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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee required)
For Fiscal year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
(NO FEE REQUIRED)
For the transition period from _____ to _____
Commission file Number 0-19824
-------
NUTRITION MANAGEMENT SERVICES COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2095332
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
725 Kimberton Road, Kimberton, Pennsylvania 19442
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 610-935-2050
------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Share of Class A Common Stock (no par value)
(Cover Page 1 of 2 pages)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchanges Act of 1934
during the preceding 12 months (or for 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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of voting stock (Class A Common Stock, no par value)
held by non-affiliates of the Registrant as of September 19, 2002 was
approximately $177,988.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At September 23, 2002, there
was outstanding 2,747,000 share of the Registrant's Class A Common Stock, no par
value, and 100,000 shares of the Registrant's Class B Common Stock, no par
value.
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
The information required by Part III for Form 10-K will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the Registrant pursuant to Regulation 14A within 120 days after
the close of its fiscal year.
This report consists of consecutively numbered pages (inclusive of all exhibits
and including this cover page). The Exhibit Index appears on pages 12 - 13.
(Cover page 2 of 2 pages)
PART I
ITEM 1 - BUSINESS
GENERAL
Nutrition Management Services Company (the "Company" or the "Registrant")
provides food management services to continuing care facilities, hospitals and
retirement communities.
The Company was incorporated under the laws of the Commonwealth of Pennsylvania
on March 28, 1979, and focuses on the continuing care and health-care segments
of the food service market. Its customers include continuing care facilities,
hospitals, and retirement communities.
On May 31, 1994, the Company purchased twenty-two (22) acres of land containing
a 40,000 square foot building formerly used as a restaurant and banquet
facility. The Company has recently renovated the property to serve as a
comprehensive training facility for Company employees. In addition, the facility
will serve as a showroom for prospective customers who will be able to observe
the Company's programs for nursing and retirement home dining and hospital
cafeteria operations. In September 1997, the Company opened the retail
restaurant portion of the Collegeville Inn Conference & Training Center. In
connection therewith, the Company expended approximately $6,000,000 in
renovation work. The Company opened the banquet and training division during its
second quarter of fiscal year 1998. The remaining division of the project was
available for operations in the third quarter of fiscal 2000.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note N on page 19 of the Consolidated Financial Statements.
DESCRIPTION OF SERVICES
The Company provides contract food service to continuing care facilities,
hospitals, and retirement communities. The Company provides complete management
and supervision of the dietary operations in its customers' facilities through
the use of on-site management staff, quality and cost-control programs, and
training and education of dietary staff. The Company's operational districts are
supported by Regional Managers, District Managers, Registered Dietitians and
Quality Assurance staff.
The Company seeks to provide food service at a lower cost than self-managed
facilities, while maintaining or improving existing service, nutritional care
standards and regulatory compliance.
1
MARKETING AND SALES
The Company's customers include continuing care facilities, hospitals and
retirement communities, which range in size from small individual facilities to
large multi-facility operations. Although many facilities perform their own food
service functions without relying upon outside management firms such as the
Company, the Company expects the market for its services to grow as facilities
increasingly seek to contain costs and are required to comply with increased
governmental regulations.
The Company's services are marketed at the corporate level by its Chief
Executive Officer, its President, and its Marketing Representatives. The
Company's services are marketed primarily through in-person solicitation of
facilities. The Company also utilizes direct mail and participates in industry
trade shows.
MARKET FOR SERVICES
The market for the Company's services consists of a large number of facilities
involved in various aspects of the continuing care and health care fields,
including nursing homes, retirement communities, hospitals and rehabilitation
centers. Such facilities may be specialized or general, privately owned or
public, for profit or not-for-profit and may serve residents and patients on a
continuing or short-term basis.
SERVICE AGREEMENTS
The Company provides its services under several different financial arrangements
including a fee basis and profit and loss basis. As of June 30, 2002 the Company
provided services under various service agreements at 72 facilities. At certain
of these facilities, the Company has contracts to provide vending services and
housekeeping services in addition to the contract to provide food services. Most
of these contracts have one year terms and are automatically renewable at the
end of each service year. The agreements generally provide that either party may
cancel the agreement upon ninety (90) days written notice.
In consideration for providing its services, the Company expects to be paid by
its clients in accordance with the credit terms agreed upon.
MAJOR CUSTOMER
In fiscal 2002, 15% of the Company's revenues were derived from sales to one
customer. The Company anticipates that future revenues would be negatively
impacted by the termination of the relationship with this major customer.
2
COMPETITION
The Company competes mainly with regional and national food service management
companies operating in the continuing care and health care industries, as well
as with the self managed departments of its potential clients.
Although the competition to service these facilities is intense, the Company
believes that it competes effectively for new agreements as well as for renewals
of existing agreements based upon the quality and dependability of its services.
The Company's ability to compete successfully depends upon its ability to
maintain and improve quality, service and reliability, to attract and retain
qualified employees and to continue to expand its marketing and service
activities.
