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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
(X) Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
( ) 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( ) NO(X)
9,531,673 shares of the issuer's common stock, par value $0.001 per share, and
3,655,170 shares of the issuer's Class N Shares, par value $0.001 per share,
were outstanding at September 30, 1999.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL MENU SOLUTIONS CORPORATION
INDEX
Page
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 1999 (unaudited) and
December 1, 1998 2
Consolidated Statements of Income - Three and nine months ended
September 30, 1999 and 1998 (unaudited) 3
Consolidated Statement of Stockholders' Equity - Nine months ended
September 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 (unaudited) 5
Notes to Consolidated Financial Statements 7 - 12
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
September 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,261,993 $ 1,865,612
Accounts receivable 4,182,206 2,270,251
Inventories 6,142,777 1,299,890
Prepaid expenses 1,689,980 100,633
------------ ------------
16,276,956 5,536,386
CAPITAL ASSETS, NET 11,198,768 3,617,196
INTANGIBLE ASSETS, NET 19,710,635 4,627,070
------------ ------------
TOTAL ASSETS $ 47,186,359 $ 13,780,652
============ ============
LIABILITIES
CURRENT LIABILITIES
Bank operating loans $ 8,901,594 $ 1,100,849
Accounts payable 3,343,662 2,072,485
Accrued liabilities 1,247,299 937,940
Current portion of capital lease obligations 325,580 94,486
Current portion of long-term debt 697,600 279,044
------------ ------------
14,515,735 4,484,804
CAPITAL LEASE OBLIGATIONS 1,140,984 297,387
LONG-TERM DEBT
3,014,145 1,250,303
CONVERTIBLE DEBENTURE 4,000,000 --
DEFERRED INCOME TAXES 610,300 93,000
------------ ------------
TOTAL LIABILITIES 23,281,164 6,125,494
------------ ------------
MINORITY INTEREST 11,701,000 3,374,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Class N voting, non-participating stock - US$0.001 par value;
10,000,000 shares authorized; 3,655,170 and
3,190,462 shares issued 5,284 4,586
Common stock - US$0.001 par value; 25,000,000 shares
authorized; 9,531,673 and 5,884,838 shares issued 13,634 8,164
Additional paid-in capital 15,113,662 4,871,951
Deficit (2,928,385) (603,543)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,204,195 4,281,158
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,186,359 $ 13,780,652
============ ============
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(CANADIAN DOLLARS)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
REVENUE $ 8,647,828 $ 763,326 $ 21,680,117 $ 2,169,537
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold 7,377,439 665,065 18,782,667 1,933,097
Selling expenses 420,366 58,776 1,327,463 132,352
Research and development 176,458 41,747 371,228 102,654
Administrative expenses 1,831,161 155,393 3,611,386 321,681
Amortization of intangibles 127,692 3,405 327,480 10,239
------------ ------------ ------------ ------------
9,933,116 924,386 24,420,224 2,500,023
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,285,288) (161,060) (2,740,107) (330,486)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest revenue 168 18,295 30,253 18,295
Interest expense (260,326) (62,669) (573,388) (63,687)
------------ ------------ ------------ ------------
(260,158) (44,374) (543,135) (45,392)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND
MINORITY INTEREST (1,545,446) (205,434) (3,283,242) (375,878)
INCOME TAXES 25,000 -- 169,400 --
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (1,520,446) (205,434) (3,113,842) (375,878)
MINORITY INTEREST 411,000 -- 789,000 --
------------ ------------ ------------ ------------
NET LOSS $ (1,109,446) $ (205,434) $ (2,324,842) $ (375,878)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC
AND DILUTED $ (0.08) $ (0.04) $ (0.22) $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE OUTSTANDING
COMMON SHARES 13,084,669 5,678,000 10,590,387 5,691,889
============ ============ ============ ============
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CANADIAN DOLLARS)
Additional Total
Class N Common Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ------- ------
Balances, December 31, 1998 3,190,462 $4,586 5,884,838 $8,164 $4,871,951 $(603,543) $4,281,158
Share exchange (unaudited) (924,375) (1,386) 924,375 1,386 -
Issuance of Class X shares
by IMSI in connection
with the acquisition of
businesses (unaudited) 1,389,083 2,084 3,644,257 3,646,341
Issuance of common shares
in connection with
financings (unaudited) 2,722,460 4,084 6,597,454 6,601,538
Net loss (2,324,842) (2,324,842)
--------- ------ --------- ------- ----------- ----------- -----------
Balances, September 30, 1999
