1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
(X) Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
( ) Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
Commission file number 0-30092
INTERNATIONAL MENU SOLUTIONS CORPORATION
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 91-1849433
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
350 Creditstone Road, Unit 202
Concord, Ontario Canada L4K 3Z2
(Address of Principal Executive Offices)
(416) 366-6368
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES( X )
NO( )
11,727,392 shares of the issuer's common stock, par value $0.001 per share,
and 2,820,629 shares of the issuer's Class N Shares, par value $0.001 per share,
were outstanding at August 11, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INTERNATIONAL MENU SOLUTIONS CORPORATION
INDEX
Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet (unaudited) as of June 30, 2000 2
Consolidated Statements of Income (unaudited) for the six month
periods ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows (unaudited) for the six month
periods ended June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 10
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(CANADIAN DOLLARS)
June 30,
2000
------------
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
------------
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(CANADIAN DOLLARS)
Three months ended, Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(restated-Note 3) (restated-Note 3)
REVENUE $ 17,089,528 $ 9,268,977 $ 32,465,787 $ 13,032,288
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold 14,476,299 8,221,872 27,222,099 11,405,228
Selling expenses 893,946 597,619 2,292,855 907,096
Administrative expenses 3,052,835 1,283,722 5,671,031 1,974,995
Amortization of intangibles 393,698 199,307 788,380 229,688
------------ ------------ ------------ ------------
18,816,778 10,302,520 35,974,365 14,517,007
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,727,250) (1,033,543) (3,508,578) (1,484,719)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on sale of assets 935,000 -- 935,000 --
Interest expense (522,330) (216,621) (924,272) (282,977)
------------ ------------ ------------ ------------
412,670 (216,621) 10,728 (282,977)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,314,580) (1,250,164) (3,497,850) (1,767,696)
INCOME TAXES -- -- -- 144,400
------------ ------------ ------------ ------------
NET LOSS $ (1,314,580) $ (1,250,164) $ (3,497,850) $ (1,623,296)
------------ ------------ ------------ ------------
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.08) $ (0.11) $ (0.22) $ (0.16)
------------ ------------ ------------ ------------
WEIGHTED AVERAGE
OUTSTANDING
COMMON SHARES 15,845,561 11,556,467 15,845,561 10,315,837
------------ ------------ ------------ ------------
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CANADIAN DOLLARS)
Six months ended June 30,
2000 1999
------------ ------------
OPERATING ACTIVITIES
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 $ -- $ --
------------ ------------
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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.
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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:
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)
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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
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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
Six months ended June 30,
2000 1999
---- ----
(unaudited)
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)
------------ ------------
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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:
JUNE 30, 2000 Desserts Fresh Frozen Corporate Total
------------- -------- ----- ------ --------- -----
(SIX MONTHS)
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
------------ ------------ ------------ ------------ ------------
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
(UNAUDITED)
9. SEGMENTED INFORMATION (CONTINUED)
JUNE 30, 1999 Desserts Fresh Frozen Corporate Total
------------- -------- ----- ------ --------- -----
(SIX MONTHS)
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
------------ ------------ ------------ ------------ ------------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Result of Operations:
Except as otherwise indicated all amounts presented in this management's
discussion and analysts and elsewhere in this report are presented in Canadian
dollars, our functional currency.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 AND
THE THREE MONTH ENDED JUNE 30, 2000 COMPARED TO THE THREE 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 the acquisitions made in April, May,
October, and November 1999 of Tasty Selections, DC Foods, Ultimate and
Huxtable's respectively, (collectively, "the 1999 acquisitions"). In addition
the Company began to realize revenues generated from the sales activities of the
Company's sales personnel through the development of new sales opportunities and
expanding the customer base beyond those of the customer bases of the acquired
companies. During this period sales in TGF, Pasta Kitchens, Prime were all
higher than for the same period in 1999. Sales in DC Foods and Ultimate Cookie
were also higher than historically. Sales in the Seafood division were lower as
the Company filled large initial stocking orders during this period in 1999
while 2000 sales during this period were primarily regular sales orders. During
the period, the Company eliminated certain products from its product group,
specifically as it related to some fresh direct store delivery products in its
Tasty Selections division. Overall, sales in the Tasty Selections division
remained relatively unchanged for the second quarter over the first quarter.