EMPLOYEES
At June 30, 2002, the Company employed a total of approximately 561 employees.
Approximately 205, of those employees serve in various executive, management,
administrative, quality assurance and sales capacities. The remaining 356
employees are primarily dietary workers. A small percentage of the Company's
dietary workers were covered by collective bargaining agreements. The Company
considers relationships with its employees to be satisfactory.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Not applicable.
ITEM 2 - PROPERTIES
The Company leases its corporate offices, located at 725 Kimberton Road,
Kimberton, PA 19442, which consists of approximately 8,500 square feet from a
corporation controlled by a related party. The initial term of the lease expired
on June 30, 2002 and will continue on a month to month basis under the same
terms and conditions for the forseeable future. The Company leases an apartment
from a corporation controlled by a related party to accommodate visiting clients
and employees.
In addition, the Company is provided with office space at each of its client
facilities.
The Company owns approximately twenty-two acres of land in Collegeville,
Pennsylvania, upon which construction was completed in 1997. The Company
renovated an existing 40,000 square foot building to serve as a training
facility and conference center.
3
The Company presently owns food service equipment, computers, office furniture,
and equipment, automobiles and trucks. Management believes that all properties
and equipment are sufficient for the conduct of the Company's current
operations.
ITEM 3 - LEGAL PROCEEDINGS
On February 7, 2001, the Company filed suit against a major client, which
represented 25% of the Company's revenues in fiscal 2001, in the Court of Common
Pleas of Chester County, Pennsylvania. In the lawsuit, the Company claims that
the client failed to pay $2.4 million for services rendered by the Company and
the client should reimburse the Company for over $400,000 in start up expenses,
in addition to other claims. The client has filed a counterclaim which the
Company is contesting as part of the overall proceedings.
There are no material legal proceedings pending against the Company other than
the counterclaim stated above.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock No Par Value, (the "Class A Common Stock") is
traded on the OTC Bulletin Board and is a penny stock. Securities and Exchange
Commission regulations generally define a penny stock to be an equity security
that is not listed on NASDAQ or a national securities exchange and that has a
market price of less than $5.00 per share, subject to certain exceptions. The
regulations of the Securities and Exchange Commission require broker-dealers to
deliver to a purchaser of the Company's Class A Common Stock a disclosure
schedule explaining the penny stock market and the risks associated with it.
Various sales practice requirements are also imposed on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors (generally institutions). In addition, broker-dealers must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account.
4
The following table shows the range of high and low bid quotations as reported
by OTC Bulletin Board for the quarters ending during the last two fiscal years
for the Class A Common Stock:
Fiscal 2002 High Low
----------- ---- ---
First Quarter 0.40 0.26
Second Quarter 0.33 0.20
Third Quarter 0.30 0.21
Fourth Quarter 0.35 0.21
Fiscal 2001 High Low
----------- ---- ---
First Quarter 0.75 0.50
Second Quarter 0.69 0.38
Third Quarter 0.53 0.38
Fourth Quarter 0.40 0.26
The prices presented are bid prices, which represent prices between
broker-dealers and do not include retail mark-ups and mark-downs or any
commission to the broker-dealer. The above prices do not reflect prices in
actual transactions.
HOLDERS
As of August 23, 2002, there were approximately 42 holders of record of the
Class A Common Stock.
DIVIDENDS
The Company has not paid any dividends on its Class A or Class B Common Stock.
It is not expected that the Company will pay any dividends in the foreseeable
future. The Company's Credit Facility prohibits it from paying any cash
dividends.
ITEM 6 - SELECTED FINANCIAL DATA
The selected historical financial data presented below should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and the notes thereto.
Years ended June 30
-------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenue $ 29,906,631 $ 40,870,720 $ 42,613,918 $ 38,773,935 $ 36,156,074
Gross profit 6,223,884 7,621,056 8,588,173 7,616,254 6,719,333
Income from
Operations (86,087) 138,720 810,718 216,241 39,120
Other income
(expense) (290,616) (462,885) (467,238) (342,314) 79,608
Net income (loss) $ (286,724) $ (315,952) $ 163,018 $ (163,227) $ 8,822
============ ============ ============ ============ ============
5
Per share of common stock (basic and diluted):
Net income (loss) $ (0.10) $ (0.11) $ 0.06 $ (0.06) $ 0.00
============ =========== ========== =========== ==========
Weighted average
common shares
outstanding 2,847,000 2,847,000 2,847,000 2,859,959 2,845,845
============ =========== ========== =========== ==========
As of June 30
-------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital $ 2,923,148 $ 2,875,949 $ 4,554,099 $ 3,004,382 $ 262,102
Total Assets 17,352,016 18,504,547 20,166,854 20,770,376 19,210,840
Long-term debt 6,273,992 6,453,248 8,002,784 7,185,000 5,616,552
Shareholders' equity 6,299,564 6,586,282 6,902,234 6,739,216 6,924,443
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934 as amended, which are intended to be covered by
the safe harbors created thereby. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Form 10-K
will prove to be accurate. Factors that could cause actual results to differ
from the results discussed in the forward-looking statements include, but are
not limited to, expenditures relating to the renovation work at the Collegeville
Inn Conference & Training Center and the outcome of the Company's litigation
under Item 3 - Legal Proceedings. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
6
requires the Company to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based on payment history and the customer's current credit
worthiness, as determined by a review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based on historical experience
and any specific customer collection issues that have been identified. While
such credit losses have historically been within the Company's expectations and
the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
RESULT OF OPERATIONS YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30,
2001
Revenues for the year ended June 30, 2002 ("Fiscal 2002") decreased by 26.8% to
$29,906,631 compared to revenues of $40,870,720 for the year ended June 30, 2001
("Fiscal 2001"). The Company recorded revenue of $9,888,568 from a major client
during fiscal 2001. The Company recorded no revenue from this client during
fiscal 2002 due to the termination of the Company's relationship with this
client. See Item 3 -- Legal Proceedings.