(unaudited) 3,655,170 $5,284 9,531,673 $13,634 $15,113,662 $(2,928,385) $12,204,195
========= ====== ========= ======= =========== =========== ===========
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INTERNATIONAL MENU SOLUTIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
Nine months ended
September 30,
1999 1998
---- ----
(unaudited)
OPERATING ACTIVITIES
Net loss $ (2,324,842) $ (375,878)
Items not requiring cash
Depreciation and amortization 1,119,067 81,901
Minority interest (789,000) --
Deferred income taxes (169,400) --
Changes in operating assets and liabilities
Accounts receivable 455,868 (142,248)
Inventories (3,998,834) (43,188)
Prepaid expenses (1,515,327) (12,556)
Accounts payable (1,194,199) (57,405)
Accrued liabilities 159,380 12,915
------------ ------------
(8,257,287) (536,459)
------------ ------------
INVESTING ACTIVITIES
Purchase of capital assets (2,766,086) (96,556)
Additions to intangible assets (688,371) (85,779)
Acquisitions, net of cash acquired in 1998 -
$2,514, June 1999 $206,302; including bank
overdraft assumed in 1999 - $1,126,779 (4,993,701) --
------------ ------------
(8,448,158) (182,335)
------------ ------------
FINANCING ACTIVITIES
Issuance of shares 6,603,879 1,513,408
Proceeds from bank loans 8,236,990 255,000
Convertible debentures issued, net
of issuance costs of $359,024 3,640,976
Proceeds from long term debt 1,155,761 --
Payment of long-term debt and
capital lease principal (535,780) (24,891)
Redemption of Class A preferred stock -- (292,868)
------------ ------------
19,101,826 1,450,649
------------ ------------
NET CHANGE IN CASH AND
CASH EQUIVALENTS 2,396,381 731,855
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,865,612 299,274
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,261,993 $ 1,031,129
------------ ------------
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Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 573,388 $ 63,687
============ ============
Cash paid during the period for income taxes $ -- $ --
============ ============
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INTERNATIONAL MENU SOLUTIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS)
1. ORGANIZATION
International Menu Solutions Corporation, a Nevada corporation (the
"Company"), and its subsidiaries develop, market and produce a series of
specialty food products for sale to food distributors, food retailer
chains and specialty food retailers.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and the instructions to Form 10-QSB and
Regulation S-B. Consequently, the accompanying unaudited consolidated
financial statements are not presented with footnotes required by
generally accepted accounting principles. These financial statements
should be read in conjunction with the audited consolidated financial
statements for December 31, 1998 recently filed with the SEC as a part of
the Company's registration statement on Form 10-SB.
The financial information presented reflects all adjustments (including
normal recurring adjustments) which are, in the opinion of management,
necessary to produce a fair statement of the financial position and
results of operations for the periods included in this report.
3. FOREIGN CURRENCY TRANSLATION
a) Translation of foreign subsidiaries' accounts
Assets and liabilities of the Company's foreign subsidiaries are
translated from their local currencies to the functional currency
at the exchange rate in effect at the balance sheet date. Revenues
and expenses are translated at the average exchange rate
prevailing during the year. The adjustments resulting from
translating the financial statements foreign subsidiaries are
recorded in comprehensive income in a separate component of
equity. The Company's functional currency is the Canadian dollar.
Consequently, no adjustments have arisen from the translation of
foreign subsidiaries accounts because all foreign subsidiaries
currently operate in Canada.
b) Translation of foreign currency transactions
Transactions incurred in currencies other than the functional
currency are converted to the functional currency at the
transaction date. Monetary assets and liabilities denominated in a
currency other than the functional currency are converted to the
functional currency at the exchange rate in effect at each period
end. All foreign currency transaction translation gains or losses
have been included in earnings.
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February, 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", which has been adopted by the Company. Upon the
adoption of SFAS No. 128, the Company is presenting basic earnings per
share and diluted earnings per share. Basic earnings per share is
computed by dividing the net earnings available to common shareholders by
the weighted average number of common shares outstanding for the year.