Revenue for the three months ended June 30, 2000 increased $7,820,551 to
$17,089,528, up 84.3% from $9,268,977 for the same period last year. The primary
reason for the increase is the impact of the 1999 acquisitions. Sales for the
second quarter increased marginally over the first quarter consistent with the
Company's products sales cycle. While the Company's sales in the first quarter
were negatively impacted by the overstock position of many retailers at the end
of 1999, it's sales levels returned to typical levels in the second 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 last year. As a percentage of revenue, cost of goods sold
improved representing 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 to a more diverse groups of products. As a
percentage of revenue, the Company continued to lower its cost of goods sold due
to the efficiencies resulting from certain capital expenditures made in last
half of 1999 and the rationalization of certain lower margin product lines in
its divisions, and specifically in its bakery division as related to fresh
direct store delivery products.
During the three month period ended June 30, 2000 the Company, as discussed
above continued to see margin improvement as a result of its capital expenditure
programs in 1999, increased volumes and changes in product mix.
The sales cycle for some of the Company's products typically reflect lower sales
during the first two quarters resulting in partial underabsorbtion of some
direct overhead costs. Therefore, during this period margins are lower than the
overall percentage for the year. Also, a larger percentage of the Company's
revenues during this period are related to the sales by the Company's DC Foods
subsidiary, which is characterized by larger sales volume and lower margin than
the rest of the divisions.
SELLING EXPENSES: Selling expenses increased $1,385,759 to $2,292,855 (7.1% of
revenue) for the six months ended June 30, 2000 compared to $907,096 (6.9% of
revenue) for the same period in 1999. The increase for the six month ended June
30, 2000 is primarily attributable to the 1999 acquisitions. The Company
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 division's products and the Company's Selections line, and the
introduction of its new products to the market. The Company began incurring
costs in the execution of this sales and marketing strategy in the second
quarter and early third quarter of 1999, therefore these costs were not incurred
at the increased level until part way through and after the 1999 six month
period.
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ADMINISTRATIVE EXPENSES: Administrative expenses increased 3,696,036 to
$5,671,031 (17.5% of revenue) for the six months ended June 30, 2000 compared to
$1,974,995 for the same period last year (15.2% revenue). The increase in
absolute dollars is due largely to the 1999 acquisitions. In addition, the
Company has continued to incur increased costs at the corporate level associated
with building management infrastructure and information systems, corporate
governance and reporting obligations, seeking out strategic acquisitions,
investor relations, and product marketing. The Company began incurring costs in
the execution of its 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 (2.4% of revenues) for six months ended June 30, 2000
compared to $229,688 (1.8% of revenue) in the same period in 1999. The increase
of $558,692 in the expense for intangibles amortization is a result of increased
purchased goodwill on acquired businesses and continued increased expenditures
on packaging and artwork in conjunction with the launch of products with new
customers and the branding of existing products in accordance with the Company's
strategy to achieve improved brand recognition through enhanced quality and
uniformity in product presentation. In addition, the value of the intangibles
increased during the 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: The Company's loss from operations increased $2,023,859 to
$3,508,578 (10.8% of revenues) for the six months ended June 30, 2000 over the
loss of 1,484,719 (11.4% of revenues) in the 1999 period. 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 the growth strategy of the Company.
The loss from operations for the three months ended June 30, 2000 increased
$693,707 to $1,727,250 over the same period in 1999; however, as a percentage of
revenue the loss decreased to 10.1% of revenues from 11.1%. Losses in the three
months ended June 30, 2000 as in the first six months then ended are typical of
the business cycle for the Company as it incurs operating, selling and
administrative expenses during this period and builds inventories in
anticipation of its third and fourth quarter sales.
FINANCING COSTS: Net interest expense increased $641,295 to $924,272 for the six
months ended June 30, 2000 as to date compared to $282,977 for the same period
last year. The increase is due primarily to the combined operating line
financing for the Company's units, including all of the acquisitions, and to
interest charges with respect to long-term debt, including the Company's
convertible debt, capital lease obligations associated with new capital
equipment acquired during 1999, and the loan obtained in June 2000. In addition,
the Company's 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: On June 30, 2000, the Company sold certain intangible
assets, recipes, and trademarks of the Prime Foods' Seafood Selections division
to former managers of the division. Under the terms of the agreement, the
Company 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 the Seafood Selections inventory of the Company during
the period up to February 28, 2001 at which time the purchasers agree to pay for
any inventory not previously purchased to that date.