Cost of operations for fiscal 2002 was $23,682,747 compared to $33,249,666 in
fiscal 2001, a decrease of $9,566,919 or 28.8%. This decrease in costs of
operations is due to lower revenues during the period, the result of the
termination of a major client contract.
Gross Profit for fiscal 2002 was $6,223,884 or 20.8% of revenue, compared to
$7,621,056 or 18.6% of revenue, a decrease of $1,397,170 or 18.3 %. The Company
recorded revenue of $9,888,568 from a major client during fiscal 2001. The
Company recorded no revenue from this client during fiscal 2002 due to the
termination of the Company's relationship with this client. See Item 3 -- Legal
Proceedings. The increase in Gross profit as a percent of revenue is due to a
change in the nature of client contracts.
7
General and Administrative expenses for fiscal 2002 were $4,562,244 or 15.2% of
revenue, compared to $5,954,094 or 14.6% of revenue for fiscal 2001, a decrease
of $1,391,850. The percentage increase is due to revenues increasing at a lower
rate than the general and administrative expenses, some of which are fixed
expenses. The Company implemented certain cost cutting measures due to the
termination of the major customer. General and administrative expenses for
fiscal 2001 include $126,404 of development costs related to the Company's
cook-chill food preparation technology.
Depreciation and amortization for fiscal 2002 was $847,727, compared to $678,242
for fiscal 2001. The increase of $169,485 or 25.0% was primarily due to the
amortization expense for investment in contracts.
Provision for doubtful accounts for fiscal 2002 was $900,000 compared to
$850,000 for fiscal 2001. The net increase is attributable to a change in
contractual relationships.
Income from operations for fiscal 2002 was $(86,087) or (0.3)% of revenue
compared to $138,720 or .3% of revenue for fiscal 2001, a decrease of $224,805.
This decrease is due to an increase in amortization expense and provision for
doubtful accounts as well as a decrease in gross profit and offset by a decrease
in general and administrative expenses.
Interest expense for fiscal 2002 was $261,037 or .9% of revenue, compared to
$486,512 or 1.2% of revenue for fiscal 2001. This decrease is primarily due to a
reduction in interest rates (5.3% average rate in fiscal 2002 and 7.7% average
rate in fiscal 2001) as well as a reduction of long term debt.
For the reasons stated above, loss before income taxes for fiscal 2002 was
$(376,703) or (1.3)% of revenue compared to loss before income taxes of
$(324,167) or (0.8) % of revenue for fiscal 2001.
Net loss for fiscal 2002 was $(286,724) or $(0.10) per share compared to net
loss of $(315,954) or $(0.11) per share for fiscal 2001, an increase of 9%.
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
Revenues for fiscal 2001 decreased by 4.1% to $40,870,720 compared to revenues
of $42,613,918 for the year ended June 30, 2000 ("Fiscal 2000"). This decrease
is a result of contracts canceled during the period, offset by growth from new
business and growth within existing contracts. The Company recorded revenues of
$9,188,568 and $7,114,407 from a major client during fiscal 2001 and 2000,
respectively. The Company anticipates that future revenues will be negatively
impacted by the termination of the relationship with this major client (See Item
3 -- Legal Proceedings).
8
Cost of operations for fiscal 2001 was $33,249,664 compared to $34,025,806 for
similar expenses in fiscal 2000, a decrease of $776,142 or 2.3%. This decrease
in costs of operations is due to lower revenues during the period offset by
inflationary price, wage, and expense increases.
Gross Profit for fiscal 2001 was $7,621,056 or 18.6% of revenue, compared to
$8,588,173 or 21.0% of revenue, a decrease of $967,117 or 11.3%. This decrease
is due to cost of operations increasing at a greater percentage than revenues.
General and Administrative expenses for fiscal 2001 were $5,954,094 or 14.6% of
revenue, compared to $6,461,990 or 15.2% of revenue for fiscal 2000. The
percentage decrease is due to revenues decreasing at a lower rate than the
general and administrative expenses. General and administrative expenses for
fiscal 2001 include $126,404 of development costs related to the Company's
cook-chill food preparation technology.
