in capital 32,034,854
Accumulated other comprehensive loss (132,888)
Deficit (6,645,190)
------------
TOTAL STOCKHOLDERS' EQUITY 25,277,674
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,045,378
------------
</TABLE>
F-30
<PAGE> 92
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Six months ended
June 30, June 30,
2000 1999
------------ ------------
(restated-Note 3)
<S> <C> <C>
REVENUE $ 32,465,787 $ 13,032,288
------------ ------------
COSTS AND EXPENSES
Cost of goods sold 27,222,099 11,405,228
Selling expenses 2,292,855 907,096
Administrative expenses 5,671,031 1,974,995
Amortization of intangibles 788,380 229,688
------------ ------------
35,974,365 14,517,007
------------ ------------
LOSS FROM OPERATIONS (3,508,578) (1,484,719)
------------ ------------
OTHER INCOME (EXPENSE)
Gain on sale of assets 935,000 --
Interest expense (924,272) (282,977)
------------ ------------
10,728 (282,977)
------------ ------------
LOSS BEFORE INCOME TAXES (3,497,850) (1,767,696)
INCOME TAXES -- 144,400
------------ ------------
NET LOSS $ (3,497,850) $ (1,623,296)
------------ ------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.22) $ (0.16)
------------ ------------
WEIGHTED AVERAGE
OUTSTANDING
COMMON SHARES 15,845,561 10,315,837
------------ ------------
</TABLE>
F-31
<PAGE> 93
INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
------------ ------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (3,497,850) $ (1,623,296)
Item not requiring cash
Depreciation and amortization 1,762,248 635,892
Loss (gain) on disposal of capital assets 1,903 --
Deferred income taxes -- (144,400)
Gain on sale of assets (935,000) --
Changes in operating assets and liabilities
Accounts receivable 6,000,830 999,341
Inventories 4,250,383) (2,497,445)
Prepaid expenses (870,958) (1,548,784)
Accounts payable (983,905) (880,981)
Accrued liabilities (1,102,573) 391,445
------------ ------------
(3,875,686) (4,668,228)
------------ ------------
INVESTING ACTIVITIES
Purchase of capital assets (1,588,813) (1,666,424)
Additions to intangible assets (1,162,642) (405,909)
Acquisitions, including net bank indebtedness
acquired in 1999 of $920,477 -- (4,993,701)
------------ ------------
(2,751,455) (7,066,034)
------------ ------------
FINANCING ACTIVITIES
Issuance of shares net of issuance costs (62,136) 5,764,530
Proceeds from bank loans 2,590,821 3,810,119
Convertible debentures issued, net
of issuance costs of $359,024 -- 3,640,976
Proceeds from long term and short-term debt 4,802,256 --
Payment of long-term debt and
capital lease principal (512,040) (413,146)
------------ ------------
6,818,901 12,802,479
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 191,760 1,068,217
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,165,370 1,865,612
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,357,130 $ 2,933,829
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 709,482 $ 313,662
------------ ------------
Cash paid during the period for income taxes $ -- $ --
------------ ------------
</TABLE>
F-32
<PAGE> 94
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
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. 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 Company has not completed its assessment of the impact of SAB
101 on its revenue recognition policies.
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 Company 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.
F-33
<PAGE> 95
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 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 the statement of stockholders'
equity for the six months ended June 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 six months ended June 30, 1999:
<TABLE>
<S> <C> <C>
Net loss as previously reported: $ (1,215,396)
Increase in amortization charges related to increased
goodwill recorded at acquisition date (29,900)
Non recognition of minority interest (378,000)
----------
Net effect of restatement on net loss and accumulated deficit (407,900)
--------------
Net loss as restated $ (1,623,296)
--------------
</TABLE>
F-34
<PAGE> 96
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
4. COMMITMENT TO ISSUE SHARES TO SELLING SHARE HOLDERS OF ACQUIRED COMPANIES
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
Company 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 Company and the selling shareholders.
Based upon the operating results of D.C. Foods for the period from
December 7, 1998 to December 31, 1999, the Company is obligated to issue
approximately 415,000 Class N shares pursuant to the conversion formula
contained in the Class E Series 1 and Series 2 shares issued by
International Menu Solutions Inc. The value of the Class N shares to be
issued, based on a price of US$2.94 (CDN$4.24) per share is approximately
$1,759,600.
Based upon the operating results of Huxtable's for the period from
November 1, 1999 to December 31, 1999, the Company is 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 issuance has been
approved by the selling shareholders and the Board of Directors of the
Company and has been recorded as equity.
Based upon the operating results of Ultimate Cookie for the period from
May 1, 1999 to April 30, 2000, the Company is obligated to issue
approximately 479,069 Class N shares pursuant to the conversion formula
contained in the Class E Series 5 and Series 6 shares issued by
International Menu Solutions Corporation. The value of the Class N shares
to be issued, based on a price of US$2.150 (CDN$3.17) per share is
approximately $1,518,600.
Based upon the operating results of TGF for the period from March 1, 1999
to February 29, 2000, the company is obliged to issue approximately
502,371 common shares pursuant to the conversion formula contained in the
exchangeable shares issued by International Menu Solutions Corporation to
the selling shareholders of TGF. The value of the Class N shares to be
issued, based on a price of at US$2.00 (CDN$2.915) per share is
approximately $1,464,200.
With the exception of Huxtable's, the calculations above have not been
approved by the selling shareholders of the respective companies and the
Board of Directors of the Company. Consequently, the Company will record
the value of the shares as additional purchase price (goodwill) when the
shares are issued, which is expected to be in the third quarter.
The Company 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 Company's Annual Report on 10-KSB filed on April 14,
2000.
5. SALE OF ASSETS
On June 30, 2000, Prime Foods sold all its interest in all contracts and
agreements to fill orders or sell product, including the goodwill of the
business, of the Seafood Selections product line for approximately
$935,000. The purchase price will be satisfied over time with monthly
payments of 3% of product sales of existing Seafood Selections labeled
products, 2% of product sales of existing Seafood Selections products
which are privately labelled by the purchaser and 1% of Seafood
Selections labeled product sales of new products developed by the
purchaser. Minimum payments must be received by
F-35
<PAGE> 97
the anniversary date of the purchase and sale agreement in the next three
years of $50,0000, $100,000, $150,000 respectively. The unpaid balance
must be paid on June 30, 2004.
6. DEBT FACILITIES AND CONVERTIBLE DEBENTURES
As of June 30, 2000, the Company and its subsidiaries have utilized an
aggregate of approximately $9,452,949 of authorized lines of credit
totaling $10,000,000. The lines of credit bear interest at Canadian prime
plus -1/2% or 8% at June 30, 2000 except for borrowings secured by cash
deposits, in which case interest is calculated at prime or 6.75%. 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 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.
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, 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 Company 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. Interest is payable monthly at a rate of 12% per annum. The
interest rate on any unpaid portion increases to 24% on September 1,
2000, and 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 Company and its subsidiaries.
The loan is due February 28, 2001. Debt Issuance costs of $500,560 have
been deferred and are to be amortized over a nine month period.
7. CONTINGENCY
The Corporation is defending a legal action in which the plaintiff has
asserted a claim of approximately $200,000 for breach of contract. The
likelihood of loss, if any, is not determinable and no accrual for this
item has been recorded as of June 30, 2000.
8. NET LOSS PER SHARE
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Net loss per share
Numerator
Net loss available to common shareholders $ (3,497,850) $ (1,623,296)
------------ ------------
Denominator
Weighted average shares outstanding 15,845,561 10,315,837
------------ ------------
$ (0.22) $ (0.16)
------------ ------------
</TABLE>
F-36
<PAGE> 98
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 basis loss per share and weighted average outstanding
common shares calculations.
9. SEGMENTED INFORMATION
The Corporation operated in four business segments. Information regarding
the Corporation's activities on a segmented bases includes the term of
earnings measurement of "EBITDA" which refers to earnings from before
interest, income taxes, depreciation and amortization. EBITDA 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>
JUNE 30, 2000 Desserts Fresh Frozen Corporate Total
------------- -------- ----- ------ --------- -----
(SIX MONTHS)
<S> <C> <C> <C> <C> <C>
Revenue $ 6,006,663 $ 2,542,535 $ 23,971,585 $ (54,996) $ 32,465,787
Inter-segment
revenue -- -- -- -- --
EBITDA 331,141 409,981 1,871,612 (3,641,215) (1,028,481)
Interest expense (158,193) (55,474) (402,701) (307,904) (924,272)
------------ ------------ ------------ ------------ ------------
Identifiable assets 5,677,957 1,509,927 27,517,948 4,954,428 39,660,260
Intangible assets 1,937,643 544,533 15,731,270 1,954,521 20,167,967
------------ ------------ ------------ ------------ ------------
Total assets 7,615,600 2,054,460 43,249,218 6,908,949 59,828,227
------------ ------------ ------------ ------------ ------------
Capital expenditures 380,736 90,040 1,341,232 57,881 1,869,889
Depreciation and
amortization $ 289,693 $ 63,190 $ 1,191,077 $ 218,288 $ 1,762,248
------------ ------------ ------------ ------------ ------------
</TABLE>
F-37
<PAGE> 99
INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
9. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1999 Desserts Fresh Frozen Corporate Total
------------- -------- ----- ------ --------- -----
(SIX MONTHS)
<S> <C> <C> <C> <C> <C>
Revenue $ 3,774,969 $ 874,770 $ 8,370,284 $ 12,265 $ 13,032,288
Inter-segment revenue -- -- --
EBITDA 148,951 52,099 288,201 (1,049,278) (848,827)
Interest expense (57,983) (5,264) (187,148) (32,582) (282,977)
------------ ------------ ------------ ------------ ------------
Identifiable assets 3,818,030 603,430 14,240,762 4,504,668 23,166,890
Intangible assets 1,783,235 236,831 8,598,218 732,969 11,351,253
------------ ------------ ------------ ------------ ------------
Total assets 5,601,265 840,261 22,838,980 5,237,637 34,518,143
------------ ------------ ------------ ------------ ------------
Capital expenditures 777,415 109,036 613,664 166,309 1,666,424
Depreciation and
amortization $ 72,571 $ 21,906 $ 519,757 $ 21,658 $ 635,892
------------ ------------ ------------ ------------ ------------
</TABLE>
F-38
<PAGE> 100
<TABLE>
<CAPTION>
INTERNATIONAL MENU SOLUTIONS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
CANADIAN DOLLARS
------------------------------------------------------------------------------------------------------------------------------------
Historical
International Menu Historical Historical
Solutions Tasty Selections Inc. DC Food Processing Huxtable's Foods
Corporation ("IMSC") ("Tasty") Inc. ("DC") L.L.C. ("Huxtables")
Year ended January 1, 1999 to December 6, 1998 to Ten months ended
December 31, 1999 date of acquisition date of acquisition October 31, 1999
(Note) (unaudited) (unaudited) (unaudited)
---------------------- -------------------- -------------------- --------------------
(Note 1 (d))
<S> <C> <C> <C> <C>
REVENUE $ 48,040,000 $ 1,344,000 $ 7,496,000 $ 12,943,000
--------------------------------------------------------------- -------------------- -------------------- --------------------
COSTS AND EXPENSES
Cost of goods sold 38,748,000 1,015,000 6,771,000 9,870,000
Selling expenses 3,680,000 97,000 49,000 1,698,000
Administrative expenses 6,500,000 79,000 143,000 2,397,000
Amortization of intangible assets 806,000 - 2,000 -
--------------------------------------------------------------- -------------------- -------------------- --------------------
49,734,000 1,191,000 6,965,000 13,965,000
--------------------------------------------------------------- -------------------- -------------------- --------------------
INCOME(LOSS) FROM OPERATIONS (1,694,000) 153,000 531,000 (1,022,000)
--------------------------------------------------------------- -------------------- -------------------- --------------------
OTHER INCOME (EXPENSE)
Interest revenue 35,000 - - -
Interest expense (879,000) (34,000) (68,000) (143,000)
--------------------------------------------------------------- -------------------- -------------------- --------------------
(844,000) (34,000) (68,000) (143,000)
--------------------------------------------------------------- -------------------- -------------------- --------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,538,000) 119,000 463,000 (1,165,000)
INCOME TAXES - (33,000) (162,000) -
--------------------------------------------------------------- -------------------- -------------------- --------------------
NET INCOME (LOSS) $ (2,538,000) $ 86,000 $ 301,000 $ (1,165,000)
--------------------------------------------------------------- -------------------- -------------------- --------------------
LOSS PER SHARE-DILUTED AND BASIC $ (0.19)
------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 13,686,558 - - -
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
Pro Forma
IMSC Consolidated
Year ended
Pro Forma December 31, 1999
Adjustments Note (unaudited)
------------------------------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C>
REVENUE $ - $ 69,823,000
------------------------------------------ ------------------- -------------------
COSTS AND EXPENSES
Cost of goods sold - 56,404,000
Selling expenses - 5,524,000
Administrative expenses - 9,119,000
Amortization of intangible assets 23,000 3 ii 1,038,000
79,000 2 (ii); 2 (iv)
30,000 2 (i); 2 (iv)
98,000 2 (iii); 2 (iv)
------------------------------------------ ------------------- -------------------
230,000 72,085,000
------------------------------------------ ------------------- -------------------
INCOME(LOSS) FROM OPERATIONS (230,000) (2,262,000)
------------------------------------------ ------------------- -------------------
OTHER INCOME (EXPENSE)
Interest revenue - 35,000
Interest expense (93,000) 3 ii) (1,217,000)
------------------------------------------ ------------------- -------------------
(93,000) (1,182,000)
------------------------------------------ ------------------- -------------------
INCOME (LOSS) BEFORE INCOME TAXES (323,000) (3,444,000)
INCOME TAXES - (195,000)
------------------------------------------ ------------------- -------------------
NET INCOME (LOSS) $ (323,000) $ (3,639,000)
------------------------------------------ ------------------- -------------------
LOSS PER SHARE-DILUTED AND BASIC $ (0.25)
------------------------------------------ ------------------- -------------------
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 881,448 4 14,568,006
------------------------------------------ ------------------- -------------------
</TABLE>
F-39
<PAGE> 101
FOOTNOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying pro forma consolidated statements of operations for the
year ended December 31, 1999 of International Menu Solutions Corporation
("IMSC") have been prepared to give effect to the business combinations
involving 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
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, 1999;
b) The unaudited financial statements of Tasty for three-month period
ended March 31, 1999;
c) The unaudited consolidated financial statements of D.C. Foods for
the period from December 7, 1998 to April 30, 1999;
d) The unaudited financial statements of Huxtable's for the ten-month
period ended October 31, 1999. The statement of operations for
Huxtable's for the ten-month period ended October 31, 1999 was
originally stated in US dollars. These results have been
translated to Canadian dollars at the average exchange rate
prevailing during the period. The average exchange rate (USD/CAD)
used was 0.6716 for the ten-month period ended October 31, 1999.