RISKS AND UNCERTAINTIES
The Company believes that the future results of operations could be impacted by
factors such as market acceptance of new products, and the success of the
Company's marketing of its home meal replacement products. Similarly, future
earnings may be adversely effected by changes in the costs of goods sold,
business and labor. Additionally, where the Company continues to expand its
business internationally, and fluctuations in the foreign currency or general
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economic conditions in any of the countries in which the Company does business
could adversely effect future results of operations.
The Company's ability to develop and market products that successfully adapt to
current market needs may also have an impact on the Company's results of
operation. A portion of future revenues will come from new products. The Company
cannot determine the ultimate effect that new products and services will have on
revenues, earnings or stock prices.
The Company's recent acquisitions and growth strategy to continue to acquire
other food processing companies may effect future results of operations. Our
operating results could be adversely effected if we fail to successfully
integrate or manage acquired companies or if we are not able to obtain the cost
savings which we anticipate. Furthermore, the Company's result of operations
could suffer if the acquired companies do not perform as we expect.
Due to factors including those noted above and elsewhere in the Management's
Discussion and Analysis of Financial Conditions and Results of Operation, the
Company's future earnings and stock price may be subject to significant
volatility. Past financial performance should not be considered as a reliable
indicator of future performance and investors should not use historical results
to anticipate trends in future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased from $4,165,370 at December
31,1999 to $4,357,130 at June 30, 2000. Of these funds, $200,000 represents funs
required to be maintained as security for certain of its long term debt, and
$4,000,000 represent funds required to be maintained by the Company as part of
its 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 a new Bank of Nova Scotia facility. Bank credit
facilities utilized at June 30, 2000 totaled approximately $9,500,000. Total
credit facilities available at June 30, 2000 were $10,000,000.
Historically, the Company's business cycle involves a significant investment in
working capital during the first six to nine months of the year in anticipation
of its late third quarter and fourth quarter sales. The Company continued to
build or maintain high levels of inventories in its Transcontinental Gourmet
Food, Prime Foods and Seafood Selections divisions. For these divisions,
inventories are expected to decline in October for Transcontinental, consistent
with its sales cycle, and as sales increase in Prime. In addition, the Company
has continued to incur increased costs associated with building management
infrastructure and information systems, corporate governance and reporting
obligations, seeking out strategic acquisitions, investor relations and
obtaining new sources of financing. The operations of D.C. Foods, Ultimate and
Pasta Kitchens have had positive cash flows 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, the Company obtained additional funds from
the loans entered into with Southbridge Investment Partnership No. 1, or
Southbridge, First Ontario Labour Sponsored Investment Fund Ltd., and Bank of
Montreal Capital Corporation to fund working capital and capital expansion of
the Company. The amount, net of transaction costs, received from the transaction
was approximately $4,000,000.
Bank of Nova Scotia:
In August, the Company agreed to renew its credit facilities with the Bank of
Nova Scotia under the following terms:
(1) an operating line in the maximum authorized amount of $10,000,000. The
operating line may be utilized by way of direct advances or bankers'
acceptance and bears interest on direct advances at The Bank of Nova
Scotia's prime rate plus -1/2%. The operating line is repayable on
demand. As security for the operating line, IMSI provided to The Bank
of Nova Scotia with general security referred to below, under the new
facility, the Bank released the requirement to maintain cash collateral
of $4,000,000 the funds being used to pay down existing debt; and
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(2) a revolving term facility to purchase equipment in the maximum
authorized amount of $3,500,000. The term facility may be utilized by
way of term promissory notes with a maximum term of 5 years and bearing
interest at The Bank of Nova Scotia Prime plus 1 -1/4% or by way of
equipment lease bearing interest at The Bank of Nova Scotia Prime plus
1 -1/4%. As security for the term facility, IMSI is to provide
appropriate lease and/or conditional sales contracts as well as to
maintain certain insurance coverage on the assets financed. In
addition, the general security referred to below is security for the
term facility.
(3) A non-revolving equipment purchase facility to purchase equipment in
the maximum authorized amount of $1,500,000. The term facility may be
utilized by way of term promissory notes with a term of 5 years and
bearing interest at The Bank of Nova Scotia Prime plus 1 1/2% or by way
of equipment lease bearing interest at The Bank of Nova Scotia Prime
plus 1 1/2% to finance up to 70% of the equipment value. As security
for the term facility, IMSI is to provide appropriate lease and/or
conditional sales contracts as well as to maintain certain insurance
coverage on the assets financed. In addition, the general security
referred to below is security for the term facility.