Depreciation and amortization for fiscal 2001 was $678,242, compared to $731,271
for fiscal 2000. The decrease of $53,029 or 7.3% was due to a decrease in
amortization expenses.
Provision for doubtful accounts for fiscal 2001 was $850,000 compared to
$584,193 for fiscal 2000. The increase of $265,807 is attributable to an
increase in business activities and a change in contractual relationships.
Income from operations for fiscal 2001 was $138,720 or 0.3% of revenue compared
to $810,718 or 1.9% of revenue for fiscal 2000, a decrease of $671,998. This
decrease is due to a decrease in gross profit and an increase in provision for
doubtful accounts offset by a decrease in general and administrative expenses.
Interest expense for fiscal 2001 was $486,512 or 1.2% of revenue, compared to
$605,806 or 1.4% of revenue for fiscal 2000. This decrease is primarily due to a
reduction in long term debt of $1,536,723 during fiscal 2001.
For the reasons stated above, loss before income taxes for fiscal 2001 was
$(324,165) or (0.8)% of revenue compared to the income before income taxes of
$343,480 or 0.8% of revenue for fiscal 2000.
Net loss for fiscal 2001 was $(315,952) or $(0.11) per share as compared to net
income of $163,018 or $0.06 per share for fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had working capital of $2,923,148 as compared to
$2,875,949 at June 30, 2001. This increase in working capital is primarily
attributable to a decrease in accounts payable offset by a decrease in accounts
receivable. The Company's cash and cash
9
equivalents increased by $141,435 to $593,310. Cash provided by operations for
fiscal 2002 was $753,892, compared to $1,103,168 provided by operations for
fiscal 2001.
Investing activities consumed $438,201 in cash during fiscal 2002 compared to
$249,290 consumed in cash during fiscal 2001. Investing activities for fiscal
2002 include capital expenditures in the amount of $243,698. During fiscal 2002,
financing activities consumed $174,256 in cash, compared to $1,536,723 consumed
in cash during fiscal 2001.
The Company has certain credit facilities with its bank including a revolving
credit of $4,000,000. At June 30, 2002, the Company has $1,337,078 available
under its revolving credit. The Company issued two series of Industrial Bonds
totaling $3,560,548 in December 1996. As of June 30, 2002 the outstanding
balance on the bonds was $2,940,000. The Company is current with all its
obligations to its bank and on its bonds and has met all financial covenants in
its loan documents.
Payment Due By Period
---------------------
Less
than 1 - 3 4 - 5 After 5
Contractual Obligations Total 1 year years years years
Long-Term Debt* 5,735,666 0 3,205,666 315,000 2,215,000
Operating Leases 15,971 0 15,971 0 0
Total Contractual Cash Obligations 5,751,637 0 3,221,637 315,000 2,215,000
* Long-Term Debt includes $2,662,922 draw on revolving line of credit, leaving
$1,337,078 available under the $4,000,000 revolving line of credit.
Amount of Commitment Expiration
Per Period
--------------------------------------------
Other Commercial Total Amounts Less than 1 - 3 4 - 5 Over 5
Commitments Committed 1 year years years years
----------- --------- ------ ----- ----- -----
Lines of Credit 4,000,000 0 4,000,000 0 0
Standby Letter of Credit 3,065,000 0 3,065,000 0 0
Total Commercial
Commitments 7,065,000 0 7,065,000 0 0
A substantial portion of the Company's revenue is dependent upon the payment of
its fees by customer health care facilities, which, in turn, are dependent upon
third-party payers such as state governments, Medicare and Medicaid. Delays in
payment by third party payers, particularly state and local governments, may
lead to delays in collection of accounts receivable.
10
The Company has no other material commitments for capital expenditures and
believes that its existing cash and cash equivalents, cash from operations and
available revolving credit will be sufficient to satisfy the needs of its
operations and its capital commitments for the next twelve months. However, if
the need arose, the Company would seek to obtain capital from such sources as
continuing debt financing or equity financing.
EFFECTS OF INFLATION
Substantially all of the Company's agreements with its customers allow the
Company to pass through to its customers its increases in the cost of labor,
food and supplies. The Company believes that it will be able to recover
increased costs attributable to inflation by continuing to pass through cost
increases to its customers.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. A liability for an asset retirement obligation
should be recognized if the obligation meets the definition of a liability and
can be reasonably estimated. The initial recording should be at fair value. SFAS
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002, with earlier application encouraged. The provisions of the
Statement are not expected to have a material impact on the financial condition
or results of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this Statement did not have a
significant impact on the financial condition or results of operations of the
Company.