Condensed statement of operations and translated values are as
follows:
<TABLE>
<CAPTION>
Historical reported
Item amount Translated amount
-------------------------------------------------------- -------------------------------------------- -------------------
(US Dollars) (Canadian dollars)
(in thousands)
<S> <C> <C>
Income statement:
Ten months ended October 31, 1999
Revenue $ 8,692 $ 12,943
Operating expenses 9,379 13,965
--------------------------------------------------------------------------------------------------------------------
Loss from operations (687) (1,022)
Other income (expense) (96) (143)
--------------------------------------------------------------------------------------------------------------------
Net loss $ (783) $ (1,165)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
The 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> 102
2. PRO FORMA ASSUMPTIONS RELATING TO ACQUISITIONS
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>
Tasty (i) D.C. Foods (ii) Huxtable's (iii)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Original purchase price
Including acquisition costs $ 2,220,000 $ 6,533,000 $ 4,880,000
-------------------------------------------------------------------------------------
Assigned fair values
Of net assets acquired
Current assets 1,383,000 1,857,000 3,072,000
Capital assets 494,000 4,891,000 1,862,000
Current liabilities (677,000) (1,571,000) (1,926,000)
Long-term liabilities (758,000) (2,220,000) (85,000)
---------------------------------------------------------------------------------------------------------------------------
442,000 2,957,000 2,923,000
---------------------------------------------------------------------------------------------------------------------------
Intangible assets acquired (v) $ 1,778,000 $ 3,576,000 $ 1,957,000
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
i) 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
ii) 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.
iii) 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.
F-41
<PAGE> 103
2. PRO FORMA ASSUMPTIONS RELATING TO ACQUISITIONS (CONTINUED)
iv) 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. For the
purposes of the pro forma financial statements and for ease of
presentation, intangible assets as a group are being amortized
over period of 15 years. The weighted average life of all
intangible assets of the Company acquired to-date is approximately
17 years.
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.
For the purposes of the pro forma earnings per share calculation,
this transaction is assumed to have occurred on January 1, 1999
(see Note 4).
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.
For the purposes of calculating pro forma adjustments to interest
expense, this transaction is assumed to occur on January 1, 1999.
F-42
<PAGE> 104
4. PRO FORMA ASSUMPTIONS RELATING TO BASIC LOSS PER SHARE
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------------
<S> <C>
Numerator
Pro forma net loss available to common shareholders $ (3,639,000)
-----------------------------------------------------------------------------
Denominator
Actual weighted average shares outstanding
During the period 13,686,558
Pro forma adjustments:
Effect of shares issued in equity
financing (see Note 3 (i)) (i) 438,356
Effect of shares issued in acquisition
of Tasty (see Note 2 (ii)) (ii) 127,366
Effect of shares issued in acquisition
of D.C. Foods (see Note 2 (iii)) (ii) 315,726
-----------------------------------------------------------------------------
Pro forma weighted average shares outstanding 14,568,006
-----------------------------------------------------------------------------
Pro forma net loss per share (basic) $ (0.25)
-----------------------------------------------------------------------------
</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-43
<PAGE> 105
AUDITORS' REPORT
To the Board of Directors
TRANSCONTINENTAL GOURMET FOODS INC.
We have audited the balance sheet of TRANSCONTINENTAL GOURMET FOODS INC. as at
February 28, 1998 and 1997 and the statements of retained earnings, income and
cash flow for the periods then ended. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at February 28, 1998 and 1997
and the results of its operations and the cash flow for the periods then ended
in accordance with generally accepted accounting principles.
/s/ KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
April 27, 1998, except for Note 16
which is as of December 22, 1998
F-44
<PAGE> 106
TRANSCONTINENTAL GOURMET FOODS INC.
BALANCE SHEET
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
ASSETS
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
CURRENT
Cash $ - $ 17,204 $ 73,910
Accounts receivable 1,116,265 213,438 196,835
Inventory (Note 2) 1,291,125 676,162 525,811
Sundry assets 20,922 43,437 27,653
Loans receivable from related companies 36,835 - -
Income taxes recoverable - - 943
--------- --------- ---------
2,465,147 950,241 825,152
FIXED, net (Notes 3, 5, 6 and 7) 1,370,266 1,116,155 877,232
DEFERRED PRODUCT DEVELOPMENT COSTS - 3,962 9,131
INVESTMENT TAX CREDITS RECOVERABLE - - 13,585
--------- --------- ---------
$ 3,835,413 $ 2,070,358 $ 1,725,100
========= ========= =========
LIABILITIES
CURRENT
Bank indebtedness (Note 5) $ 876,522 $ - $ -
Accounts payable and accrued liabilities 864,956 298,061 231,187
Long-term debt (Note 6) 192,000 132,000 193,793
Capital lease obligations (Note 7) 26,927 39,160 41,750
Due to shareholders 83,176 71,731 38,700
Income taxes payable 70,460 41,133 -
--------- --------- ---------
2,114,041 582,085 505,430
LONG-TERM DEBT (Note 6) 594,500 396,000 202,873
CAPITAL LEASE OBLIGATIONS (Note 7) 52,014 28,508 67,668
DEFERRED GOVERNMENT GRANT - 21,717 27,117
CONVERTIBLE DEBENTURES - - 531,000
DEFERRED INCOME TAXES 93,000 41,030 36,030
--------- --------- ---------
$ 2,853,555 $ 1,069,340 $ 1,370,118
--------- --------- ---------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 9) 475,100 540,100 80,400
RETAINED EARNINGS 506,758 460,918 274,582
--------- --------- ---------
981,858 1,001,018 354,982
--------- --------- ---------
$ 3,835,413 $ 2,070,358 $ 1,725,100
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 107
TRANSCONTINENTAL GOURMET FOODS INC.
STATEMENT OF RETAINED EARNINGS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
(Unaudited)
(Note 13) (Note 13)
<S> <C> <C> <C>
RETAINED EARNINGS, beginning of period $ 460,918 $ 274,582 $ 136,624
Net earnings for the period 57,317 197,636 141,579
--------- --------- ---------
518,235 472,218 278,203
Dividends paid ( 11,477) ( 11,300) ( 3,621)
--------- --------- ---------
RETAINED EARNINGS, end of period $ 506,758 $ 460,918 $ 274,582
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 108
TRANSCONTINENTAL GOURMET FOODS INC.
STATEMENT OF INCOME
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
(Unaudited)
(Note 13) (Note 13)
<S> <C> <C> <C>
SALES $ 3,842,487 $ 5,206,031 $ 3,830,176
--------- --------- ---------
COST OF SALES
Inventory, beginning of period 676,162 525,811 591,650
Direct labour 809,298 1,047,998 623,335
Purchases 1,509,137 1,734,815 1,357,913
Delivery 274,170 289,234 164,075
--------- --------- ---------
3,268,767 3,597,858 2,736,973
Less: Inventory, end of period 1,291,125 676,162 525,811
--------- --------- ---------
1,977,642 2,921,696 2,211,162
--------- --------- ---------
GROSS PROFIT 1,864,845 2,284,335 1,619,014
PRODUCTION EXPENSES 304,668 328,828 253,387
ADMINISTRATIVE EXPENSES 1,082,767 1,345,531 873,495
--------- --------- ---------
EARNINGS BEFORE THE FOLLOWING 477,410 609,976 492,132
Interest 100,321 85,241 103,883
Depreciation and amortization 238,475 247,871 204,270
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES 138,614 276,864 183,979
--------- --------- ---------
Income taxes - current 29,327 74,228 39,200
- deferred 51,970 5,000 3,200
--------- --------- ---------
81,297 79,228 42,400
--------- --------- ---------
NET EARNINGS FOR THE PERIOD $ 57,317 $ 197,636 $ 141,579
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 109
TRANSCONTINENTAL GOURMET FOODS INC.
STATEMENT OF CASH FLOW
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
(Unaudited)
(Note 13) (Note 13)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings for the period $ 57,317 $ 197,636 $ 141,579
Amortization 238,475 247,871 204,270
Deferred income taxes 51,970 5,000 3,200
Change in non-cash working capital balances related to operations
Accounts receivable (902,827) ( 16,603) ( 49,718)
Inventory (614,963) (150,351) 65,839
Sundry assets 22,515 ( 15,784) 60,727
Accounts payable and accrued liabilities 566,895 66,874 ( 36,680)
Income taxes payable 29,327 42,076 33,170
-------- -------- --------
(551,291) 376,719 422,387
-------- -------- --------
FINANCING ACTIVITIES
Due to shareholders 11,445 71,731 53,151
Dividends paid ( 11,477) ( 11,300) ( 3,621)
Capital lease obligations 11,273 ( 41,750) ( 43,572)
Long-term debt 258,500 131,334 (121,751)
Redemption of share capital ( 65,000) ( 10,000) -
Share capital issued - - 50,000
Deferred government grant ( 21,717) ( 5,400) ( 6,780)
Investment tax credits recoverable - 13,585 22,737
Convertible debentures - (100,000) -
Loans receivable from related companies ( 36,835) - -
-------- -------- --------
146,189 48,200 ( 49,836)
-------- -------- --------
INVESTING ACTIVITY
Purchase of fixed assets (488,624) (481,625) (167,250)
-------- -------- --------
CHANGE IN CASH AND BANK INDEBTEDNESS (893,726) ( 56,706) 205,301
CASH AND BANK INDEBTEDNESS, beginning of period 17,204 73,910 (131,391)
-------- -------- --------
CASH AND BANK INDEBTEDNESS, end of period $ (876,522) $ 17,204 $ 73,910
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 110
TRANSCONTINENTAL GOURMET FOODS INC.
NOTES TO FINANCIAL STATEMENTS
IN ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(FIGURES AS AT NOVEMBER 30, 1998 AND FOR THE NINE MONTH PERIOD ENDED
NOVEMBER 30, 1998 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) INVENTORY
Inventory is valued at the lower of cost and net realizable
value.
(b) FIXED ASSETS
Fixed assets are recorded at cost. Amortization is being
provided to charge operations with the cost of assets over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Machinery and equipment - 20% per annum, declining balance basis
Artworks, moulds and dies - 20% per annum, declining balance basis
Vehicles - 30% per annum, declining balance basis
Computer - 30% per annum, declining balance basis
Office equipment - 20% per annum, declining balance basis
Leasehold improvements - over term of lease, straight-line basis
</TABLE>
A half year's amortization is taken in the year of acquisition.
Artwork, moulds and dies represent amounts paid to third parties
for packaging design and print set-up.
(c) ASSETS UNDER CAPITAL LEASES
Assets under capital leases are initially recorded at the cost
to otherwise purchase the asset. Amortization is provided to
charge operations with the cost of the assets over their
estimated useful lives on the declining balance basis at the
following annual rates.
Machinery and equipment - 20%
Vehicles - 30%
(d) DEFERRED PRODUCT DEVELOPMENT COSTS
Deferred product development costs are recorded at cost and
amortized on a straight-line basis over five years.
(e) DEFERRED GOVERNMENT GRANT
The deferred government grant is being amortized on a declining
balance at 20% per annum.
F-49
<PAGE> 111
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) FOREIGN CURRENCY TRANSLATIONS
Assets, liabilities, revenues and expenses arising from foreign
currency transactions are translated into Canadian dollars at
the exchange rate in effect on the date of the transactions.
Monetary items denominated in a foreign currency (such as
accounts payable) are adjusted to reflect the exchange rate in
effect at the balance sheet date.
Any exchange gain or loss that arises from translation or
settlement of a foreign currency denominated monetary item is
included in the determination of net loss for the year.
(g) REVENUE RECOGNITION
Revenue is recognized at the time product is shipped to the
customer.
(h) INCOME TAXES
Income taxes are provided for on the allocation basis and
include provision for all income taxes currently payable as well
as those which have been deferred to future years. The deferred
tax balance arises from amortization being claimed for income
tax purposes in amounts differing from those recorded in the
accounts.
(i) ESTIMATES
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reported
period. These estimates are reviewed periodically, and, as
adjustments become necessary, they are reported in earnings in
the period in which they become known.
(j) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements reflect 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 presented.
2. INVENTORY
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Raw materials $ 234,895 $ 209,056 $ 249,582
Work-in-process 117,660 151,532 111,843
Finished goods 938,570 315,574 164,386
--------- --------- ---------
$ 1,291,125 $ 676,162 $ 525,811
========= ========= =========
</TABLE>
F-50
<PAGE> 112
3. FIXED ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, 1998
------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
---- ------------ ---
<S> <C> <C> <C>
Machinery and equipment $ 2,146,069 $ 1,100,353 $ 1,045,716
Artwork, moulds and dies 311,478 145,024 166,454
Vehicles 68,017 59,858 8,159
Computer hardware 60,682 39,804 20,878
Office equipment 26,984 13,361 13,623
Leasehold improvements 80,569 62,233 18,336
--------- --------- ---------
2,693,799 1,420,633 1,273,166
--------- --------- ---------
Assets under capital lease
Machinery and equipment 127,581 52,148 75,433
Vehicles 113,987 92,320 21,667
--------- --------- ---------
241,568 144,468 97,100
--------- --------- ---------
$ 2,935,367 $ 1,565,101 $ 1,370,266
========= ========= =========
<CAPTION>
FEBRUARY 28, 1998
------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
---- ------------ ---
<S> <C> <C> <C>
Machinery and equipment $ 1,729,969 $ 940,290 $ 789,679
Artwork, moulds and dies 304,307 116,072 188,235
Vehicles 68,017 57,489 10,528
Computer hardware 49,081 34,866 14,215
Office equipment 23,082 11,187 11,895
Leasehold improvements 80,569 42,885 37,684
--------- --------- ---------
2,255,025 1,202,789 1,052,236
--------- --------- ---------
Assets under capital lease
Machinery and equipment 77,731 41,769 35,962
Vehicles 113,987 86,030 27,957
--------- --------- ---------
191,718 127,799 63,919
--------- --------- ---------
$ 2,446,743 $ 1,330,588 $ 1,116,155
========= ========= =========
</TABLE>
F-51
<PAGE> 113
3. FIXED ASSETS (Continued)
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
---- ------------ ---
<S> <C> <C> <C>
Machinery and equipment $ 1,379,670 $ 786,657 $ 593,013
Artwork, moulds and dies 225,703 78,839 146,864
Vehicles 68,017 52,977 15,040
Computer hardware 39,054 29,370 9,684
Office equipment 18,961 8,728 10,233
Leasehold improvements 41,995 24,488 17,507
--------- --------- ---------
1,773,400 981,059 792,341
--------- --------- ---------
Assets under capital lease
Machinery and equipment 77,731 32,779 44,952
Vehicles 113,988 74,049 39,939
--------- --------- ---------
191,719 106,828 84,891
--------- --------- ---------
$ 1,965,119 $ 1,087,887 $ 877,232
========= ========= =========
</TABLE>
Amortization of assets under capital lease during the period amounted to
$16,670 (February 28, 1998 - $20,971; February 28, 1997 - $34,824).