Diluted earnings per share is derived by adjusting the basic earnings per
share calculation to reflect the effect of securities with
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dilutive potential. The computation of diluted earnings per share does
not include securities with dilutive potential that would have an
anti-dilutive effect on earnings per share.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for the reporting and presentation of comprehensive
income and its components. The Company's adoption of SFAS No. 130 has had
no significant impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the reporting and identification of operating segments and
requires certain financial and descriptive information regarding those
segments. The Company operates in one business segment and consequently
the adoption of SFAS No. 131 had no material effect on the consolidated
financial statements.
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards
for the reporting and accounting for derivative instruments. Presently,
the Company's use of derivative instruments and hedging arrangements is
not significant. Management is in the process of determining the impact
of SFAS No. 133 on the consolidated financial statements.
5. ACQUISITIONS
During the period ended September 30, 1999, International Menu Solutions
Inc. ("IMSI"), a Canadian subsidiary of the Company, acquired the
businesses set out in the table below which have been accounted for using
the purchase method:
Tasty Batters(1) DC Foods(2)
---------------- -----------
Acquisition date April 15, 1999 May 10, 1999
Estimated purchase price including acquisition costs $2,235,000 $15,725,000
----------------------------------------------------------------------------------------------------------
Assigned to fair values of net assets acquired:
Current assets 1,382,544 1,857,491
Capital assets 493,877 3,391,083
Current liabilities (677,196) (1,557,793)
Long-term liabilities (757,532) (1,680,472)
----------------------------------------------------------------------------------------------------------
441,693 2,010,309
----------------------------------------------------------------------------------------------------------
Goodwill $1,793,307 $13,714,691
==========================================================================================================
(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 Company and 442,750
Class X shares of IMSI to the vendors, collectively valued at
$1,160,000 (see Note 8).
(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 X shares of IMSI and 893,333 Class N shares
of the Company; 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 Company
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based on the earnings recorded by D.C. Foods in 1999 and 2002 (see
Note 8). An independent valuations expert valued the total
consideration issued by IMSI at $15,800,000.
On May 17, 1999, IMSI acquired the remaining 41% equity
interest in Norbakco, having acquired 59% interest on December 1,
1998. The consideration paid for the additional interest was the
issue by IMSI of 53,000 Class X Shares, the issue by the Company of
53,000 Class N Shares and the purchase from the selling shareholders
of shareholder loans made to Norbakco in the amount of $180,000.
Goodwill arising from the above acquisitions is being amortized
straight-line over a 20 to 40 year period depending on the business
acquired.
Unaudited supplemental pro forma results of operations
The following table presents unaudited pro-forma revenue, net loss and
loss per share for the nine months ended September 30, 1999 assuming IMSI
had acquired the above businesses, except for Norbakco which is not
material, on January 1, 1999:
Revenue $ 27,903,000
Net loss (2,019,000)
Net loss per share $ (0.18)
6. INVENTORY
September 30, December 31,
1999 1998
---- ----
(unaudited)
Raw materials $2,774,520 $ 957,704
Work in process 1,148,134 27,185
Finished goods 2,220,123 315,001
- - ------------------------------------------------------------------------------
Total inventory $ 6,142,777 $ 1,299,890
==============================================================================
7. BANKING FACILITIES AND CONVERTIBLE DEBENTURES
On July 22, 1999, IMSI finalized arrangements with respect to the
provision of credit facilities by The Bank of Nova Scotia to IMSI. The
financing consists of the following facilities:
(1) an operating line in the maximum authorized amount of $10,000,000.
The operating line may be utilized by way of direct advances or bankers'
acceptance and bears interest on direct advances ranging from The Bank
of Nova Scotia's Prime to Prime plus 1/2%. The operating line is
repayable on demand. As security for the operating line, IMSI provided
to The Bank of Nova Scotia cash collateral of $4,000,000 as well as the
general security referred to below; and
(2) a revolving term facility to purchase equipment in the maximum
authorized amount of $3,500,000. The term facility may be utilized by
way of term promissory notes with a maximum term of 5 years 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.
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
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.
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
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exchangeable shares of IMSI which are then exchangeable into shares of
the Company. IMSI will have the right to force conversion of the
debentures if certain trading statistics are maintained after July 1,
1999. A total of $359,000 was paid by IMSI in respect of professional
fees and commissions, which have been recorded as deferred financing
costs.