In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical
Corrections" (SFAS No. 145) was issued. This
11
standard changes the accounting principles governing extraordinary items by,
among other things, providing more definitive criteria for extraordinary items
by clarifying and, to some extent, modifying the existing definition and
criteria, specifying disclosure for extraordinary items and specifying
disclosure requirements for other unusual or infrequently occurring events and
transactions that are not extraordinary items. SFAS 145 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
provisions of the Statement are not expected to have a material impact on the
financial condition or results of operations of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data to be provided pursuant to this
Item 8 are included under Part IV, Item 14, of this Form 10-K.
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Proxy Statement of the Company for the
2002 Annual Meeting of Shareholders under the caption "Directors and Executive
Officers of the Registrant", and is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
This information will be contained in the Proxy Statement of the Company for the
2002 Annual Meeting of Shareholders under the caption "Executive Compensation
and Compensation of Directors" and is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the
2002 Annual Meeting of Shareholders under the caption "Security Ownership" and
"Election of Directors" and is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statements of the Company for
the 2002 Annual Meeting of Shareholders under the caption
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"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Reports of Independent Certified Public Accountants F - 3
Consolidated Balance Sheets as of June 30, 2002 and 2001 F - 4
Consolidated Statements of Operations for the Years Ended June
30, 2002, 2001 and 2000 F - 5
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2002, 2001 and 2000 F - 6
Consolidated Statements of Cash Flows for the Years Ended June
30, 2002, 2001 and 2000 F - 7
Notes to Consolidated Financial Statements F - 8 to F - 20
Schedule of Valuation Accounts F - 22
(B) Reports on Form 8-K
None
(C) Exhibits
The following Exhibits are filed as part of this report (references are to Reg.
S-K Exhibit Numbers):
3.1 Amended and Restated Certificate of Incorporation of Company
(Incorporated by reference to Exhibit 3-1 of the Company's Statement
on Form S-1 (File No. 33-4281).
3.2 By-laws of the Company (Incorporated by reference to Exhibit 3.2 of
the S- 1).
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4.1 Specimen Stock Certificate of the Company (Incorporated by reference
to Exhibit 4.1 of the S-1).
4.5 Registration Rights Agreement between the Company and Kathleen Hill
(Incorporated by reference to Exhibit 4.5 of the S-1).
10.1 Employment Agreement between the Company and Joseph Roberts
(Incorporated by reference to Exhibit 10.1 of the S-1).
10.3 Employment Agreement between the Company and Kathleen Hill
(Incorporated by reference 10.3 of the S-1).
10.4 Company's 1991 Stock Option Plan (Incorporated by reference to
Exhibit 10.4 of the S-1).
10.8 Guaranty Agreement between the Company and Joseph Roberts
(Incorporated by reference to Exhibit 10.9 Annual Report on Form
10-K filed September 27, 1992).
10.9 Lease Agreement Between the Company and Ocean 7, Inc. (Incorporated
by reference to Exhibit 10.11 Annual Report of Form10-K filed
September 27, 1992).
10.11 Escrow Agreement among the Company, Service America Corporation and
Meridian Bank (Incorporated by reference to Exhibit 2, Current
Report on Form 8-K filed July 29, 1993).
10.13 Agreement of Purchase and Sale between the Company and REVEST II
Corporation, with Amendments. (Incorporated by reference to Exhibit
10.13, Annual Report on Form 10-K filed September 27, 1994).
10.14 Loan Agreement between the Montgomery County Industrial Development
Authority and Collegeville Inn Conference & Training Center,
Inc. (a wholly-owned subsidiary of the Company). (Incorporated by
reference to exhibit 10.14, annual report on Form 10-K Filed on
September 27, 1997.)
10.15 Trust Indenture between Montgomery County Industrial Development
Authority and Dauphin Deposit Bank and Trust Company, as Trustee.
(Incorporated by reference to exhibit 10.15, annual report on Form
10-K filed September 27, 1997.)
10.16 Loan Agreement between Montgomery County Industrial Development
Authority and Apple Fresh Foods Limited (a wholly-owned subsidiary
of the Company). (Incorporated by reference to exhibit 10.16, annual
report on Form 10-K Filed on September 27, 1997.)
14
10.17 Trust Indenture between the Montgomery County DevelopmentAuthority
and Dauphin Deposit Bank and Trust Company, as Trustee.
(Incorporated by reference to exhibit 10.17, annual report on Form
10-K Filed on September 27, 1997.)
10.18 Loan Agreement between the Company and Corestates Bank, N.A.
(Incorporated by reference to exhibit 10.18, annual report on Form
10-K Filed on September 27, 1997.)
99.1 Section 906 Certification of Chief Executive Officer
99.2 Section 906 Certification of Principal Financial Manager. The
Company does not have a Chief Financial Officer.