4. DEFERRED PRODUCT DEVELOPMENT COSTS
Deferred product development costs consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Product development costs $ 48,345 $ 48,345 $ 48,345
Less: Accumulated amortization 48,345 44,383 39,214
-------- -------- --------
$ - $ 3,962 $ 9,131
======== ======== ========
</TABLE>
5. BANK INDEBTEDNESS
The demand bank loan bears interest at 8.25% per annum and is secured by
a general assignment of book debts, inventory and defined values of
certain fixed assets financed separately under long-term debt (Note 6)
and capital lease obligations (Note 7).
F-52
<PAGE> 114
6. LONG-TERM DEBT
The long-term debt is a five year business loan bearing interest at
prime plus 3/4% per annum, payable monthly. As collateral, the Company
has provided a general assignment of accounts receivable, a general
security agreement over all assets, assigned life insurance, assigned
fire insurance over inventory and equipment and a first charge over
certain equipment. The aggregate payments in each of the four succeeding
years are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
February 28, 1998 $ - $ - $ 193,793
February 28, 1999 - 132,000 165,390
November 30, 1999 192,000 - -
February 28, 2000 - 132,000 37,483
November 30, 2000 202,000 - -
February 28, 2001 - 132,000 -
November 30, 2001 212,000 - -
February 28, 2002 - 132,000 -
November 30, 2002 180,500 - -
-------- -------- --------
786,500 528,000 396,666
Less: Current portion 192,000 132,000 193,793
-------- -------- --------
$ 594,500 $ 396,000 $ 202,873
======== ======== ========
</TABLE>
Interest expense on long-term debt was $87,479 (February 28, 1998 -
$85,241; February 28, 1997 - $34,449).
7. CAPITAL LEASE OBLIGATIONS
The Company has the following obligations under capital leases.
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
February 28, 1998 $ - $ - $ 52,976
February 28, 1999 - 42,655 45,076
November 30, 1999 34,861 - -
February 28, 2000 - 17,851 17,192
November 30, 2000 30,353 - -
February 28, 2001 - 16,514 14,752
November 30, 2001 11,961 - -
November 30, 2002 11,961 - -
November 30, 2003 6,978 - -
-------- -------- --------
96,114 77,020 129,996
Less: Interest 17,173 9,352 20,578
Current portion 26,927 39,160 41,750
-------- -------- --------
$ 52,014 $ 28,508 $ 67,668
======== ======== ========
</TABLE>
F-53
<PAGE> 115
8. DEFERRED GOVERNMENT GRANT
During 1994, the Company received approximately $59,000 of government
assistance pursuant to an agreement dated June 24, 1993 with the Ontario
Ministry of Agriculture and Food ("Ministry") to assist in the financing
and purchase of certain production equipment. Under the terms of the
Company's agreement with the Ministry, the Company is required to meet
certain requirements and conditions, including maintaining its plant
location in Ontario. If there is a breach of these conditions, part or
all of the assistance may be repayable.
9. CAPITAL STOCK
Share capital consists of the following.
AUTHORIZED
Unlimited CLASS "A" SPECIAL SHARES, non-participating,
non-voting unless dividends in default for 1 year,
dividends at the Bank of Canada's prime rate plus
2% payable quarterly, redeemable and retractable
at amount paid up thereon
Unlimited COMMON SHARES
<TABLE>
<CAPTION>
COMMON SHARES CLASS "A" SPECIAL SHARES
-------------------------- --------------------------------------
TOTAL
NUMBER BOOK NUMBER BOOK BOOK
OF SHARES VALUE OF SHARES VALUE VALUE
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1996 $ 9,000 $ 5,400 $ 250 $ 25,000 $ 30,400
Issued - - 500 50,000 50,000
-------- -------- -------- -------- --------
Balance, February 28, 1997 9,000 5,400 750 75,000 80,400
Issued (see (i) below) 3,858 350,000 1,197 119,700 469,700
Redemption - - ( 100) ( 10,000) ( 10,000)
-------- -------- -------- -------- --------
Balance, February 28, 1998 12,858 355,400 1,847 184,700 540,100
Redemption - - ( 650) ( 65,000) ( 65,000)
-------- -------- -------- -------- --------
Balance, November 30, 1998 $ 12,858 $ 355,400 $ 1,197 $ 119,700 $ 475,100
======== ======== ======== ======== ========
</TABLE>
(i) Pursuant to a refinancing agreement which closed March 31, 1997,
the Company's capital stock increased on the following basis.
<TABLE>
<S> <C>
Issue of common shares $ 350,000
Conversion of debentures to Class "A" special shares 81,000
Conversion of shareholder loans to Class "A" special shares 38,700
----------
Increase in share capital March 31, 1998 $ 469,700
==========
</TABLE>
Subsequent to November 30, 1998, the Company redeemed the remaining
Class "A" special shares at $100 per share.
F-54
<PAGE> 116
10. RELATED PARTY TRANSACTIONS
The Company had the following transactions with related parties.
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
----------- --------- --------
<S> <C> <C> <C>
Interest expense on shareholder loans $ 11,000 $ - $ -
Consulting fees paid to shareholders 122,667 158,581 60,992
Allocated administrative cost 130,000 - -
</TABLE>
11. LEASE COMMITMENTS
The Company is committed to a rental for its premises of approximately
$104,044 under agreements expiring in December 1999 as follows.
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
February 28, 1998 $ - $ - $ 87,435
February 28, 1999 - 92,426 92,426
November 30, 1999 96,041 - -
February 28, 2000 - 80,035 80,035
November 30, 2000 8,003 - -
-------- -------- --------
$ 104,044 $ 172,461 $ 259,896
======== ======== ========
</TABLE>
12. ECONOMIC DEPENDENCE
Approximately 32% (February 28, 1998 - 40%; 1997 - 40%) of sales during
the period are to several regional divisions of one customer. Sales are
negotiated separately with each regional division.
13. COMPARATIVE FIGURES
The comparative figures are for the nine month period ended November 30,
1998 and eleven month period ended February 28, 1997.
14. FINANCIAL INSTRUMENTS
CREDIT RISK
The company is exposed to credit risk on the accounts receivable from
its customers. In order to reduce credit risk, the company reviews the
account and monitors credit worthiness on a regular basis.
F-55
<PAGE> 117
14. FINANCIAL INSTRUMENTS (Continued)
FAIR VALUES OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The carrying amounts of accounts receivable, deposit on equipment, loans
to related companies and accounts payable approximate their fair value
because of the short-term maturities of these items.
The carrying amounts of bank indebtedness, long-term debt and capital
lease obligations approximate fair value because they bear interest
reasonably close to the market rate.
15. UNITED STATES ACCOUNTING PRINCIPLES
The following table reconciles the net income as reported on the
statement of earnings prepared in accordance with Canadian GAAP to the
net income that would have been reported had the financial statements
been prepared in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income in accordance with Canadian GAAP $ 88,042 $ 197,636 $ 141,579
Deferred product developments costs 3,057 3,988 ( 7,045)
--------- --------- ---------
Net income in accordance with U.S. GAAP $ 91,099 $ 201,624 $ 134,534
========= ========= =========
Total assets $ 3,885,413 $ 2,066,396 $ 1,715,969
========= ========= =========
Retained earnings $ 537,483 $ 457,861 $ 267,537
========= ========= =========
</TABLE>
(a) STATEMENT OF CASH FLOW
Under Canadian GAAP, bank indebtedness forms a part of cash
equivalents. Under U.S. GAAP, changes in bank indebtedness
represent financing activities. Changes in bank indebtedness
amounted to $932,583 (February 28, 1998 - nil; February 28, 1997
- $(138,053))
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash provided by (used in) operating activities $ ( 501,291) $ 376,719 $ 422,387
Cash provided (used in) by financing activities 1,028,772 48,200 ( 187,889)
Cash used in investing activities ( 488,624 ( 481,625) ( 167,250)
--------- --------- ---------
Change in cash 38,857 ( 56,706) 67,248
Cash, beginning of year 17,204 73,910 6,662
--------- --------- ---------
CASH, END OF YEAR - U.S. GAAP $ 56,061 $ 17,204 $ 73,910
========= ========= =========
</TABLE>
F-56
<PAGE> 118
15. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(b) ADDITIONAL DISCLOSURES AS REQUIRED IN ACCORDANCE WITH U.S. GAAP
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts $ 18,500 $ - $ -
======== ======== ========
</TABLE>
(c) SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income taxes paid $ - $ 32,564 $ 22,326
======== ======== ========
Interest paid $ 100,321 $ 85,241 $ 103,883
======== ======== ========
</TABLE>
(d) Financial Accounting Standards No. 109, "Accounting for Income
Taxes" requires the use of an asset and liability approach for
financial accounting and reporting for income taxes. There would
be no cumulative effect from the adoption of the statement, nor
would the results of operations be different than those reported
under Canadian GAAP.
The following is a summary of the components of the deferred tax
liability amount calculated in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
NOVEMBER 30 FEBRUARY 28
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Tax depreciation in excess of accounting depreciation $ 51,970 $ 5,000 $ 3,200
========= ========= =========
</TABLE>
16. SUBSEQUENT EVENT
On December 1, 1998, all of the Company's common shares were acquired by
a public corporation.
17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000, and,
if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
F-57
<PAGE> 119
AUDITORS' REPORT
To the Shareholders of
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS; THE PREDECESSOR COMPANY TO TASTY SELECTIONS INC.)
We have audited the balance sheet of 1188980 ONTARIO LTD. (OPERATING AS TASTY
BATTERS) as at June 30, 1998 and the statements of income and retained earnings
and cash flows for each of the two fiscal years in the period ended June 30,
1998. These financial statements are the responsibility of management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at June 30, 1998 and the
results of its operations and its cash flow for each of the two fiscal years in
the period ended June 30, 1998 in accordance with generally accepted accounting
principles.
/s/ KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
September 1, 1998, except for Note 11
which is as of May 21, 1999
F-58
<PAGE> 120
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
1999 1998
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT
Cash (Note 2) $ 241,920 $ 293,575
Accounts receivable 602,018 501,722
Inventory 459,771 334,684
Prepaid expense and deposits 105,834 56,494
---------- ----------
1,409,543 1,186,475
CAPITAL (Note 3) 493,877 528,046
---------- ----------
$1,903,420 $1,714,521
========== ==========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 437,015 $ 492,655
Roynat loan (Note 4) 60,000 60,000
Small business loan (Note 5) 50,000 50,000
Income taxes payable 80,031 33,275
Roynat subordinated debenture (Note 7) 50,150 --
Advances from shareholders 200,000 --
---------- ----------
877,196 635,930
ROYNAT LOAN (Note 4) 90,000 135,000
SMALL BUSINESS LOAN (Note 5) 95,833 133,333
ROYNAT SUBORDINATED DEBENTURE (Note 7) 306,299 358,628
ADVANCES FROM SHAREHOLDERS (Note 6) -- 200,000
DEFERRED INCOME TAXES 65,400 33,747
---------- ----------
1,434,728 1,496,638
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 8) 100 100
RETAINED EARNINGS 468,592 217,783
---------- ----------
468,692 217,883
---------- ----------
$1,903,420 $1,714,521
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 121
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
1999 1998 1997
--------- --------- ---------
(Unaudited) (Note 12)
(Note 12)
<S> <C> <C> <C>
GROSS SALES $ 4,701,079 $ 5,656,431 $ 4,217,277
Discounts allowed (52,751) (84,890) (46,283)
Rebates and allowances (180,145) (243,289) (177,371)
--------- --------- ---------
NET SALES 4,468,183 5,328,252 3,993,623
COST OF GOODS SOLD 3,364,922 4,118,396 3,191,796
--------- --------- ---------
GROSS PROFIT 1,103,261 1,209,856 801,827
--------- --------- ---------
EXPENSES
Selling 320,712 373,893 304,234
Administrative 292,717 444,742 427,236
Financial 101,995 115,366 61,407
--------- --------- ---------
715,424 934,001 792,877
--------- --------- ---------
INCOME BEFORE INCOME TAXES 387,837 275,855 8,950
--------- --------- ---------
Income taxes - current 105,375 43,283 --
- deferred 31,653 31,689 2,058
Utilization of loss carry-forward -- (10,008) --
--------- --------- ---------
137,028 64,964 2,058
--------- --------- ---------
NET INCOME FOR THE YEAR 250,809 210,891 6,892
RETAINED EARNINGS, beginning of year 217,783 6,892 --
--------- --------- ---------
RETAINED EARNINGS, end of year $ 468,592 $ 217,783 $ 6,892
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE> 122
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEARS ENDED JUNE 30,
1999 1998 1997
------------ ----------- -----------
(Unaudited) (Note 12)
(Note 12)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income for the year $ 250,809 $ 210,891 $ 6,892
Deferred income taxes 31,653 31,689 2,058
Amortization 47,717 61,486 30,126
------------ ----------- -----------
330,179 304,066 39,076
------------ ----------- -----------
Change in non-cash components of working capital
Increase in accounts receivable (100,296) (147,241) (354,481)
(Increase) decrease in inventory (125,087) 50,483 (385,167)
Increase in prepaid expenses and deposits (49,340) (4,103) (52,391)
Increase (decrease) in accounts payable and accrued liabilities (55,640) 169,356 323,299
Increase in income taxes payable 46,756 33,275 --
------------ ----------- -----------
46,572 405,836 (429,664)
------------ ----------- -----------
FINANCING ACTIVITIES
Proceeds from (payment of) Roynat loan (net) (45,000) (60,000) 255,000
Proceeds from (payment of) small business loan (net) (37,500) (50,000) 233,333
Proceeds from (payment of) Roynat subordinated debentures (2,179) (41,372) 400,000
Advance from shareholders -- -- 200,000
Bank loan -- (10,000) 10,000
Issuance of capital stock -- -- 100
------------ ----------- -----------
(84,679) (161,372) 1,098,433
------------ ----------- -----------
INVESTING ACTIVITY
Purchase of capital assets (13,548) (24,680) (594,978)
------------ ----------- -----------
CHANGE IN CASH (51,655) 219,784 73,791
CASH, beginning of year 293,575 73,791 --
------------ ----------- -----------
CASH, end of year $ 241,920 $ 293,575 $ 73,791
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE> 123
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
NOTES TO FINANCIAL STATEMENTS
(FIGURES AS AT MARCH 31, 1999 AND THE NINE MONTH PERIOD THEN ENDED
ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) INVENTORIES
Raw materials are valued at the lower of cost and replacement cost.