8. CAPITAL TRANSACTIONS
Reverse acquisition
On July 16, 1998, ANM Holdings Corporation, the predecessor corporation
to the Company, then a non-operating corporation, acquired all of the
outstanding common shares of IMSI. For accounting purposes, the
transaction was treated as a reverse acquisition of ANM by IMSI. In
conjunction with the reverse acquisition transaction, the Company 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 Company
on a one for one basis at the option of the holder until 2013, at which
time the Company can force conversion of the Class N shares.
In the nine-month period ended September 30, 1999, 924,375 Class N and
924,375 Class X shares of IMSI were exchanged for common shares of the
Company (unaudited)
Private placement financing
During the period November 17 to November 28, 1999, the Company sold, by
private placement, 1,997,300 units for US$0.90 each, consisting of one
common share and one-half of a warrant. In exchange for one warrant and
US$1.40, the holder may purchase one common share of the Company until
May 31, 1999. These warrants were exercised during May 1999. Total
proceeds resulting from the exercise of the warrants to the Company were
$2,069,202 (US$1,398,110).
On April 16, 1999, Southbridge Inc. ("Southbridge") subscribed for
1,523,810 common shares of the Company at a subscription price of $2.625
per common share. Proceeds to the Company, net of issuance costs, totaled
approximately $3,693,000, net of issuance cost of approximately $307,000.
As a part of the subscription, the Company granted to Southbridge 400,000
warrants which entitle Southbridge to purchase up to 200,000 common
shares at the price of $2.25 per common share during the period to April
16, 2000 and 200,000 common shares at the price of $2.625 per common
share during the period to April 16, 2001.
Exchangeable share transactions - Acquisitions of TGF/Norbakco and D.C.
Foods
In conjunction with the acquisitions of D.C. Foods and TGF/Norbakco
(acquired in 1998), IMSI issued exchangeable shares to satisfy the share
consideration requirements of the respective share purchase agreements.
The shares are exchangeable into common shares of the Company at the
holder's option based on exchange ratios contained in the purchase
agreements. The exchange ratio is determined by a formula which is
primarily based upon the earnings before interest, depreciation and taxes
("EBITDA") of the acquired businesses for the years ending February 28,
1999 and 2000 for TGF/Norbakco and for the period from December 6, 1998
to December 31, 1999 and the year ending March 2002 or December 2002 for
D.C. Foods and the Company's common stock market price on those dates.
The value of the exchangeable shares is recorded as minority interest.
Based on the financial results of the acquired operations to-date and the
current market price of the Company's common stock, management has
estimated that approximately 2,630,000 and 1,800,000 shares of the
Company's common stock could be issued pursuant to the future conversion
rights of the holders of the exchangeable shares for TGF/Norbakco
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and D.C. Foods, respectively. At such time as the future conversion
rights of the holders of the exchangeable shares is determined, the value
of the remaining minority interest associated with the individual
exchangeable shareholder groups will be reclassified to additional paid
in capital. These shares have been treated for accounting purposes as
being issued. It is impossible to predict with absolute certainty the
exact number of shares that could be issued as the EBITDA of the acquired
businesses for the periods specified above is unknown.
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9. NET LOSS PER SHARE
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited)
Net loss per share
Numerator
Net loss available to common shareholders $ 1,109,406 $ 205,434 $ 2,324,842 $ 375,878
------------ ---------- ------------ ----------
Denominator
Weighted average shares outstanding 13,084,669 5,678,000 10,590,387 5,691,889
------------ ---------- ------------ ----------
$ 0.08 $ 0.04 $ 0.22 $ 0.07
============ ========== ============ ==========
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 outstanding
are considered common stock equivalents for the purposes of the basis
loss per share and weighted average outstanding common shares
calculations.
10. SUBSEQUENT EVENTS (UNAUDITED)
a) Letter of intent - Huxtable's Foods, L.L.C. ("Huxtables").