99.3 Section 302 Certification of Principal Executive Officer
99.4 Section 302 Certification of Principal Financial Manager
15
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Nutrition Management Services Company
(Registrant)
/s/ Joseph V. Roberts
- ------------------------------------------
Joseph V. Roberts, Chief Executive Officer
and Director
Date: September 28, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated as of September 28, 2002.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
- -------------------------- ---------------------------
Joseph V. Roberts, Chief Kathleen A. Hill, President and
Executive Officer and Director Director
(Principal Financial Officer)
/s/ Richard Kresky /s/ Samuel R. Shipley
- -------------------------- ---------------------------
Richard Kresky, Director Samuel R. Shipley, Director
/s/ Michael M. Gosman /s/ Michelle L. Roberts-O'Donnell,
- -------------------------- ----------------------------------
Michael M. Gosman, Director Michelle L. Roberts-O'Donnell,
Director
/s/ Jane Scaccetti
- -------------------------
Jane Scaccetti, Director
16
Financial Statements and Report of Independent Certified Public Accountants
Nutrition Management Services Company and Subsidiaries
June 30, 2002 and 2001
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 3
CONSOLIDATED BALANCE SHEETS F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8
SUPPLEMENTAL INFORMATION
SCHEDULE OF VALUATION ACCOUNTS F - 22
F-1
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Nutrition Management Services Company
We have audited the accompanying consolidated balance sheets of
Nutrition Management Services Company and its subsidiaries as of June 30, 2002
and 2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Nutrition Management Services Company and its subsidiaries as of
June 30, 2001 and 2000, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 2001,
in conformity with accounting principles generally accepted in the United States
of America.
We have also audited the schedule of valuation accounts for
Nutrition Management Services Corporation and its subsidiaries for each of the
three years in the period ended June 30, 2002. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
September 20, 2002
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
2002 2001
------------ ------------
Current assets
Cash and cash equivalents $ 593,310 $ 451,875
Accounts receivable (net of allowance for doubtful accounts of $1,774,753
and $1,175,596 in 2002 and 2001, respectively) 5,659,990 6,424,629
Unbilled revenue 46,505 177,967
Deferred income taxes 882,487 636,617
Inventory 230,238 232,869
Prepaid and other 289,079 417,009
------------ ------------
Total current assets 7,701,609 8,340,966
------------ ------------
Property and equipment - net 8,683,712 9,127,742
------------ ------------
Other assets
Investment in contracts (net of accumulated amortization expense of $160,000
and $ 0 in 2002 and 2001, respectively 120,000 280,000
Advances to employees 523,490 328,988
Deferred income taxes 103,089 192,269
Bond issue costs (net of accumulated amortization of $81,328
and $66,761 in 2002 and 2001, respectively) 210,096 224,562
Other assets 10,020 10,020
------------ ------------
Total other assets 966,695 1,035,839
------------ ------------
$ 17,352,016 $ 18,504,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 191,814 $ 186,813
Accounts payable 3,811,110 4,537,741
Accrued expenses 443,483 341,286
Accrued payroll 260,861 273,217
Accrued income taxes -- --
Other 71,192 125,960
------------ ------------
Total current liabilities 4,778,460 5,465,017
------------ ------------
Long-term liabilities
Long-term debt - net of current portion 5,543,852 5,386,120
Long-term payable 730,146 1,067,128
Other -- --
------------ ------------
Total long-term liabilities 6,273,998 6,453,248
------------ ------------
Stockholders' equity
Undesignated preferred stock - no par, 2,000,000 shares authorized, none outstanding --
Common stock
Class A - no par, 10,000,000 shares authorized; 3,000,000
issued, 2,747,000 outstanding in 2001 and 2000 3,801,926 3,801,926
Class B - no par, 100,000 shares authorized; 100,000 shares issued and outstanding 48 48
Retained earnings 2,997,147 3,283,871
------------ ------------
6,799,121 7,085,845
Less treasury stock - (common - Class A: 253,000 shares in 2002 and 2001 - at cost) (499,563) (499,563)
------------ ------------
Total stockholders' equity 6,299,558 6,586,282
------------ ------------
Total liabilities and stockholders' equity $ 17,352,016 $ 18,504,547
============ ============
The accompanying notes are an integral part of these statements.
4
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2002 2001 2000
------------ ------------ ------------
Food service revenue $ 29,906,631 $ 40,870,720 $ 42,613,978
Cost of operations
Payroll and related expenses 10,170,603 13,024,040 15,304,354
Other costs of operations 13,512,144 20,225,624 18,721,452
------------ ------------ ------------
Cost of operations 23,682,747 33,249,664 34,025,806
------------ ------------ ------------
Gross profit 6,223,884 7,621,056 8,588,172
------------ ------------ ------------
Expenses
General and administrative expenses 4,562,244 5,954,094 6,461,990
Depreciation and amortization 847,727 678,242 731,271
Provision for doubtful accounts 900,000 850,000 584,193
------------ ------------ ------------
Expenses 6,309,971 7,482,336 7,777,454
------------ ------------ ------------
(Loss) income from operations (86,087) 138,720 810,718
------------ ------------ ------------
Other (expense) income
Interest expense (261,037) (486,512) (605,806)
Interest income 9,131 32,773 68,188
Other (38,710) (9,146) 70,380
------------ ------------ ------------
Other expense - net (290,616) (462,885) (467,238)
------------ ------------ ------------
(Loss) income before income taxes (376,703) (324,165) 343,480
Income tax (benefit) expense (89,979) (8,213) 180,462
------------ ------------ ------------
Net (loss) income $ (286,724) $ (315,952) $ 163,018
============ ============ ============
Net (loss) income per share - basic and diluted $ (0.10) $ (0.11) $ 0.06
============ ============ ============
Weighted average number of shares 2,847,000 2,847,000 2,847,000
============ ============ ============
The accompanying notes are an integral part of these statements.