Finished goods are valued at the lower of cost and net realizable
value. Cost is determined on a first in, first out basis.
(b) CAPITAL ASSETS
Capital assets are stated at cost. Amortization is being provided for
as follows:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment - over 10 years, straight-line basis
Leasehold improvements - over the life of the lease, straight-line basis
Computer equipment - over 5 years, straight-line basis
Office furniture and equipment - over 10 years, straight-line basis
</TABLE>
(c) REVENUE RECOGNITION
Revenue is recognized at the time product is shipped to the
customer.
(d) 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 at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(e) UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements reflect 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 presented.
2. CASH
Cash is comprised of the following.
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
<S> <C> <C>
Cash and money market fund $ 368,976 $ 304,701
Outstanding cheques (127,056) (11,126)
--------- ---------
$ 241,920 $ 293,575
========= =========
</TABLE>
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
---------------------------------------- ----
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
<S> <C> <C> <C> <C>
Machinery and equipment $586,311 $129,004 $457,307 $498,801
Leasehold improvements 23,602 4,253 19,349 10,666
Computer equipment 4,260 1,917 2,343 2,982
Office furniture and equipment 19,033 4,155 14,878 15,597
-------- -------- -------- --------
$633,206 $139,329 $493,877 $528,046
======== ======== ======== ========
</TABLE>
F-62
<PAGE> 124
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
NOTES TO FINANCIAL STATEMENTS
(FIGURES AS AT MARCH 31, 1999 AND THE NINE MONTH PERIOD THEN ENDED
ARE UNAUDITED)
4. ROYNAT LOAN
The loan bears interest at Roynat's floating base rate plus 3.5% per annum,
repayable in monthly payments of $5,000 and is secured by a first charge on
all fixed assets, subject to a prior fixed charge of $250,000 in favour of
the bank (Note 5) on all equipment, except that which was purchased
specifically with Roynat financing, a first floating charge on all other
assets including all trademarks, patents and intellectual property.
The loan is to be repaid as follows.
<TABLE>
<CAPTION>
March 31,
1999
<S> <C>
2000 $ 60,000
2001 60,000
2002 30,000
--------
150,000
Less: Current portion 60,000
--------
$ 90,000
========
</TABLE>
5. SMALL BUSINESS LOAN
The small business loan bears interest at prime plus 3% per annum,
repayable monthly in equal payments of $4,166.67 plus interest and is
secured by a $250,000 chattel first mortgage on equipment.
The loan is repayable over the next five years as follows.
<TABLE>
<CAPTION>
March 31,
1999
<S> <C>
2000 $ 50,000
2001 50,000
2002 45,833
--------
145,833
Less: Current portion 50,000
--------
$ 95,833
========
</TABLE>
6. ADVANCES FROM SHAREHOLDERS
These advances bear interest at Roynat's base rate plus 3.5% per annum with no
specific terms of repayment and are secured by a general security agreement over
all assets of the company. The loans have been postponed in favour of the
company's bankers and Roynat Inc.. Subsequent to March 31, 1999, the loans were
repaid.
F-63
<PAGE> 125
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
NOTES TO FINANCIAL STATEMENTS
(FIGURES AS AT MARCH 31, 1999 AND THE NINE MONTH
PERIOD THEN ENDED ARE UNAUDITED)
7. ROYNAT'S SUBORDINATED DEBENTURE
The debenture bears interest at Roynat's base rate plus 3.5% per annum,
has been postponed to the bank and is secured by the same terms as the
Roynat loan (Note 4). The principal amount of the loan is repaid
annually, calculated as 20% of net after tax profit with a balloon
payment on August 1, 2001.
8. CAPITAL STOCK
AUTHORIZED
1,000,000 Class "A" special shares, non-voting, fully participating
redeemable
1,000,000 Class "B" special shares, non-voting, 100%,
non-cumulative, redeemable
1,000,000 Common shares
ISSUED
10 Class "A" special shares $ 10
90 Common shares 90
----
$100
====
9. CONTRACT AND COMMITMENTS
The company has a lease for its operating premises which expires
December 31, 1999. The remaining minimum lease payment amounts to
$68,828.
10. FINANCIAL INSTRUMENTS
The company uses the following methods and assumptions to estimate the
fair value of each class of financial instruments.
(a) Cash, accounts receivable and all current liabilities - the
carrying amounts approximate fair value because of the short
maturity of those instruments.
(b) Long-term portion of Roynat loan, advances from shareholders,
small business loan, subordinated debenture - the carrying
amounts approximate fair value because the interest rate is
floating with prime.
11. UNITED STATES ACCOUNTING PRINCIPLES
The company prepares its financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP")
which generally conform to generally accepted accounting principles in
the United States ("U.S. GAAP"), except for the following.
F-64
<PAGE> 126
1188980 ONTARIO LTD.
(OPERATING AS TASTY BATTERS;
PREDECESSOR TO TASTY SELECTIONS INC.)
NOTES TO FINANCIAL STATEMENTS
(FIGURES AS AT MARCH 31, 1999 AND THE NINE MONTH
PERIOD THEN ENDED ARE UNAUDITED)
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(a) ADDITIONAL DISCLOSURES AS REQUIRED IN ACCORDANCE WITH U.S.
GAAP
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Allowance for doubtful accounts $ 4,000 $ 12,038 $18,000
======== ======== =======
</TABLE>
(b) SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Income taxes paid $ 58,619 $ -- $ --
======== ======== =======
Interest paid $ 76,283 $117,763 $79,057
======== ======== =======
</TABLE>
(c) Under U.S. GAAP, Financial Accounting Standards No. 109
"Accounting for Income Taxes" requires the use of an asset and
liability approach for financial accounting and reporting for
income taxes. There would be no cumulative effect from the
adoption of the statements, nor would the results of
operations be different than those reported under Canadian
GAAP.
The following is a summary of the components of the deferred tax
liability amount calculated in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Tax depreciation in excess of accounting depreciation $65,400 $33,747 $55,383
======== ======= =======
</TABLE>
12. FINANCIAL STATEMENTS
The 1999 figures are for the nine months ended March 31, 1999 and the
1997 figures are for the period from the date of incorporation, July 8,
1996 to June 30, 1997.
13. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000,
and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
F-65
<PAGE> 127
Report of Independent Auditors
Board of Directors
1005549 Ontario Limited
We have audited the consolidated balance sheets of 1005549 Ontario Limited as
at December 6, 1998 and December 7, 1997 and the consolidated statements of
earnings, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of 1005549 Ontario Limited as at
December 6, 1998 and December 7, 1997 and the results of its operations and
their cash flows for the years then ended in accordance with generally accepted
accounting principles in Canada.
Generally accepted accounting principles in Canada vary in certain significant
respects from generally accepted accounting principles in the United States.
Application of generally accepted accounting principles in the United States
would have affected results of operations for the years ended December 6, 1998
and December 7, 1997 and stockholders' equity as at December 6, 1998 and
December 7, 1997 to the extent summarized in note 15 to the consolidated
financial statements.
/s/ KPMG LLP
Chartered Accountants
Waterloo, Canada
May 10, 1999
F-66
<PAGE> 128
1005549 ONTARIO LIMITED
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Amounts expressed in Canadian Dollars)
=======================================================================================================================
December 6, December 7,
1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 91,228 $ 116,981
Accounts receivable (note 2) 1,407,918 1,094,734
Inventories (note 3) 405,070 331,047
Income taxes recoverable - 84,316
Prepaid expenses - 7,222
Due from shareholders - 18,968
-----------------------------------------------------------------------------------------------------------------
1,904,216 1,653,268
Capital assets (note 4) 3,116,255 2,820,047
Goodwill (note 5) 142,735 149,460
-----------------------------------------------------------------------------------------------------------------------
$ 5,163,206 $ 4,622,775
=======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Bank indebtedness (note 6) $ 259,490 $ -
Accounts payable 837,626 938,851
Accrued liabilities 105,708 598,083
Income taxes payable 215,665 -
Due to shareholders 104,742 -
Current portion of long-term debt (note 7) 77,437 225,315
Current portion of obligations under capital lease (note 8) 222,823 172,792
-----------------------------------------------------------------------------------------------------------------
1,823,491 1,935,041
Long-term debt (note 7) 682,957 759,473
Capital lease obligations (note 8) 708,634 611,069
Redeemable shares (note 9) 810,000 543,350
Deferred income taxes 87,000 61,560
Stockholders' equity:
Share capital (note 11) 20 20
Contributed surplus 47,267 47,267
Retained earnings 1,003,837 664,995
-----------------------------------------------------------------------------------------------------------------
1,051,124 712,282
-----------------------------------------------------------------------------------------------------------------------
$ 5,163,206 $ 4,622,775
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE> 129
1005549 ONTARIO LIMITED
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
(Amounts expressed in Canadian Dollars)
====================================================================================================================
December 6, December 7,
1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 17,579,530 $ 12,154,824
Cost of revenue 15,306,944 10,186,249
--------------------------------------------------------------------------------------------------------------------
Gross profit 2,272,586 1,968,575
Operating expenses:
Automotive 36,680 30,534
Bad debts 42,250 (6,198)
Bank charges 6,078 4,315
Business and realty taxes 14,830 41,356
Equipment rental 24,093 -
Insurance 33,898 28,605
Management wages 64,032 518,930
Office and general 31,105 30,726
Office wages 82,172 63,153
Professional fees and dues 47,248 56,687
Profit sharing 63,249 60,631
Repairs and maintenance 320,718 309,202
Telephone 9,987 10,534
Travel and entertainment 20,694 23,951
Gain on disposal of capital assets (34,385) -
Amortization 439,175 362,915
Utilities 56,254 63,426
Interest on long-term debt 116,606 131,753
Other (income) expense 2,970 (5,352)
--------------------------------------------------------------------------------------------------------------
1,377,654 1,725,168
--------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 894,932 243,407
Income taxes: (note 10)
Current 264,000 39,300
Deferred 25,440 16,320
--------------------------------------------------------------------------------------------------------------
289,440 55,620
--------------------------------------------------------------------------------------------------------------------
Net earnings $ 605,492 $ 187,787
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE> 130
1005549 ONTARIO LIMITED
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
(Amounts expressed in Canadian Dollars)
============================================================================================================================
Share Contributed Retained
capital surplus earnings Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, at December 31, 1996 $ 20 $ 47,267 $ 481,208 $ 528,495
Net earnings - - 187,787 187,787
Dividends - - (4,000) (4,000)
----------------------------------------------------------------------------------------------------------------------------
Balances, at December 7, 1997 20 47,267 664,995 712,282
Net earnings - - 605,492 605,492
Redemption premium on
redeemable shares (note 9) - - (266,650) (266,650)
----------------------------------------------------------------------------------------------------------------------------
Balances, at December 6, 1998 $ 20 $ 47,267 $ 1,003,837 $ 1,051,124
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-69
<PAGE> 131
1005549 ONTARIO LIMITED
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Amounts expressed in Canadian Dollars)
=======================================================================================================================
December 6, December 7,
1998 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 605,492 $ 187,787
Items not involving cash:
Amortization 439,175 362,915
Deferred income taxes 25,440 16,320
Gain on disposal of capital assets (34,385) -
Changes in operating assets and liabilities:
Accounts receivable (313,184) 29,770
Inventories (74,023) (7,426)
Income taxes 299,981 (174,550)
Prepaid expenses 7,222 239
Due from shareholders 18,968 (14,981)
Accounts payable (101,225) (162,218)
Accrued liabilities (492,375) 297,972
Due to shareholders 104,742 -
-----------------------------------------------------------------------------------------------------------------------
485,828 535,828
Cash flows from investing activities:
Purchase of capital assets (789,273) (929,248)
Proceeds on disposal of capital assets 95,000 -
-----------------------------------------------------------------------------------------------------------------
(694,273) (929,248)
Cash flows from financing activities:
Net advance (repayment) of bank indebtedness 259,490 -
Payments on long-term debt (224,394) (74,175)
Borrowings on capital lease obligations 333,025 681,661
Payments on capital lease obligations (185,429) (261,978)
Dividends - (4,000)
-----------------------------------------------------------------------------------------------------------------
182,692 341,508
-----------------------------------------------------------------------------------------------------------------------
Decrease in cash (25,753) (51,912)
Cash and cash equivalents, beginning of year 116,981 168,893
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 91,228 $ 116,981
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents comprised of:
Cash $ 68,853 $ 28,322
Cash equivalents with maturities less than ninety days 22,375 88,659
-----------------------------------------------------------------------------------------------------------------------
$ 91,228 $ 116,981
-----------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 129,199 $ 128,910
Income taxes $ 129,741 $ 233,043
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-70
<PAGE> 132
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements
(Amounts expressed in Canadian Dollars)
================================================================================
The company is incorporated under the laws of the Province of Ontario and
its principal business activity is food processing.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying consolidated financial statements are presented in
accordance with accounting principles generally accepted in Canada
(Canadian GAAP).
The consolidated financial statements include the accounts of 1005549
Ontario Limited and its subsidiary, D.C. Food Processing Inc. All
significant inter-company transactions and balances have been
eliminated on consolidation. These financial statements are prepared
on the basis of their historical costs and do not include any
adjustments that may result on the acquisition of consolidated
1005549 Ontario Limited by International Menu Solutions Corporation
as more fully described in note 16.
(b) Revenue recognition:
Revenue is recognized at the point the goods are shipped.
(c) Inventories
Inventories have been valued at the lower of cost determined on a
first-in, first-out basis, and net realizable value.