On October 15, 1999, the Company entered into a letter of intent to
acquire certain assets of Huxtables through a newly formed subsidiary
of the Company. The terms of the letter call for a cash payment of
US$3,000,000 and future payments, payable in cash or common shares of
the Company based on the earnings of the newly formed subsidiary
during the period to December 31, 2002.
b) Acquisition - The Ultimate Cookie Co. Ltd. "UCC"
On October 18, 1999, the Company acquired all of the outstanding
common shares of UCC by paying $175,000 in cash and by issuing
250,000 Class E Series 5 shares and 250,000 Class E Series 6 shares
of IMSI which are exchangeable into shares of the Company based on
future earnings of UCC.
c) Exercise of broker options
On October 18, 1999, 172,302 options held by brokers of previous
financings were exercised to purchase an equivalent number of common
shares of the Company. The transaction resulted in proceeds of
US$172,302 to the Company.
d) Share subscription
On October 20, 1999, Southbridge subscribed for 1,555,556 special
warrants (the "Warrants") at a price of US$3.00 each. The Warrants
entitle the holder to acquire one Class X shares of IMSI for each
Warrant held for no additional consideration until the earlier of
five days after the date of issuance by the Ontario Securities
Commission (the "Commission") of a receipt for a preliminary
prospectus filed in the province of Ontario or October 22, 2000.
Approximately $4,000,000 of the proceeds resulting from the
subscription for the Warrants is to be held in escrow until February
29, 2000, pending the approval of mutually agreeable acquisitions or
transactions by the Company. In addition, the Company is subject to
certain penalty provisions which shall be satisfied by increasing the
number of shares issuable upon surrender of the Warrants by 10% to
32%. The Company will have to comply with such penalty provisions in
the event that the Company does not raise additional funds or file
the
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required prospectus documents with the Commission within the
timelines specified in the special warrant indenture.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Result of Operations
NINE MONTHS ENDED SEPTEMBER 30, 1999 (OR "Q3-99") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 (OR "Q3-98")
REVENUE: Revenue for the nine months ended September 30, 1999 increased
$19,510,600 or 900% to $21,680,100 from $2,169,500 during the same period in
1998. The growth in revenue can be attributed to the acquisitions made in late
1998 -- Pasta Kitchens, Transcontinental Gourmet Foods, and Norbakco; and
acquisitions made in April/May 1999 -- Tasty Selections and DC Foods,
respectively. In addition to the above, the Company's Seafood Selections
division, established in late 1998, had its first sales in March of 1999.
Revenue for the three months ended September 30, 1999 increased $7,884,500 to
$8,647,800, up 1033% from $763,300 for the same period last year. The primary
reason for the increase is the impact of the acquisitions identified above.
Sales for the third quarter increased marginally over the second quarter
consistent with the Company's product sales cycle being weighted to the fourth
quarter. The Company continued to pursue entry of its Selections brands into the
United States which it launched into several retail chains in the fourth
quarter. Sales for the quarter were lower than anticipated as new customers
delayed the launch of certain products and programs until the fourth quarter.
COST OF GOODS SOLD/GROSS MARGIN: Cost of goods sold for the nine months ended
September 30, 1999 increased to $18,782,700 up $16,849,600 or 872% from
$1,933,100 for the same period last year. As a percentage of revenue, cost of
goods sold represented 86.6% of revenue for the nine months then ended, and
85.3% for Q3-99 compared to 89.1%, and 87.1% for the same periods in 1998. The
change in absolute dollars is attributed to previously mentioned acquisitions
and establishment of the Seafood Selections division. The reduced cost as a
percentage of revenue can be attributed to a more diverse product group of
products with better margins.
The sales cycle for some of the Company's divisions' products reflect lower
sales during the first three quarters resulting in partial underabsorbtion of
some direct overhead costs. Therefore, during this period margins are typically
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. In addition, during the third quarter the
Company expanded its production facilities and combined its Tasty Selections
operations into the expanded Norbakco facilities and TGF moved into the space
vacated by Tasty Selections resulting in increased lease cost, repairs and
maintenance costs as the Company refurbished and relocated some of its
production equipment for better production efficiencies. The company expects to
benefit from these expanded facilities and production efficiencies in the fourth
quarter and future periods.
SELLING EXPENSES: Selling expenses increased $1,195,100 to $1,327,400 (6.1% of
revenue) for the nine months ended September 30, 1999 compared to $132,300 (6.1%
of revenue) for the same period ended September 30, 1998. For Q3-99 Selling
expenses were $420,400, an increase of $361,600 over the same period last year.
The increase in the quarter and the year to date is primarily attributable to
the 1998/99 acquisitions. In 1999, the Company increased selling expenses beyond
those of the combined costs of the existing and acquired manufacturing divisions
as a result of the corporate involvement in the promotion of its each division's
products and the Company's Selections line, the introduction of its new products
to the market, and the establishment of a western corporate sales office.