5
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three years ended June 30, 2002
Class A Class B
Common stock Common stock Treasury stock
----------------------- ---------------------- --------------------- Total
Number Number Retained Number stockholders'
of shares Amount of shares Amount earnings of shares Amount equity
--------- -------- --------- ----------- ------------ --------- ----------- ------------
Balance - June 30, 1999 2,747,000 $ 3,801,926 100,000 $ 48 $ 3,436,805 (253,000) $ (499,563) $ 6,739,216
Net income -- -- -- -- 163,018 -- -- 163,018
----------- ----------- --------- --------- ----------- ----------- ----------- -----------
Balance - June 30, 2000 2,747,000 3,801,926 100,000 48 3,599,823 (253,000) (499,563) 6,902,234
Net loss -- -- -- -- (315,952) -- -- (315,952)
----------- ----------- --------- --------- ----------- ----------- ----------- -----------
Balance - June 30, 2001 2,747,000 3,801,926 100,000 48 3,283,871 (253,000) (499,563) 6,586,282
Net loss -- -- -- -- (286,724) -- -- (286,724)
----------- ----------- --------- --------- ----------- ----------- ----------- ----------
Balance - June 30, 2002 2,747,000 $ 3,801,926 100,000 $ 48 $ 2,997,147 (253,000) $ (499,563) $6,299,558
=========== =========== ========= ========= =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
6
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2002 2001 2000
------------ ------------ -----------
Operating activities
Net (loss) income $ (286,724) $ (315,952) $ 163,018
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Depreciation and amortization 847,727 678,242 731,271
Amortization of bond costs 14,567 14,566 14,566
Provision for bad debts 900,000 850,000 584,193
Amortization of deferred gain (50) (26,364) (26,364)
(Benefit) provision for deferred taxes (156,690) (52,361) 121,000
Loss on sale of equipment -- -- 11,159
Changes in assets and liabilities
Accounts receivable (135,361) (717,360) 792,767
Unbilled revenue 131,462 417,261 (159,565)
Inventory 2,631 (5,490) 18,262
Prepaid and other 127,930 43,894 (94,671)
Accounts payable (726,630) 567,083 (101,243)
Accrued expenses 102,198 (248,512) 19,654
Accrued payroll (12,356) (77,330) (107,823)
Accrued income taxes -- (18,466) 4,474
Other (54,812) (6,043) (18,160)
----------- ----------- -----------
Net cash provided by operating activities 753,892 1,103,168 1,952,538
----------- ----------- -----------
Investing activities
Purchase of property and equipment (243,698) (222,523) (403,169)
(Advances) repayments to employees and officers (194,503) (26,767) 44,650
Deferred costs -- -- 19,751
----------- ----------- -----------
Net cash used in investing activities (438,201) (249,290) (338,768)
----------- ----------- -----------
Financing activities
Proceeds from long-term borrowings 1,217,000 2,633,611 225,000
Repayment of long-term borrowings (1,054,268) (3,833,346) (747,332)
Repayment of long-term accounts payable (336,988) (336,988) --
----------- ----------- -----------
Net cash used in financing activities (174,256) (1,536,723) (522,332)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 141,435 (682,845) 1,091,438
Cash and cash equivalents - beginning of year 451,875 1,134,720 43,282
----------- ----------- -----------
Cash and cash equivalents - end of year $ 593,310 $ 451,875 $ 1,134,720
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for
Interest $ 270,483 $ 508,646 $ 566,891
Income taxes $ (113,473) $ 90,825 $ 175,988
The accompanying notes are an integral part of these statements.
7
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE A - ORGANIZATION AND BUSINESS
Nutrition Management Services Company (the Company) was organized on March
28, 1979, to provide professional management expertise and food services to
continuing care and health care facilities in the domestic United States.
The Company competes mainly with regional and national food service
management companies as well as self-managed departments. Apple Management
Services (Apple Management), a wholly owned subsidiary, was organized on
November 25, 1991, to provide management service expertise. The
Collegeville Inn Conference and Training Center, Inc. (Collegeville Inn
located in Lower Providence Township, Pennsylvania), a wholly owned
subsidiary, was organized on April 29, 1994. This facility opened in
September 1997, and is used as a showroom for prospective customers,
comprehensive training facility, and retail restaurant. Apple Fresh Foods,
Ltd. (Apple Fresh Foods), was organized on November 14, 1997, to develop a
cook-chill food preparation technology for use in the Company's food
service business. Apple Fresh Food's operation is located in the
Collegeville Inn.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
-----------------------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company's primary estimate
is its allowance for doubtful accounts.