(d) Capital assets:
Capital assets are stated at acquisition cost. Amortization is provided
using the following methods and annual rates:
<TABLE>
<CAPTION>
================================================================================================
Asset Basis Rate
------------------------------------------------------------------------------------------------
<S> <C> <C>
Building Declining balance 5%
Parking lot Declining balance 20%
Equipment Declining balance 20%
Scales Declining balance 20%
Computer equipment Declining balance 30%
Equipment under capital lease Straight-line 5 years
================================================================================================
</TABLE>
(e) Goodwill:
Goodwill represents the excess of purchase price over the fair
value of identifiable assets acquired and is amortized on a
declining balance basis at the annual rate of 5%. 1005549 Ontario
Limited reviews the carrying value of goodwill on an annual basis.
Based on estimated discounted future cash flows, it has been
determined that there is no impairment in the value of goodwill.
F-71
<PAGE> 133
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 2
(Amounts expressed in Canadian Dollars)
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Deferred income taxes:
The company accounts for income taxes on the deferred tax allocation
method. Under this method, timing differences between reported and
taxable income result in provision for taxes not currently payable.
Such timing differences arise principally as a result of claiming
amortization and other amounts for tax purposes at amounts differing
from those charged to income.
(g) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results
could differ from these estimates.
2. ACCOUNTS RECEIVABLE:
Accounts receivable are net of allowances for doubtful accounts of
$15,175 at December 6, 1998 and $901 at December 7, 1997.
3. INVENTORIES:
<TABLE>
<CAPTION>
============================================================================================================
1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 259,524 $ 220,697
Finished product 145,546 110,350
------------------------------------------------------------------------------------------------------------
$ 405,070 $ 331,047
============================================================================================================
</TABLE>
F-72
<PAGE> 134
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 3
(Amounts expressed in Canadian Dollars)
================================================================================
4. CAPITAL ASSETS:
<TABLE>
<CAPTION>
==========================================================================================================================
December 6, December 7,
1998 1997
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 235,800 $ 235,800
Building 1,203,178 1,147,880
Computer equipment 3,586 2,226
Equipment 1,008,174 708,329
Scales 22,056 14,361
Parking lot 36,084 34,500
Equipment under capital lease 2,186,402 1,823,525
--------------------------------------------------------------------------------------------------------------------------
4,695,280 3,966,621
Less accumulated amortization 1,579,025 1,146,574
--------------------------------------------------------------------------------------------------------------------------
$ 3,116,255 $ 2,820,047
==========================================================================================================================
</TABLE>
The amortization of equipment under capital lease amounted to $237,478 in
1998 (1997 - $173,874).
5. GOODWILL:
<TABLE>
<CAPTION>
====================================================================================================================
December 6, December 7,
1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 192,800 $ 192,800
Less accumulated amortization 50,065 43,340
--------------------------------------------------------------------------------------------------------------------
$ 142,735 $ 149,460
====================================================================================================================
</TABLE>
6. BANK INDEBTEDNESS:
Bank indebtedness bears interest at prime plus .75% and is secured by a
general security agreement covering all assets other than real property,
a guarantee and postponement of claim for $50,000 signed by two of the
shareholders, and an assignment of life insurance over two of the
shareholders.
F-73
<PAGE> 135
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 4
(Amounts expressed in Canadian Dollars)
===============================================================================
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
=========================================================================================================================
December 6, December 7,
1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank mortgage, payable in monthly instalments of
$6,500 plus interest at 7.52%, due October 2010 $ 640,642 $ 666,937
Bank loan, payable in monthly instalments of $4,010
plus interest at Royal Bank prime plus 1%, due
October 2001 115,717 155,920
Prime plus 1% term loan, payable in blended monthly
instalments of $705, due May 1999 4,035 11,931
Mortgage payable, no monthly instalments, interest
payable only at 1% per month, repaid during the
year - 150,000
-------------------------------------------------------------------------------------------------------------------------
760,394 984,788
Current portion of long-term debt 77,437 225,315
-------------------------------------------------------------------------------------------------------------------------
$ 682,957 $ 759,473
=========================================================================================================================
=========================================================================================================================
Annual principal payments over each of the next five years are as follows:
-------------------------------------------------------------------------------------------------------------------------
1999 $ 77,437
2000 78,317
2001 63,867
2002 38,607
2003 41,616
-------------------------------------------------------------------------------------------------------------------------
$ 299,844
=========================================================================================================================
</TABLE>
F-74
<PAGE> 136
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 5
(Amounts expressed in Canadian Dollars)
===============================================================================
8. OBLIGATIONS UNDER CAPITAL LEASE:
<TABLE>
<CAPTION>
==================================================================================================================
December 6, December 7,
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 6:
1998 $ - $ 217,882
1999 285,494 211,393
2000 244,505 170,403
2001 228,005 153,903
2002 228,005 153,903
2003 109,637 36,021
-----------------------------------------------------------------------------------------------------------
Total minimum lease payments 1,095,646 943,505
Less amount representing interest (at rates
ranging from 6.35% to 14.79%) 164,189 159,644
-----------------------------------------------------------------------------------------------------------------
Present value of net minimum capital
lease payments 931,457 783,861
Current portion of obligations under capital lease 222,823 172,792
-----------------------------------------------------------------------------------------------------------------
$ 708,634 $ 611,069
=================================================================================================================
</TABLE>
Interest of $63,484 (1997 - $48,210) relating to capital lease
obligations has been included in interest on long-term debt.
9. REDEEMABLE SHARES:
<TABLE>
<CAPTION>
========================================================================================================================
Number of December 6, Number of December 7,
shares 1998 shares 1997
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Authorized:
Unlimited number of
Class C non-voting,
redeemable, retractable
special shares - $ - 1,000 $ 543,350
Unlimited number of
Class D non-voting,
redeemable, retractable
special shares 810 810,000 - -
------------------------------------------------------------------------------------------------------------------------
810 $ 810,000 1,000 $ 543,350
========================================================================================================================
</TABLE>
F-75
<PAGE> 137
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 6
(Amounts expressed in Canadian Dollars)
===============================================================================
9. REDEEMABLE SHARES (CONTINUED):
The company has issued redeemable, retractable special shares. Under
Canadian generally accepted accounting principles, these shares are
presented as liabilities in the consolidated financial statements at
their redemption amount.
On December 4, 1998, the share capital of 1005549 Ontario Limited was
amended to authorize an unlimited number of non-voting redeemable,
retractable Class D special shares. 810 Class D special shares, with a
redemption amount of $810,000, and 200 Class A common shares were issued
and exchanged for 1,000 Class C special shares, with a redemption amount
of $543,350, and 200 Class B convertible shares. The excess, $266,650, of
their redemption amount over their carrying amount was charged to
retained earnings in 1998.
10. INCOME TAXES:
<TABLE>
<CAPTION>
===============================================================================================================
December 6, December 7,
1998 1997
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings before income taxes $ 894,932 $ 243,407
Combined Canadian basic federal and
provincial income tax rate 44.6% 44.6%
Income taxes based on combined Canadian
basic federal and provincial income tax rate 399,140 108,560
Increase in taxes resulting from:
Manufacturing and processing allowance (56,823) -
Tax reductions to certain private companies (44,595) (43,836)
Other items (8,282) (9,104)
---------------------------------------------------------------------------------------------------------------
$ 289,440 $ 55,620
===============================================================================================================
</TABLE>
F-76
<PAGE> 138
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 7
(Amounts expressed in Canadian Dollars)
===============================================================================
11. SHARE CAPITAL:
<TABLE>
<CAPTION>
==================================================================================================================
1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized:
Unlimited number of common shares
Unlimited number of Class A common shares
Unlimited number of Class B convertible,
common shares
Issued:
200 Class A common shares $ 20 $ -
200 Class B convertible common shares - 20
------------------------------------------------------------------------------------------------------------------
$ 20 $ 20
==================================================================================================================
</TABLE>
12. FINANCIAL INSTRUMENTS:
The carrying value of the company's accounts receivable due from
shareholders, due to shareholders, bank indebtedness, accounts payable,
accrued liabilities, short-term investments approximate their fair values
due to their demand nature or relatively short periods to maturity.
The fair value of the company's long-term debt and obligations under
capital lease has been determined to equal their carrying values, as the
current financing arrangements represent the borrowing rate presently
available to the company for loans with similar terms and maturities.
13. NATURE OF OPERATIONS AND SEGMENTED INFORMATION:
Management has determined that the company operates in one dominant
industry segment which involves the processing of food items. All of the
company's operations, assets and employees are located in Canada and
revenues are generated from sales in Canada.
14. CONCENTRATION OF CREDIT RISK:
At December 6, 1998, six customers accounted for 43% (1997 - 74%) of
total accounts receivable. The company maintains reserves for potential
credit losses but historically has not experienced any significant losses
related to individual customers or groups of customers.
F-77
<PAGE> 139
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 8
(Amounts expressed in Canadian Dollars)
===============================================================================
15. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The company follows Canadian generally accepted accounting principles
which are different in some respects from those applicable in the United
States.
(a) Since redemption of the shares described in note 9 is outside the
control of the company, the shares are classified as liabilities
under Canadian GAAP. For U.S. GAAP purposes, such redeemable shares
can be classified outside stockholders' equity and below
liabilities. This classification difference has no impact on net
income or stockholders' equity for U.S. GAAP purposes.
(b) Under Canadian GAAP the income tax provision is based on the
deferral method and adjustments are generally not made for changes
in income tax rates. Under U.S. GAAP, deferred tax liabilities are
based on the asset and liability method and are measured using the
enacted tax rate expected to apply to taxable income in the periods
in which the deferred tax liability is expected to be settled.
The following presents a reconciliation of net earnings from Canadian
GAAP to U.S. GAAP:
<TABLE>
<CAPTION>
================================================================================================================================
December 6, December 7,
1998 1997
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings under Canadian GAAP $ 605,492 $ 187,787
Income tax adjustment under the asset
and liability method (4,719) (8,752)
--------------------------------------------------------------------------------------------------------------------------------
Net earnings under U.S. GAAP $ 600,773 $ 179,035
--------------------------------------------------------------------------------------------------------------------------------
The following table presents stockholders' equity under U.S. GAAP.
<CAPTION>
================================================================================================================================
December 6, December 7,
1998 1997
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stockholders' equity under Canadian GAAP $ 1,051,124 $ 712,282
Income tax adjustment under the asset
and liability method (49,790) (45,071)
--------------------------------------------------------------------------------------------------------------------------------
$ 1,001,334 $ 667,211
================================================================================================================================
</TABLE>
F-78
<PAGE> 140
1005549 ONTARIO LIMITED
Notes to Consolidated Financial Statements, page 9
(Amounts expressed in Canadian Dollars)
===============================================================================
16. SUBSEQUENT EVENTS:
On February 15, 1999, the share capital of 1005549 Ontario Limited was
amended to authorize unlimited number of voting, redeemable, retractable
Class E special shares. 2000 Class E special shares and 200 Class B
convertible common shares were issued and exchanged for 200 Class A
common shares.
On May 7, 1999, the stated capital of the Class E special shares was
increased from $10 to $1,962,510.
On May 10, 1999, all of the outstanding capital stock was acquired by
International Menu Solutions Corporation including the shares described
in note 9 and all of the shares described in note 11.
17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE:
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect a
company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-79
<PAGE> 141
1005549 ONTARIO LIMITED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
March 7, 1999 March 8, 1998
-------------------- -------------------
ASSETS
<S> <C> <C>
Current Assets
Accounts receivable $1,673,490 $ 954,672
Inventory 391,729 331,977
Prepaid expenses and other current assets 23,785 18,830
---------- ----------
2,089,004 1,305,479
Capital assets 3,084,030 2,823,794
Goodwill 141,790 148,015
---------- ----------
$5,314,824 $4,277,288
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank indebtedness $ 196,430 $ 149,886
Accounts payable and accrued liabilities 1,279,734 1,161,293
Current portion of long-term obligations 300,480 397,507
---------- ----------
1,776,644 1,708,686
Long-term obligations 1,395,328 1,224,931
Deferred income taxes 61,560 45,240
Redeemable shares 810,000 543,350
STOCKHOLDERS' EQUITY
Common stock 20 20
Additional paid up capital 47,267 47,267
Retained earnings 1,224,005 707,794
---------- ----------
1,271,292 755,081
---------- ----------
$5,314,824 $4,277,288
========== ==========
</TABLE>
F-80
<PAGE> 142
1005549 ONTARIO LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
December 7, 1998 December 8, 1997
to March 7, 1999 to March 8, 1998
-------------------- ------------------
<S> <C> <C>
REVENUE $ 4,879,226 $ 3,430,535
----------- -----------
EXPENSES
Cost of goods sold 4,299,923 3,178,932
Selling expenses 6,998 6,033
Administrative expenses 215,691 127,401
----------- -----------
4,522,612 3,312,366
----------- -----------
INCOME FROM OPERATIONS 356,614 118,169
OTHER INCOME (EXPENSE)
Interest revenue 1,627 --
Interest expense (23,198) (35,297)
----------- -----------
(21,571) (35,297)
----------- -----------
NET INCOME BEFORE INCOME TAXES 335,043 82,872
INCOME TAXES 114,875 40,070
----------- -----------
NET INCOME $ 220,168 $ 42,802
=========== ===========
</TABLE>
F-81
<PAGE> 143
1005549 ONTARIO LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
December 7, 1998 December 8, 1997
to March 7, 1999 to March 8, 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 220,168 $ 42,802
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 108,645
80,205
Deferred income taxes
(25,440) (16,320)
Changes in operating assets and liabilities:
Accounts receivable (265,572) 140,062
Inventory
13,341 (930)
Prepaid expenses and other current assets
(23,785) 7,360
Accounts payable and accrued liabilities 15,993 (291,325)
--------- ---------
Net cash flow from operating activities
43,350 (38,146)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of capital assets
(75,475) (82,510)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations
(89,235) (226,728)
Proceeds from long-term obligations
93,192 80,517
Proceeds from bank indebtedness (63,060) 149,886
--------- ---------
Net cash flow from financing activities
(59,103) 3,675
--------- ---------
NET CHANGE IN CASH (91,228) (116,981)
CASH, BEGINNING OF PERIOD 91,228 116,981
--------- ---------
CASH, END OF PERIOD $ -- $ --
========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
--------- ---------
Interest $ 23,198 $ 35,297
========= =========
income taxes $ 215,665 $ --
========= =========
</TABLE>
F-82
<PAGE> 144
1005549 ONTARIO LIMITED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CANADIAN DOLLARS)
1. ORGANIZATION
The Company and its subsidiaries develop, market and produce a series of
speciality food products for sale to food distributors, food retailer
chains and speciality food retailers.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
The consolidated financial statements include the accounts of
1005549 Ontario Limited and its subsidiary, D.C. Food Processing
Inc. All significant inter-company transactions and balances
have been eliminated on consolidation. These financial
statements are prepared on the basis of their historical costs
and do not include any adjustments that may result on the
acquisition of consolidated 1005549 Ontario Limited by
International Menu Solutions Corporation (see Note 6).