As general security for the credit facilities, IMSI provided a general
assignment of all of the assets of IMSI, a general assignment of book debts and
life insurance on the life of Michael Steele. Each of Prime, TGF, Norbakco,
Tasty Selections, 1005549 Ontario Limited and D.C. Foods, Huxtables and the
Company have provided unlimited guarantees of the indebtedness of IMSI to The
Bank of Nova Scotia supported by general assignments of all of the assets of
such subsidiaries. In addition, the Company provided to The Bank of Nova Scotia
a postponement and assignment of any amounts owing to it from time to time by
IMSI.
Southbridge Investment Partnership No. 1, First Ontario Labour Sponsored
Investment Fund Ltd., and Bank of Montreal Capital Corporation - Loan:
On June 5, 2000, the Company entered into a loan agreement with its largest
existing institutional shareholders Southbridge Investment Partnership No. 1, or
Southbridge, First Ontario Labour Sponsored Investment Fund Ltd., and Bank of
Montreal Capital Corporation as lenders pursuant to which IMSI borrowed the
principal amount of $4,500,000. Interest is payable monthly at a rate of 12% per
annum until August 31, 2000, and then increases to match the funds' equity
returns to a rate of 24% per annum for the period from September 1, 2000 to and
including November 30, 2000, and at the rate of 36% per annum for the period
from December 1, 2000 to and including February 28, 2001. The loan is
subordinated to the Bank of Nova Scotia, and other lenders having first charge
on assets. The loan is secured by 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.
The Company is currently in compliance with its financial covenants with the
Bank of Nova Scotia. To fund its continuing strategy of acquiring and
integrating new businesses and its working capital requirements, management is
currently in the process of seeking additional financing through various forms
of equity to fund the operations of the Company's ongoing mergers and further
acquisitions and capital plant expansion. To this end, the Company has
approached several financial services companies to assist in the raising of debt
or equity financing to fund acquisitions and working capital. However, there can
be no assurance that the Company or IMSI will be able to raise additional
capital or whether such capital will be sufficient to satisfy financial
covenants, meet the Company's plan or other ongoing needs.
CAUTIONARY STATEMENT INVOLVING FORWARD LOOKING STATEMENTS
Some of the information in this Form 10-QSB may constitute forward-looking
statements which are subject to various risks and uncertainties. Such statements
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "anticipate," "estimate," "continue," "plan," or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial conditions or state other
"forward-looking" information. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors,
including but not limited to: competitive factors and pricing pressures;
relationships with its manufacturers, distributors, and banks; legal and
regulatory requirements; general economic conditions; and other risk factors
which may be described in our future filings with the Securities and Exchange
Commission. We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. In addition, when considering such
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forward-looking statements, the reader should keep in mind the factors described
in other cautionary statements appearing elsewhere in this Form 10-QSB. Such
statements describe circumstances which could cause actual results to differ
materially from those contained in any forward looking statement.
This Form 10-QSB may also include statistical data or disclose trends regarding
the food processing industry. This data may have been obtained from industry
publications and reports which we believe to be reliable sources. We have not
independently verified such data nor sought the consent of any organizations to
refer to their reports herein.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No unregistered securities were sold during the three months ended June 30,
2000. During the period the following transactions occurred:
In June, 2000 the Company's Board finalized and approved the issuance of 956,178
shares of common stock to the sellers of Huxtable's under the terms of the
Company's November, 1999 asset purchase agreement for acquisition of the assets
of Huxtables Kitchens LLC based on the performance of the unit during the period
November 1, 1999 to December 31, 1999 as defined in the purchase agreement.
In May, certain shareholders exchanged 295,166 Class x shares of International
Menu Solutions Inc. (and surrendered 295,166 Class N shares of the Company) for
the same number of shares of common stock of the Company. Other than the
exchange and surrender of such shares, there was no consideration accruing to
the Company for the exchange and surrender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule for the six months ended
June 30, 2000.
(b) None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 11, 2000
INTERNATIONAL MENU SOLUTIONS CORPORATION
By: /s/ MICHAEL STEELE
-----------------------
Michael Steele
President and Chief Executive Officer
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