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RESEARCH AND DEVELOPMENT: Research and development expenses increased $268,600
to $371,200 (1.7% of revenue) for the nine months ended September 30, 1999
compared to $102,600 (4.7% of revenue) for the same period last year. The
increase is primarily due to continued product development efforts associated
with new meal components and meal kits being developed in conjunction with new
retail customers/products for launch in Q4, including the Company's new Salmon
Wellington product.
ADMINISTRATIVE EXPENSES: Administrative expenses increased $3,289,700 to
$3,611,400 (16.7% of revenue) for the nine months ended September 30, 1999 and
$1,675,800 to $1,831,200 (21.2% of revenue) for Q3-99 over the same periods in
1998. The increase in absolute dollars is due to previously mentioned
acquisitions that were completed during 1998/1999. In addition, the Company has
continued to incur increased costs at the corporate level associated with
building management infrastructure and information systems, corporate governance
and reporting obligations, seeking out strategic acquisitions, investor
relations, product marketing. During the current quarter the company established
a sales offices in Calgary, and hired sales managers in Maryland and California,
contributing to the increased cost as a percent of revenue in the third quarter.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES: Amortization of intangibles
increased to $327,500 (1.5% of revenues) for year to date compared to $10,200
(0.5% of revenue) in 1998. The growth of $317,300 in the expense for intangibles
amortization is a result of increased purchased goodwill on acquired companies
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 for better brand recognition
through uniformity in the quality of product presentation.
LOSS FROM OPERATIONS: The Company's loss from operations increased $2,409,600 to
$2,740,100 (12.6% of revenues) for the nine months ended September 30, 1999 over
the same period in 1998. Losses for Q3-99 operations increased by $1,124,200 (to
$1,285,300) over the same period in Q3-98. The increase in the loss is primarily
due to significant increases in product development efforts and new
administrative costs incurred to assist the growth of the Company, the delay to
the fourth quarter of the Company driven sales initiatives and the normal loss
cycle in its Transcontinental and Prime Foods. The Seafood Division incurred
losses during the second and third quarter as it continued its sales efforts
resulting in fourth quarter sales. For these products, retailers preferred to
launch them the fourth quarter.
FINANCING COSTS: Net interest expense increased $497,700 to $543,100 in for the
current year to date compared to $45,400 for the same period last year end.
Q3-99 finance charges have increased $215,800 to $260,100. The increase is due
primarily to the combined operating line financing for the Company's divisions,
including all of the acquisitions, and to interest charges with respect to
long-term debt, including the Company's convertible debt and capital lease
obligations associated with and new capital equipment acquired during 1998 and
1999.
MINORITY INTEREST SHARE IN LOSSES: This amount, $789,000 for the year to date
represents the share in losses by the Minority Interest shareholders
(Shareholders owning Class B, C, D, and E shares) in IMSI. These Minority
Interest shareholders comprise, at September 30, 1999, the vendors of
Transcontinental Gourmet Foods, and DC Foods.
RISKS AND UNCERTAINTIES
The Company believes that in the future results of operations could be impacted
by factors such as market acceptance of new products, and the success of the
company's employees marketing home meal replacements. 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 economic
conditions in any of the countries in which the Company does business could
adversely effect future results of operations.
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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 the factors 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 $1,865,000 at December
31,1998 to $4,262,000 at September 30, 1999. Of these funds $4,200,000 represent
funds required to be maintained by the Company as part of its banking facilities
agreement. Bank credit facilities utilized at September 30, 1999 totaled
approximately $7,800,000. Total credit facilities available at September 30,
1999 were $10,000,000. The Company increased its bank borrowings by $6,770,000
from December 31, 1998 to September 30, 1999. During the nine month period ended
September 30, 1999, the Company received approximately $10,500,000 from the
issuance of common stock, convertible debt and other securities of IMSI. The
funds were used primarily to complete the acquisitions of D.C. Foods and Tasty
Selections during the year, and to fund investments in working capital and
capital equipment.