The unaudited interim financial statements 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 presented.
b) Revenue recognition
Revenue is recognized at the time goods are shipped to the
customer.
c) Inventories
Inventories have been valued at the lower of cost and determined
on a first-in, first-out basis, and the net realizable value.
F-83
<PAGE> 145
1005549 ONTARIO LIMITED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d) Capital assets
Capital assets are stated at acquisition cost. Amortization is
provided using the following methods and annual rates.
<TABLE>
<CAPTION>
Asset Basis Rate
----- ----- ----
<S> <C> <C>
Building Declining Balance 5%
Equipment Declining Balance 20%
Scales Declining Balance 20%
Computer Equipment Declining Balance 30%
Equipment under Straight Line 5 years
Capital Lease
</TABLE>
e) Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the identifiable assets acquired and is amortized
on a declining balance basis at the annual rate of 5%.
Management reviews the carrying value of goodwill on an annual
basis. Based on estimated discounted future cash flows, it has
been determined that there is no impairment in the value of
goodwill.
f) Financial instruments
The carrying value of the Company's accounts receivable due from
shareholders, due to shareholders, bank indebtedness, accounts
payable, accrued liabilities, short-term investments approximate
their fair values due to their demand nature or relatively short
periods due to maturity.
The fair value of the Company's long-term debt and obligations
under capital lease has been determined to equal their carrying
values, as the current financing arrangements represent the
borrowing rate presently available to the Company for loans with
similar terms and maturities.
F-84
<PAGE> 146
1005549 ONTARIO LIMITED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
g) Nature of operations and segmented information
Management has determined that the Company operates in one
dominant industry segment which involves the processing of food
items. All of the Company's operations, assets, and employees
are located in Canada and revenues are generated from sales in
Canada.
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
March 7, 1999 March 8, 1998
Accumulated
Cost depreciation Net book value Net book value
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Land 235,800 - 235,800 235,800
Equipment under
capital lease 2,052,364 1,071,711 980,653 1,002,638
Building 1,215,425 188,727 1,026,698 1,023,070
Computer Equipment 32,855 1,432 31,423 1,088
Equipment 1,119,107 342,133 776,974 524,180
Scales 22,056 10,093 11,963 13,143
Parking Lot 36,084 15,565 20,519 23,875
-------------------------------------------------------------------------------
4,713,691
1,629,661 3,084,030 2,823,794
===============================================================================
</TABLE>
F-85
<PAGE> 147
1005549 ONTARIO LIMITED
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(CANADIAN DOLLARS)
4. REDEEMABLE SHARES
<TABLE>
<CAPTION>
Number of
Shares March 7, Number of March 8,
1999 Shares 1998
---------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Authorized:
Unlimited number of Class C,
non-voting, redeemable,
retractable special shares 0 $-- 1,000 $543,350
Unlimited number of Class D,
non-voting, redeemable,
retractable special shares 810 810,000 -- --
-------------------------------------------------------------------
810 $810,000 1,000 $543,350
-------------------------------------------------------------------
</TABLE>
The Company has issued redeemable, retractable special shares. These
shares are presented as liabilities in the consolidated financial
statements at their redemption amount.
On December 4, 1998, the share capital of 1005549 Ontario Limited was
amended to authorize an unlimited number of non-voting redeemable,
retractable Class D special shares. 810 Class D special shares, with a
redemption amount of $810,000, and 200 Class A common shares were issued
and exchanged for 1,000 Class C special shares, with a redemption amount
of $543,350, and 200 Class B convertible shares. The excess, $266,650, of
their redemption amount over their carrying amount was charged to
retained earnings in 1998.
5. SUBSEQUENT EVENTS
On May 7, 1999, the stated capital of the Class E special shares was
increased from $10 to $1,962,510.
On May 10, 1999, all of the outstanding shares of capital stock of the
Company were acquired by International Menu Solutions Corporation.
F-86
<PAGE> 148
[LETTERHEAD OF CORBIN & WERTZ]
INDEPENDENT AUDITORS' REPORT
To the Members of
Huxtable's Foods, L.L.C.
We have audited the accompanying balance sheet of Huxtable's Foods, L.L.C. (a
Delaware limited liability company) (the "Company") as of December 31, 1998 and
the related statements of operations, members' capital (deficit) and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Huxtable's Foods, L.L.C. as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Corbin & Wertz
CORBIN & WERTZ
Irvine, California
April 30, 1999
F-87
<PAGE> 149
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Huxtable's Foods, L.L.C.
We have audited the accompanying statements of operations, members' capital
(deficit) and cash flows of HUXTABLE'S FOODS, L.L.C. (a
Delaware limited liability company) for the year ended December 31, 1997.
These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Huxtable's Foods, L.L.C. operations and
its cash flows for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for start-up costs in 1997 to comply with Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities."
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
June 22, 1998
F-88
<PAGE> 150
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash $ 73,000
Accounts receivable, net of allowance for
doubtful accounts of $67,000 566,000
Inventories 689,000
Prepaid expenses 40,000
-----------
Total current assets 1,368,000
Property and equipment, net 1,457,000
Other assets 31,000
-----------
$ 2,856,000
===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable $ 574,000
Accrued liabilities and other 172,000
Current portion of long-term debt 177,000
Current portion of obligations under capital leases 123,000
-----------
Total current liabilities 1,046,000
-----------
Long-term liabilities:
Accrued preferred return 998,000
Long-term debt, net of current portion 140,000
Obligations under capital leases, net of current
portion 100,000
Other 12,000
-----------
Total long-term liabilities 1,250,000
-----------
Members' capital:
Members' accounts 871,000
Notes and accrued interest receivable from
related parties (311,000)
-----------
Total members' capital 560,000
-----------
$ 2,856,000
===========
</TABLE>
See accompanying notes to financial statements
F-89
<PAGE> 151
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 12,303,000 $ 11,269,000
Cost of goods sold 9,322,000 8,431,000
------------ ------------
Gross profit 2,981,000 2,838,000
Operating expenses:
Selling, general and administrative 3,425,000 3,505,000
Non-cash compensation -- 203,000
------------ ------------
Loss from operations (444,000) (870,000)
Other income (expense):
Interest expense, net of interest income of
$4,000 and $4,000, respectively (138,000) (89,000)
------------ ------------
Loss before cumulative effect of change
in accounting (582,000) (959,000)
Cumulative effect of change in accounting for
start-up costs -- (34,000)
------------ ------------
Net loss $ (582,000) $ (993,000)
============ ============
</TABLE>
See accompanying notes to financial statements
F-90
<PAGE> 152
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF MEMBERS' CAPITAL
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Notes and
Members' Accounts Accrued Interest
------------------------------------------- Receivable From
Preferred Regular Total Related Parties Total
----------- ---------- ----------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,957,000 $(3,109,000) $(1,152,000) $ (311,000) $(1,463,000)
Conversion of members' notes and accrued interest
payable 2,810,000 -- 2,810,000 -- 2,810,000
Capital contribution 865,000 -- 865,000 -- 865,000
Awards of sharing ratios to employees and others 203,000 -- 203,000 -- 203,000
Accrued preferred return (382,000) -- (382,000) -- (382,000)
Net loss (24,000) (969,000) (993,000) -- (993,000)
----------- ---------- ----------- ----------- -----------
Balance, December 31, 1997 5,429,000 (4,078,000) 1,351,000 (311,000) 1,040,000
Conversion of members' notes and accrued interest
payable 510,000 -- 510,000 -- 510,000
Accrued preferred return (408,000) -- (408,000) -- (408,000)
Net loss (14,000) (568,000) (582,000) -- (582,000)
----------- ---------- ----------- ----------- -----------
Balance, December 31, 1998 $ 5,517,000 (4,646,000) $ 871,000 $ (311,000) $ 560,000
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-91
<PAGE> 153
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(582,000) $(993,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 332,000 310,000
Compensation expense in connection with
awards of sharing ratios -- 203,000
Provision for doubtful accounts (25,000) 12,000
Gain on sale of equipment -- (10,000)
Interest expense in connection with conversion
of note payable 30,000 --
Changes in operating assets and liabilities:
Accounts receivable 241,000 (325,000)
Inventories (31,000) (176,000)
Prepaid expenses 20,000 (15,000)
Other assets 7,000 33,000
Accounts payable, accrued liabilities and other (112,000) (27,000)
--------- ---------
Net cash used in operating activities (120,000) (988,000)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (33,000) (263,000)
Proceeds from sale of equipment -- 11,000
--------- ---------
Net cash used in investing activities (33,000) (252,000)
--------- ---------
Cash flows from financing activities:
Payments from short-term notes payable -- (30,000)
Proceeds from capital contributions -- 865,000
Proceeds from members' notes payable 480,000 150,000
Payments on long-term debt (128,000) (73,000)
Payments on obligations under capital leases (142,000) (128,000)
--------- ---------
Net cash provided by financing activities 210,000 784,000
--------- ---------
Net change in cash 57,000 (456,000)
Cash, beginning of year 16,000 472,000
--------- ---------
Cash, end of year $ 73,000 $ 16,000
========= =========
</TABLE>
Continued
F-92
<PAGE> 154
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -------------
<S> <C> <C>
Supplemental disclosures of each flow information:
Cash paid during the year for:
Interest $ 136,000 $ 109,000
============ =============
Income taxes $ 800 $ 800
============ =============
</TABLE>
Supplemental disclosures of non-cash investing and financing activities:
During 1998, the Company incurred capital lease obligations of $111,000
for the acquisition of machinery and equipment.
During 1998 and 1997, members converted $510,000 and $2,810,000,
respectively, of debt and accrued interest into members capital (see Note
9).
During 1997, the Company granted sharing ratios to employees and others
which were valued at $203,000 (see Note 9).
During 1998 and 1997, the Company accrued $408,000 and $382,000 of
preferred return, respectively.
See accompanying notes to financial statements
F-93
<PAGE> 155
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 1998 and 1997
NOTE 1 - ORGANIZATION, BUSINESS AND LIQUIDITY
Organization and Business
Huxtable's Foods, L.L.C. (the Company), a Delaware limited liability company,
was established on May 30, 1995. Under the Limited Liability Agreement (the
"Agreement"), the Company is owned by preferred members and regular members.
The Company processes and assembles gourmet sauces, meal replacement foods and
holiday food packages for distribution to retail stores and supermarket
commissaries, principally in the western United States.
Liquidity and Risks
The Company had losses of $582,000 and $993,000 for the years ended December 31,
1998 and 1997, respectively.
The Company's ability to continue in existence is dependent on, among other
factors, the Company's ability to generate adequate cash flows from operations
and from debt or equity financing to fund its operations and repay its
obligations. The Company has addressed the negative trend mentioned above by
focusing its efforts on its core profitable product lines, obtaining debt
financing of $480,000 from existing members in 1998 and maintaining a bank line
of credit of $1,000,000 (see Note 7). Management believes that these plans are
sufficient to allow the Company to adequately fund its operations through at
least December 31, 1999. In the event that additional funds are required, the
majority owners have committed to provide such funding.
The Agreement
Under terms of the Agreement, expiring July 31, 2025, profits are to be
allocated to all members pro-rata in accordance with each member's sharing ratio
(as defined). Losses are allocated approximately 98 percent to Huxtable's
Comestibles, Inc. and approximately two percent to the other members in total
(as defined). In addition, the preferred members are entitled to an annual
cumulative preferred return equal to seven percent of their unreturned capital
contributions, totaling approximately $408,000 and $382,000 for the years ended
December 31, 1998 and 1997, respectively. As a result of the Company not having
positive operating cash flows for both years, the preferred return is classified
as long-term in the accompanying balance sheet.
F-94
<PAGE> 156
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 1 - ORGANIZATION, BUSINESS AND LIQUIDITY, continued
Members may not assign, sell, or transfer their membership interests without the
consent of a majority of the other members. Also, one of the regular members
(Huxtable's Comestibles, Inc.) is required to offer to sell its membership
interest in the Company to the preferred members if certain key employees' (who
are the majority shareholders of Huxtable's Comestibles, Inc.) employment with
the Company is terminated for any reason.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories consist primarily of food and related packaging products and are
stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets or
lease terms, ranging from three to ten years. Maintenance and repairs are
charged to expense as incurred. Significant renewals and betterments are
capitalized. At the time of retirement or other disposition of property and
equipment, the cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in operations.
The Company assesses the recoverability of property and equipment by determining
whether the depreciation of such assets over their remaining lives can be
recovered through projected undiscounted cash flows. The amount of impairment,
if any, is then measured based on fair value and is charged to operations in the
period in which such impairment is determined by management. As of December 31,
1998 the Company's management believes that no impairment of the carrying value
of its property and equipment exists.
F-95
<PAGE> 157
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Organization Costs
Organization costs represent the costs incurred to set up the Company and
prepare the Agreement and were being amortized on a straight-line basis over
five years.
During 1997, the Company adopted Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities." The cumulative effect of adopting this statement,
which requires costs of start-up activities to be expensed as incurred, was a
write off of $34,000 of previously capitalized organization costs.
Concentrations of Risk
The Company maintains cash balances at financial institutions that are secured
by the Federal Deposit Insurance Corporation up to $100,000. The Company had in
aggregate approximately $247,000 of uninsured balances at December 31, 1998.
A substantial portion of the customers' ability to pay their receivables is
dependent on the strength of the supermarket industry. Receivables are unsecured
and the Company is at risk to the extent such amounts become uncollectible.
The Company's three largest and four largest customers represent approximately
59 percent and 55 percent of net sales for the years ended December 31, 1998 and
1997, respectively, and 64 percent of December 31, 1998 accounts receivable.
Revenue Recognition
Revenues are recorded when products are shipped.
Income Taxes
The members intend that the Company be classified as a partnership for Federal
and California State tax purposes. As a result, no taxes are paid at the Company
level or reflected in the Company's financial statements except for the $800
minimum tax in California. The tax returns, the qualification of the Company as
a limited liability company for tax purposes and the amount of allocable income
or loss are subject to examination by federal and state taxing authorities. If
such examinations were to result in changes to allocable Company income or loss,
the tax liability of the members could be changed accordingly. No such
examinations are currently pending.
F-96
<PAGE> 158
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS No. 123) encourages, but does not require, companies to
record compensation cost for grants of equity instruments to employees at fair
value. The Company has chosen to continue to account for these grants using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
(see Note 3). Accordingly, compensation cost for warrants issued to employees is
measured as the excess, if any, of the estimated fair value of the warrants at
the date of grant over the amount the employee must pay to acquire the equity
interest. Beginning in 1996, grants of equity instruments to non-employees are
accounted for using SFAS No. 123.
Statements of Cash Flows
For the purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of 90 days or less to
be cash.
Reclassifications
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
NOTE 3 - RELATED PARTY TRANSACTIONS
Members' Notes Payable
During 1998 and 1997, all members' notes and accrued interest payable were
converted to members' capital as described in Note 9 below. Accrued interest on
these notes was approximately $30,000 in 1998.
Warrants
The Company has a management warrant pool pursuant to which officers, employees,
consultants and other advisors may be granted warrants to acquire up to an
aggregate of 13.67 percent of the Company at a price of $45,000 per one percent
of the Company. At December 31, 1998, the Company has 1.287 percent warrant pool
available for future grants.
F-97
<PAGE> 159
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 3 - RELATED PARTY TRANSACTIONS, continued
Notes and Accrued Interest Receivable from Related Parties
Notes and accrued interest receivable from related parties consist of the
following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Notes receivable from officers of the
Company, due July 2000, bearing interest
at 9%, payable quarterly beginning
January 1998 $ 178,000
Note receivable from Huxtable's Comestibles,
Inc., due August 1996, bearing interest at
8% through August 1996 with default interest
at 18% on the principal and accrued interest
balance as of August 1996 thereafter until
the note is paid 105,000
Accrued interest 28,000
-----------
$ 311,000
===========
</TABLE>
Beginning January 1, 1997, the Company stopped accruing interest on these notes.
These amounts are included as a reduction of members' capital on the
accompanying balance sheets.
NOTE 4 - PROPERTY AND EQUIPMENT
As of December 31, 1998 property and equipment consisted of the following:
<TABLE>
<S> <C>
Machinery and equipment $ 1,210,000
Computer equipment and furniture 206,000
Transportation equipment 66,000
Leasehold improvements 1,026,000
-----------
2,508,000
Less accumulated depreciation and amortization (1,051,000)
-----------
$ 1,457,000
===========
</TABLE>
F-98
<PAGE> 160
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 5 - LONG-TERM DEBT
At December 31, 1998 long-term debt consisted of the following:
<TABLE>
<S> <C>
Promissory note payable to a shareholder
of Huxtable's Comestibles, Inc., due in
varying monthly principal installments
plus interest at 11% through February 2000,
guaranteed by certain Company officers $ 157,000
Promissory note payable to a vendor, bearing
interest at prime plus 0.25%, due in monthly
installments of principal and interest
ranging from $5,000 and $6,000 through May
2001, guaranteed by certain Company officers 129,000
Other 31,000
-----------
317,000
Less current position (177,000)
-----------
$ 140,000
===========
</TABLE>
Future principal maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Years Ending
December 31
------------
<S> <C>
1999 $ 177,000
2000 103,000
2001 33,000
2002 4,000
-----------
$ 317,000
===========
</TABLE>
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES
The Company is a lessee of certain property and equipment under capital leases
that expire through May 2003 (see Note 4). Terms of the leases call for monthly
payments ranging from $355 to $2,460. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair market value of the related assets. The assets are
depreciated over their estimated useful lives.
F-99
<PAGE> 161
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES, continued
Future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
-----------
<S> <C>
1999 $ 147,000
2000 59,000
2001 28,000
2002 28,000
2003 12,000
-----------
274,000
Less amounts representing interest (51,000)
-----------
Present value of minimum capital lease payments 223,000
Less current portion (123,000)
-----------
$ 100,000
===========
</TABLE>
The following is an analysis of the leased equipment under capital leases as of
December 31, 1998, which is included in property and equipment (see Note 4).
<TABLE>
<S> <C>
Machinery and equipment $ 793,000
Less accumulated depreciation (426,000)
-----------
$ 367,000
===========
</TABLE>
NOTE 7 - LINES OF CREDIT
The Company has a $1,000,000 revolving line of credit with a bank which expires
on October 2, 1999. Interest on the borrowings is payable monthly at the bank's
prime rate (prime rate was 7.75% at December 31, 1998) plus 1%. Under the terms
of the agreement, the Company may borrow up to 80% of eligible accounts
receivable, as defined. At December 31, 1998, the Company had no outstanding
advances under this agreement. All members' notes payable are subordinated to
these borrowings.
F-100
<PAGE> 162
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 7 - LINES OF CREDIT, continued
The credit agreement contains various financial covenants. At December 31, 1998,
the Company was in compliance with these covenants.
The Company also has overdraft agreements with another bank totaling $85,000. At
December 31, 1998, the Company had no outstanding advances under these
agreements.
NOTE 8 - LEASE COMMITMENTS
The Company leases certain property and equipment under operating lease
agreements. The leases expire at various dates through 2004 and provide for
monthly payments ranging from $300 to $23,000. The main production facility
lease payments are guaranteed by certain officers of the Company.
The future minimum aggregate lease payments under operating lease agreements
with an initial or noncancelable term of more than one year at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
------------
<S> <C>
1999 $ 378,000
2000 344,000
2001 351,000
2002 359,000
2003 357,000
2004 304,000
------------
$ 2,093,000
============
</TABLE>
For the years ended December 31, 1998 amd 1997, rent expense was approximately
$380,000 each year.
NOTE 9 - MEMBERS' CAPITAL
In January 1997, Austin Yellowstone (the former majority owner) exercised its
warrant for a 41.026 percent preferred sharing ratio in exchange for the
forgiveness of $1,600,000 in debt. Also in January 1997, Austin Yellowstone
converted $1,060,000 of debt and accrued interest into members' capital for a
preferred sharing ratio of 19.069 percent. During 1997, Austin Yellowstone and a
related entity dissolved. Various individuals and entities were assigned their
preferred member interests.
F-101
<PAGE> 163
HUXTABLE'S FOODS, L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1998 and 1997
NOTE 9 - MEMBERS' CAPITAL, continued
The Company accepted the surrender of all remaining outstanding warrants in
January 1997 in return for regular and preferred sharing ratios totaling 4.405
and 2.8 percent, respectively. All of the preferred sharing ratio grants and 0.8
percent of the regular sharing ratio grants vested immediately, with the
remaining two percent of the regular sharing ratio grants vesting ratably over
36 months. No associated capital contribution was required for these sharing
ratios. Based on an estimate of fair value as determined by management,
$203,000 was recorded as compensation expense as a result of granting these
preferred sharing ratios.
In January 1997, the Company issued a 10 percent regular sharing ratio, of which
20 percent vested immediately and 80 percent vests ratably over 48 months, to an
officer of the Company without an associated contribution to capital. This
sharing ratio cannot be diluted until certain conditions are met. There was no
compensation expense recorded in connection with the award of the sharing ratio,
as the fair value of the sharing ratio, based on management's estimate, at the
date of grant was zero. The Company also agreed to pay this officer $100,000 if
certain conditions are met in the future.
Between February and April 1997, the Company received $865,000 in additional
contributions from existing preferred members for a sharing ratio of 11.476
percent.
During July 1997, certain preferred members made loans to the Company totaling
$150,000. Effective July 31, 1997, these loans were converted to members'
capital for a preferred sharing ratio of 1.951 percent.
During November 1997, the Company awarded regular sharing ratios totaling 4.783
percent to three employees. These awards did not require a capital contribution
and vest ratably over 36 months. There was no compensation expense recorded in
connection with the award of these, sharing ratios, as the fair value of the
sharing ratio, based on management's estimate, at the date of grant was zero.
During March 1998, certain preferred members made loans to the company totaling
$480,000. Effective December 1998, these loans and related accrued interest were
converted to members' capital for a preferred sharing ratio of 5.849 percent.
F-102
<PAGE> 164
HUXTABLE'S FOODS, L.L.C.
BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
(UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------- -----------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 237,000 $ 118,000
Accounts receivable 862,000 999,000
Inventory 943,000 919,000
Prepaid expenses and other current assets 48,000 93,000
----------- -----------
Total current assets 2,090,000 2,129,000
Property and equipment, net 1,243,000 1,430,000
Other assets 24,000 27,000
----------- -----------
$ 3,357,000 $ 3,586,000
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL (DEFICIENCY)
Current liabilities
Bank loans $ 900,000 $ 600,000
Accounts payable and accrued liabilities 1,121,000 1,027,000
Current portion of long term debt 190,000 168,000
Current portion of lease obligations 59,000 37,000
----------- -----------
Total current liabilities 2,270,000 1,832,000
Long-term liabilities
Accrued preferred return 1,530,000 896,000
Long-term debt, net of current portion 45,000 193,000
Obligations under capital lease, net of current
portion 58,000 117,000
----------- -----------
Total long-term liabilities 1,633,000 1,206,000
----------- -----------
Members' capital (deficiency)
Members' accounts (235,000) 859,000
Notes and accrued interest receivable from
related parties (311,000) (311,000)
----------- -----------
Total members' capital (deficiency) (546,000) 548,000
----------- -----------
$ 3,357,000 $ 3,586,000
=========== ===========
</TABLE>
F-103
<PAGE> 165
HUXTABLE'S FOODS, L.L.C.
INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUE $ 7,436,000 $ 7,657,000
----------- -----------
OPERATING EXPENSES
Cost of goods sold 5,734,000 5,820,000
Selling expenses 959,000 890,000
Research and development 211,000 228,000
Administrative expenses 1,226,000 1,321,000
----------- -----------
8,132,000 8,259,000
----------- -----------
LOSS FROM OPERATIONS (694,000) (602,000)
OTHER INCOME (EXPENSE)
Interest income -- 3,000
Interest expense (78,000) (82,000)
----------- -----------
(78,000) (79,000)
----------- -----------
NET LOSS $ (772,000) $ (681,000)
=========== ===========
</TABLE>
F-104
<PAGE> 166
HUXTABLE'S FOODS, L.L.C.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(772,000) $(681,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 235,000 253,000
Changes in operating assets and liabilities:
Accounts receivable (296,000) (219,000)
Inventory (254,000) (229,000)
Prepaid expenses and other current assets (8,000) 28,000
Accounts payable and accrued liabilities 375,000 67,000
--------- ---------
Net cash used in operating activities (720,000) (781,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases of property and equipment (21,000) (13,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to members 193,000 480,000
Payments on long-term debt (82,000) (100,000)
Payments on obligations under capital leases (106,000) (84,000)
Proceeds from bank loans 900,000 600,000
--------- ---------
Net cash provided by financing activities 905,000 896,000
--------- ---------
NET CHANGE IN CASH 164,000 102,000
CASH, BEGINNING OF PERIOD 73,000 16,000
--------- ---------
CASH, END OF PERIOD $ 237,000 $ 118,000
========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
--------- ---------
Interest $ 78,000 $ 82,000
========= =========
income taxes $ 800 $ 800
========= =========
Supplemental disclosure of non-cash investing and financing activities:
During the periods ended September 30, 1999 and 1998, the Company
converted notes payable to members and accrued interest of $198,000
and $485,000 to members capital, respectively.
</TABLE>
F-105
<PAGE> 167
HUXTABLE'S FOODS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
1. ORGANIZATION, BUSINESS AND LIQUIDITY
Organization and Business
Huxtable's Foods, L.L.C. (the Company), a Delaware limited liability
company, was established on May 30, 1995. Under the Limited Liability
Agreement (the "Agreement"), the Company is owned by preferred members
and regular members.
The Company processes and assembles gourmet sauces, meal replacement
foods and holiday food packages for distribution to retail stores and
supermarket commissaries, principally in the western United States.
Liquidity and Risks
The Company had losses of $772,000 and $681,000 for the nine-month
periods ended December 31, 1999 and 1998, respectively.
The Company's ability to continue in existence is dependent on, among
other factors, the Company's ability to general adequate cash flows from
operations and from debt or equity financing to fund its operations and
repay its obligations. The Company has addressed the negative trend
mentioned above by focusing its efforts on its core profitable product
lines, obtaining debt financing from existing members in 1998 and 1999
and maintaining a bank line of credit of $1,000,000. Management believes
that these plans are sufficient to allow the Company to adequately fund
its operations through at least December 31, 1999. In the event that
additional funds are required, the majority owners have committed to
provide such funding.
The Agreement
Under terms of the Agreement, expiring July 31, 2025, profits are to be
allocated to all members pro-rata in accordance with each member sharing
ratio (as defined). Losses are allocated approximately 98% to Huxtable's
Comestibles, Inc. and approximately two percent to the other members in
total (as defined). In addition, the preferred members are entitled to an
annual cumulative preferred return equal to seven percent of their
unreturned capital contributions. As a result of the Company not having
positive operating cash flows for both years, the preferred return is
classified as long-term in the accompanying balance sheets.
F-106
<PAGE> 168
HUXTABLE'S FOODS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
1. ORGANIZATION, BUSINESS AND LIQUIDITY (CONTINUED)
Members may not assign, sell, or transfer their membership interests
without the consent of a majority of the other members. Also, one of the
regular members (Huxtables' Comestibles, Inc.) is required to offer to
sell its membership interest in the Company to the preferred members if
certain key employees' (who are the majority shareholders of Huxtable's
Comestibles, Inc.) employment with the Company is terminated for any
reason.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements 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.
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 at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories consist primarily of food and related packaging products and
are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related
asssets or lease terms, ranging from three to ten years. Maintenance and
repairs are charged to expense as incurred. Significant renewals and
betterments are capitalized. At the time of retirement or other
disposition of property and equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss
is reflected in operations.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is then measured based on fair value and
is charged to operations in the period in which such an impairment is
determined by management. As of December 31, 1998, the Company's
management believes that no impairment of the carrying value of its
property and equipment exists.
F-107
<PAGE> 169
HUXTABLE'S FOODS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATION COSTS
Organization costs represent the costs incurred to set up the Company and
prepare the Agreement and were being amortized on straight-line basis
over five years.
During 1997, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities." The cumulative effect of adopting
this statement, which requires cots of start-up activities to be expensed
as incurred, was a write-off of $34,000 of previously capitalized
organization costs.