Historically, the company business cycle involves a significant investment in
working capital during the first nine months of the year in anticipation of its
late third quarter and fourth quarter sales. The Company has also made
investments in new capital equipment and leases during the year. The leasehold
improvements are financed out of cash flows. The Company continued to build or
maintain high levels of inventories in its Transcontinental Gourmet Food, Prime
Foods and Seafood Selections divisions. For each of these divisions, inventories
begin do decline in October and later as the retailers begin to purchase product
for the fall/winter seasons and hors d'oeuvres for the holiday season. This
year's build up of the Company's inventory of hors d'oeuvres is greater than
historically in anticipation of the expected increased demand for millennium
celebrations. In addition, the Company has continued to incur increased product
development costs associated with building management infrastructure and
information systems, corporate governance and reporting obligations, seeking out
strategic acquisitions, investor relations and obtaining new sources of
financing.
Cash flows from operations were approximately $8,257,000 for the nine-month
period ended September 30, 1999. Cash flows from operations for the same period
last year were approximately $536,000. The operations of Tasty Selections and
D.C. Foods had positive cash flows from operations during this period which
funded the operations management costs in IMSI.
On July 22, 1999, IMSI finalized arrangements with respect to the provision of
credit facilities by The Bank of Nova Scotia to IMSI. The financing consists of
the following facilities:
(1) an operating line in the maximum authorized amount of $10,000,000. The
operating line may be utilized by way of direct advances or bankers' acceptance
and bears interest on direct advances ranging from The Bank of Nova Scotia's
Prime to Prime plus 1/2%. The operating line is repayable on demand. As
security for the operating line, IMSI provided to The Bank of Nova Scotia cash
collateral of $4,000,000 as well as the general security referred to below; and
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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.
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 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.
In October 1999, the Company completed a CDN$7,000,000 (US$4,700,000) private
placement of special warrants in the Company's IMSI subsidiary to be used to
settle certain payment obligations on previous acquisitions and to fund future
acquisitions of the Company.
Management believes that its existing cash flows from operation and credit
facilities are sufficient to fund operations. However, to finance future
expansion, both capital expansion and the acquisition of new companies, the
Company will have to seek additional financing. This financing may take the form
of either equity or debt. To this end, the Company's subsidiary, IMSI recently
engaged Scotia Capital Markets Inc., a division of Scotiabank & Scotia McLeod
Canada, to act as its financial advisor for capital raising projects to fund the
Company's acquisition strategy and infrastructure expansion and production
integration plans. However, there can be no assurance that the Company or IMSI
will be able to raise additional capital or whether such capital will be
sufficient to meet its plan or other ongoing needs.
YEAR 2000
The "Year 2000" problem is the result of computer programs being written using
two digits, rather than four, to define the applicable year. Computer programs
and microprocessors that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, or not recognize the date at
all. This could result in major system failures or miscalculations causing
disruptions in operations, including among other things, a temporary inability
to process transactions, send invoices, access internal financial information or
engage in normal business activities. Year 2000 problems experienced by our
suppliers, or us could adversely impact our ability to meet the demands of, or
service our customers or otherwise carry on our business.
To assist in the integration of recent acquisitions, and to mitigate the
uncertainties associated with Year 2000 issues the Company decided to purchase a
new financial accounting and management information system that will be
integrated and implemented across all operating and management functions. The
implementation of the new computer system has begun and the Company estimates
that the cost of the new system, including the software, hardware and
installations costs will total approximately $250,000. The Company will continue
to monitor potential Year 2000 compliance issues related to all critical systems
through the new year.
In addition, the Company has communicated with parties with which it does
significant business to assess their Year 2000 compliance and the extent to
which the Company is exposed to any significant third party Year 2000 compliance
issues. The costs associated with any further third party Year 2000 compliance
issues are not expected to be significant. This process will not guarantee that
systems of other parties upon which the Company's systems directly or indirectly
rely will be Year 2000 compliant on a timely basis, or that a failure by another
party to render their systems compliant with Year 2000 issues will not have a
material adverse effect on the Company.
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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 and distributors; 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 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 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 22 , 1999, Southbridge Equities Inc., a corporation
organized under the laws of the Province of Ontario, Canada ("Southbridge
Equities"), subscribed for 1,555,556 special warrants ("Special Warrants") of
International Menu Solutions, Inc., a corporation organized under the laws of
the Province of Ontario, Canada and a subsidiary of the Company ("IMSI"), for an
aggregate consideration of approximately US$5 million. Each Special Warrant
entitles Southbridge Equities, upon exercise thereof without any further
consideration, to receive one Non-voting Class X Exchangeable Share (an
"Exchangeable Share") of IMSI. Such Special Warrants are immediately exercisable
and any Special Warrant not exercised by October 22, 2000 (or earlier under
certain circumstances) will be deemed to have been exercised as of such date.