CONCENTRATIONS OF RISK
The Company maintains cash balances as financial institutions that are
secured by the Federal Deposit Insurance Corporation up to $100,000. The
Company had in aggregate approximately $247,000 of uninsured balances at
December 31, 1998.
A substantial portion of the customers' ability to pay their receivables
is dependent on the strength of the supermarket industry. Receivables are
unsecured and the Company is at risk to the extent such amounts become
uncollectible.
The Company's three largest and four largest customers represent
approximately 59 percent and 55 percent on net sales for the years ended
December 31, 1998 and 1997, respectively, and 64 percent and 46 percent
of December 31, 1998 and 1997 accounts receivable, respectively.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
INCOME TAXES
The members intend that the Company be classified as partnership for
Federal and California State tax purposes. As a result, no taxes are paid
at the Company level or reflected in the Company's financial statements
except for the $800 minimum tax in California. The tax returns, the
qualification of the Company as a limited liability company for tax
purposes and the amount of allocable income or loss are subject to
examination by federal and state taxing authorities. If such examinations
were to result in changes to allocable Company income or loss, the tax
liability of the members could be changed accordingly. No such
examinations are currently pending.
F-108
<PAGE> 170
HUXTABLE'S FOODS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
STATEMENTS OF CASH FLOWS
For the purposes of the statements of cash flows, the Company considers
all highly liquid investments which an original maturity date of 90 days
or less to be cash.
3. PROPERTY AND EQUIPMENT
As of September 30, 1999 and 1998, property and equipment consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Machinery and equipment $1,231,000 $1,089,000
Computer equipment and furniture 206,000 202,000
Transportation equipment 66,000 61,000
Leasehold improvements 1,026,143 1,026,000
---------- ----------
2,529,000 2,378,000
Less accumulated depreciation and amortization (1,286,000) (948,000)
---------- ----------
Net book value $1,243,000 $1,430,000
========== ==========
</TABLE>
F-109
<PAGE> 171
HUXTABLE'S FOODS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(UNITED STATES DOLLARS)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Promissory note payable to shareholder of
Huxtable's Comestibles, Inc., due in varying
monthly principal installments plus interest
at 11% through February 2000, guaranteed by
certain Company officers $ 75,000 $ 175,000
Promissory note payable to a vendor, bearing
interest at prime plus 0.25%, due in monthly
installments of principal and interest
ranging from $5,000 and $6,000 through May 2001,
guaranteed by certain Company Officers 129,000 141,000
Other 31,000 45,000
---------- ----------
235,000 361,000
Less current portion (190,000) (168,000)
---------- ----------
$ 45,000 $ 193,000
========== ==========
</TABLE>
5. SUBSEQUENT EVENT
On November 12, 1999 substantially all of the Company's assets and liabilities
were acquired by Huxtable's Kitchens Inc., a subsidiary of International Menu
Solutions Corporation.
F-110
<PAGE> 172
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada General Corporation Law, or 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 directors' claims for indemnification under the above-described
provisions, which could have a material adverse effect on our financial
condition.
ITEM 25. EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee .............................................................. $ 5,378
Blue Sky expenses.................................................................. $12,060
Legal fees and expenses............................................................ $*
Accounting fees and expenses....................................................... $*
Printing expenses.................................................................. $*
Miscellaneous...................................................................... $*
Total .................................................................... $*
</TABLE>
--------------------
* To be completed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In August 2000, we issued 956,178 shares of our common stock in
satisfaction of the Stub Payment to the shareholders of Huxtable's LLC. This
transaction was exempt under Section 4(2) of the Securities Act.
II-1
<PAGE> 173
In May 2000, certain shareholders exchanged 295,166 Class X shares of
IMSI and surrendered 295,166 of our Class N shares for the same number of shares
of our common stock. Other than the exchange and surrender of such shares, there
was no consideration accruing to us for the exchange and surrender.
In December 1999, certain option holders exercised options covering
227,698 shares of our common stock at a per share exercise price of US$1.00
(CDN$1.44), resulting in proceeds of US$227,698 (CDN$330,162). These securities
were issued in an offshore transaction in reliance on Regulation S under the
Securities Act of 1933, or the Securities Act.
In October 1999, certain option holders exercised options covering
172,302 shares of our common stock at a per share exercise price of US$1.00
(CDN$1.46), resulting in proceeds of US$172,302 (CDN$249,838). These securities
were issued in an offshore transaction in reliance on Regulation S under the
Securities Act.
In October 1999, certain shareholders exchanged 544,385 Class X shares
of IMSI (and 544,385 of our Class N shares) for the same number of shares of our
common stock. Other than the delivery of such Class X shares and Class N shares,
there was no consideration paid to us for this share exchange.
In August 1999, we sold 200,000 shares of common stock at a price of
US$3.00 (CDN$4.35) per share, for total consideration of US$558,000
(CDN$809,000) net of commissions and offering costs. These securities were sold
in an offshore transaction in reliance on Regulation S under the Securities Act.
May 1999, we granted 156,250 warrants to First Ontario and 93,750
warrants to BMOCC to acquire shares of common stock, with each such warrant
entitling the holder to purchase one share of common stock at the following
prices:
- 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.
In May 1999, we issued shares of common stock pursuant to the
redemption of warrants on a November 1998, private placement of units consisting
of one share 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 our common stock at US$1.40 per
share. We sold 998,650 shares for a total cash consideration of US$1,384,110
(CDN$2,006,959).
On April 16, 1999 Southbridge Inc. subscribed for 1,523,810 shares of
our common stock at a subscription price of $2.625 per share, pursuant to
Regulation S under the Securities Act. As part of the subscription we granted to
Southbridge Inc. 400,000 warrants. These warrants entitle Southbridge Inc. to
purchase up to 200,000 shares of common stock at a price of $2.25 per share and
200,000 shares of common stock at a price of $2.625 per share up to April 16,
2001.
In November 1998, we offered 3,300,000 units consisting of 3,300,000
shares of common stock of the Company and 1,650,000 redeemable stock purchase
warrants, in a private placement pursuant to Regulation S under the Securities
Act. Each warrant entitles the registered holder to purchase one share of common
stock at US$1.40 per share. We 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:
II-2
<PAGE> 174
<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 us, when we were known as ANM Holding Corporation.
In July 1998, we issued a total of 1,400,000 shares of common stock,
pursuant to Rule 504 of Regulation D under the Securities Act. All 1,400,000
shares were sold to six investors for a total cash consideration of US$925,000
(CD$1,341,250), 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 common stock, pursuant to
Rule 504 of Regulation D under 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:
II-3
<PAGE> 175
<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, we issued a total of 28,000 shares of common stock,
pursuant to Rule 504 of Regulation D under 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
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, we issued a total of 1,250,000 shares of common stock,
pursuant to Rule 504 of Regulation D under the Securities Act. All 1,250,000
shares were sold to seven investors for a total cash
II-4
<PAGE> 176
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. 27 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.
2.9 Asset Purchase Agreement by and among Seafood Selections Inc., Prime
Foods Processing Inc., IMSI, The Rhyn Company Inc. and Gourmet
Sensations Inc. dated June 30, 2000.
2.10*** Subscription Agreement among Southbridge Equities, Inc., IMSI and the
Company dated as of October 22, 1999.
2.11*** Subscription Agreement between Southbridge Inc. and the Company dated
April 16, 1999.
II-5
<PAGE> 177
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 dated
May 7, 1999.
3.3* Certificate of Amendment of Certificate of Incorporation of the Company
dated May 10, 1999.
3.4* By-laws of the Company.
3.5 Warrant for 56,250 shares of the Company's common stock issued to Bank
of Montreal Capital Corporation dated May 10, 1999
3.6 Warrant for 37,500 shares of the Company's common stock to be issued to
Bank of Montreal Capital Corporation dated May 10, 1999
3.7 Warrant for 93,750 shares of the Company's common stock issued to First
Ontario Fund dated May 10, 1999
3.8 Warrant for 62,500 shares of the Company's common stock issued to First
Ontario Fund dated May 10, 1999.
3.9*** Special Warrant Certificates issued to Southbridge Equities Inc. dated
October 22, 1999
3.10*** Warrant to purchase 200,000 shares of the Company's common stock issued
to Southbridge Inc. dated April 16, 1999
3.11*** Warrant to purchase 200,000 shares of the Company's common stock issued
to Southbridge Inc. dated April 16, 1999
3.12 Registration Rights Agreement among the Company, Victor Fradkin, Rhys
Quin, Lauderdale Capital Corp. and Larry Hoffman dated December 1, 1999
3.13 Registration Rights Agreement among the Company and Southbridge, Inc.
dated April 16, 1999.
3.14 Intentionally deleted
3.15 Intentionally deleted
3.16 Registration Rights Agreement among the Company, Michael Eskenazi, Gina
Eskenazi and Felix and Norton International Inc. dated October 18, 1999
3.17*** Registration Rights Agreement between the Company and Southbridge
Equities Inc. dated October 22, 1999
3.18 Registration Rights Agreement between the Company and Huxtable's Foods,
LLC dated November 12, 1999
3.19 Registration Rights Agreement between the Company and individual
shareholders
3.20 Registration Rights Agreement among the Company, Donald Kilimnik,
Deborah Kilimnik, Robert Curik and Angela Curik dated May 10, 1999
II-6
<PAGE> 178
3.21 Right of First Refusal among Katherine Kan, Alrae Investments Inc.,
IMSI and the Company dated April 15, 1999
3.22 Right of First Refusal among Michael Eskenazi, Gina Eskenazi, Felix &
Norton International Inc., IMSI and the Company dated October 18, 1999
3.23 Right of First Refusal among Donald Kilimnik, Robert Curik, Deborah
Kilimnik, Angela Curik, IMSI and the Company dated May 10, 1999
3.24** Right of First Offer between the Company and Southbridge Inc. dated
April 16, 1999
3.25 Right of First Refusal among the Company, IMSI, Victor Fradkin, Rhys
Quin, Lauderdale Capital Corp. and Larry Hoffman dated December 1, 1998
5.1+++ Form of Opinion of Nevada Counsel
10.1+ Indenture between 1249462 Ontario Limited and IMSI dated March 1, 1999.
10.2+ Standard Industrial Lease between R Reef West-VI, Inc. and Huxtable's
Combustibles, Inc. dated August 16, 1994.
10.3+ Lease by and among Raffaele Cerundolo and Tony Taurasi, as T&R
Construction and Management Inc., and Transcontinental Gourmet Foods
Inc. dated May 25, 1999.
10.4+ Indenture by and among 1249462 Ontario Limited, Tasty Selections Inc.
and IMSI dated June 15, 1999.
10.5+ Commitment Letter by and among The Bank of Nova Scotia, IMSI, Prime
Foods Processing, Inc., 1188908 Ontario, Inc. and D.C. Food Processing,
Inc. dated April 15, 1999.
10.6 Lease between Alcane Holdings Ltd. and Thornhill Bakery dated February
1995
10.7 Indenture among 1249462 Ontario Limited, Tasty Selections Inc. and IMSI
dated January 1, 2000
10.8 Indenture between 1249462 Ontario Limited and IMSI dated March 1, 2000
10.9+ Employment Agreement between the Company and Michael Steele dated
August 1, 1998.
10.10* Agency Agreement between Robert Caldwell Capital Corporation and IMSI
dated April 10, 1999.
10.11++ Loan Agreement by and among the Company, IMSI, Southbridge Investment
Partnership No. 1, First Ontario Labour Sponsored Investment Fund Ltd.
and Bank of Montreal Capital Corporation dated May 26, 2000 regarding
credit facilities
10.12 Credit Facility between IMSI and the Bank of Nova Scotia dated August
3, 2000.
10.13 Loan Agreement among the Company, IMSI, First Ontario Fund and Bank of
Montreal Capital Corporation dated May 10, 1999
10.14 Loan Agreement between Prime Foods Processing Inc. and Business
Development Bank of Canada dated November 5, 1997
II-7
<PAGE> 179
10.15+++ Loan Agreement between TGF and Business Development Bank of Canada
dated May, 1997
10.16 Loan Agreement between TGF and Business Development Bank of Canada
dated March, 1998
10.17 Commitment between D.C. Foods and Royal Bank of Canada dated June 5,
2000
10.18 Company's Executive Incentive Stock Option Plan
10.19 Agreement and Plan of Reorganization among the Company, Great American
Barbecue Food Company, and Great American Barbecue Company and certain
of its shareholders dated July 14, 2000
21.0 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Kraft, Berger, Grill, Schwartz, Cohen & March LLP
(accountants for Transcontinental Gourmet Foods)
23.3 Consent of Kraft, Berger, Grill, Schwartz, Cohen & March LLP
(accountants for Tasty Selections Inc.)
23.4 Consent of KPMG LLP (accountants for 1005549 Ontario Ltd Inc.)
23.5 Consent of Corbin & Wertz (accountants for Huxtable's Foods, L.L.C.)
23.6 Consent of Arthur Andersen LLP (accountants for Huxtable's Foods,
L.L.C.)
23.8+++ Consent of Nevada counsel (contained in opinion filed as exhibit 5.1)
24.1 Power of Attorney (contained in signature section of Registration
Statement)
* Exhibits were filed in the Company's 10SB-A filed July 16, 1999 and are
incorporated herein by reference thereto.
** Exhibit was filed in the Company's Report on Form 8-K filed November
26, 1999 and is incorporated herein by reference thereto.
*** Exhibits were filed in the Company's Schedule 13-D dated August 15,
2000 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.
++ Exhibit was filed in the Company's 10SB-A3 filed June 22, 2000 and is
incorporated herein by reference thereto.
+++ To be filed by amendment.
ITEM. 28 UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
II-8
<PAGE> 180
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 181
SIGNATURES
In accordance with the requirement of the Securities Exchange Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
Province of Ontario, Canada, on August 31, 2000.
INTERNATIONAL MENU SOLUTIONS CORPORATION
By: /s/ Michael Steele
_____________________________________________________
Michael Steele, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael Steele, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other registration statement for the same offering that is effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933) and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact and agent, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the indicated capacities
on August 31, 2000.
/s/ Michael Steele /s/ Christopher Hamm
_____________________________________ ________________________________________
Michael Steele, Christopher Hamm
President, Chief Executive Vice President, Finance & Administration
Officer and Director
/s/ G.E. Creber /s/ Len Shiffman
_____________________________________ ________________________________________
G.E. Creber, Secretary, Treasurer and Len Shiffman, Director
Director
/s/ Mark Preston
________________________________________
Mark Preston
Vice President, Corporate Controller
and Principal Accounting
Officer
II-10