The Special Warrants are subject to customary anti-dilution adjustment
provisions. In addition, each Special Warrant will be exercisable for (i) 1.1
Exchangeable Shares in the event that IMSI does not receive a receipt for a
(final) prospectus issued by the Ontario Securities Commission by August 5,
2000, and (ii) 1.2 Exchangeable Shares in the event that IMSI is not able to
obtain additional financing of least US$7 million by March 30, 2000 or certain
trading volume and price targets for the Company's common stock are no met.
Also, in the event that IMSI is not able to obtain such additional financing by
March 30, 2000, the Special Warrants will be deemed to be amended to change all
references to Exchangeable Shares to refer to the common stock of the Company.
These securities were sold in an offshore transaction in reliance on Regulation
S under the Securities Act of 1933, as amended. In connection with such
subscription, the Company and its subsidiary entered into additional agreements
with Southbridge Equities which, among other thing, address registration rights.
The proceeds will be used to fund previously announced acquisitions and
expansion plans. Southbridge Equities is a subsidiary of Southbridge, Inc.
Reginald Peterson, a director of IMSI, is the controlling shareholder of
Southbridge, Inc. Prior to this transaction, Southbridge, Inc.
beneficially owned 1,523,810 shares of common stock of the Company.
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Issue of shares in relation to the Acquisition of The Ultimate Cookie Co Inc.
On October 15, 1999, the Company, through IMSI, purchased all of the
issued and outstanding shares of The Ultimate Cookie Co. Inc., a Montreal-based
bakery ("UCC"), for consideration comprised of US$175,000.00 in cash, 250,000
Class E Series 5 shares of IMSI and 250,000 Class E Series 6 shares of IMSI. The
Class E shares were issued by IMSI on October 18, 1999 and are exchangeable for
common stock of the Company based upon the conditions for each series of the
Class E shares, which are largely based upon financial tests to be achieved by
UCC. These shares are non-participating and non-voting except in matters
affecting the characteristics of the shares.
Options to Brokton International, Ltd.,
Dover IX Investment Limited, IPO International Ltd. and Tinamilu Holdings Inc.
In October, certain of the above option holders exercised options
covering 172,302 shares of common stock of the Company at a per share exercise
price of US$1.00 (CDN$1.46), resulting in US$172,302 being put into treasury of
the Company for general corporate purposes. These securities were issued in an
offshore transaction in reliance on Regulation S under the Securities Act of
1933, as amended.
Options Third Party Financial Advisors
On October 27, 1999, in consideration of financial advisory,
consulting, marketing and public relations services provided to the Company, the
Company granted 150,000 options. 50,000 of these options have a per share
exercise price of US$2.25; 100,000 of these options have a per share exercise
price that is determined by calculating the average of the 10 trading days
trading price prior to the date of grant (US$3.01 per share). All options must
be exercised within 12 months of the date of grant.
Exchange of Shares
In October, certain shareholders exchanged 544,385 Class N shares of
the Company (and 544,385 Class X shares of IMSI) for the same number of share of
common stock of the Company. Other than the surrender of such shares, there was
no consideration accruing to the Company for this share exchange.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 15, 1999, the Company announced that it had entered into a
letter of intent to acquire Huxtable's Kitchens, a private company based in Los
Angeles, California, for a combination of cash and securities of the Company.
The completion of such acquisition is subject to the negotiation and execution
of a suitable acquisition agreement, however, there can be no assurance that any
such agreement will be entered into and, if entered into, whether the
acquisition will be beneficial to the Company and/or its stockholders in the
near term or at all.
IMSI recently engaged Scotia Capital Markets Inc., a division of
Scotiabank & Scotia McLeod Canada, to act as its financial advisor for capital
raising projects to fund the Company's acquisition strategy and infrastructure
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expansion and production integration plans. However, there can be no assurance
that the Company or IMSI will be able to raise additional capital or whether
such capital will be sufficient to meet its plan or other ongoing needs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule for the nine months ended September 30, 1999.
(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: November 12 , 1999
INTERNATIONAL MENU SOLUTIONS CORPORATION
By: /s/ Michael Steele
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Michael Steele
President and Chief Executive Officer
/s/ Larry Hoffman
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Larry Hoffman
Chief Financial Officer
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