2. Cash and Cash Equivalents
-------------------------
Cash equivalents are comprised of certain highly liquid investments with an
original maturity of three months or less when purchased.
3. Accounts Receivable
-------------------
The Company's accounts receivable are primarily related to food service
management fees. Credit is extended based on prior experience with the
customer and evaluation of customers' financial condition. Accounts
receivable are generally due within thirty days. The allowance for doubtful
receivables represents an estimate of amounts considered uncollectible and
is determined based on management's historical collection experience,
adverse situations that may affect the customer's ability to repay, and
prevailing economic conditions.
4. Unbilled Revenue
----------------
Unbilled revenue represents amounts for services provided, but not billed
as of the balance sheet date.
5. Inventory
---------
Inventory, which consists primarily of food, is stated at the lower of cost
(first-in, first-out method) or market. The Company records inventory for
contracts which require goods to be owned. For the remaining customers, a
payable or receivable is recorded for the goods purchased on behalf of the
Company's customers, and billed back to customers quarterly. As of June 30,
2002 and 2001, inventory is $230,238 and $232,869, respectively. As of June
30, 2002 and 2001, inventory receivable from customers is $13,484 and
$42,300, respectively, while inventory payable to customers is $9,775 and
$29,744, respectively.
(Continued)
8
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Revenue Recognition
-------------------
Sales revenue is generated primarily from fees for food service management
at continuing care and health care facilities, and the Collegeville Inn
restaurant. Revenue is recognized when services are performed.
7. Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of the related assets or the remaining lease term.
8. Investments in Contracts
------------------------
Investments in contracts are capital costs incurred by the Company on
behalf of their customers. These costs are amortized over the life of the
contract. As of June 30, 2002 and 2001, investments in contracts are
$120,000 and $280,000, respectively. The associated accumulated
amortization is $160,000 and $0 as of June 30, 2002 and 2001 respectively.
9. Deferred Financing Costs
------------------------
Debt financing costs incurred in connection with the bonds payable are
deferred and amortized, using the interest method, over the term of the
related debt and are classified as other assets on the balance sheet.
10. Accounting for Stock-Based Compensation
---------------------------------------
The Company follows the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, for its stock options. This statement
contains a fair value-based method for valuing stock-based compensation
that entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized over
the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options
and similar equity instruments under Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to Employees. Entities that
continue to account for stock options using APB Opinion 25 are required to
make pro forma disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined in SFAS 123 had been applied.
The Company's employee stock option plan is accounted for under APB Opinion
25.
(Continued)
9
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Income Taxes
------------
Income taxes consist of taxes currently due plus deferred taxes related
primarily to temporary differences between the basis of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
12. Earnings Per Share
------------------
The Company follows the provisions of SFAS No. 128, Earnings Per Share,
which eliminate primary and fully diluted earnings per share and require
presentation of basic and diluted earnings per share in conjunction with
the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock.
Options to purchase 89,750, 89,750 and 108,000 shares of common stock at
$4.00 per share were outstanding during 2002, 2001 and 2000, respectively.
They were not included in the computation of diluted earnings per share
because the option price is greater than the average market price.
13. Advertising Costs
-----------------
It is the Company's policy to expense advertising costs in the period in
which they are incurred. Advertising expense for the years ended June 30,
2002, 2001 and 2000 was $62,448, $24,048 and $46,976, respectively.
14. Reclassification
----------------
Certain 2001 and 2000 items have been reclassified to conform to the
current year presentation.
15. Use of Estimates
----------------
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE C - PROPERTY AND EQUIPMENT
The following details the composition of property and equipment.
Estimated
useful lives 2002 2001
------------ ----------- ----------------
Property and equipment
Land - $ 497,967 $ 497,967
Building 40 7,491,984 7,482,568
Machinery and equipment 2 - 8 3,763,746 3,418,237
Furniture and fixtures 2 - 8 749,434 700,101
Other, principally autos and trucks 2 - 10 371,722 434,072
----------- --------------
12,874,853 12,532,945
Less accumulated depreciation 4,191,141 3,405,203
----------- --------------
$ 8,683,712 $ 9,127,742
=========== ===============
(Continued)
10
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE C - PROPERTY AND EQUIPMENT - Continued
Depreciation expense amounted to $687,728, $678,242 and $721,598 for the
years ended June 30, 2002, 2001 and 2000, respectively.
NOTE D - LONG- TERM DEBT
Long-term debt consisted of the following:
2002 2001
------- --------
Bank revolving credit, interest due monthly at the National Consumer
rate minus .25% (effectively 4.5% as of June 30, 2002), secured by
all corporate assets as well as a negative pledge on all assets;
matures on October 31, 2003 $ 2,662,922 $ 2,312,922
Note payable, term loan incurred in connection with purchased computer
equipment, payable in equal monthly installments of $6,722 at a
fixed rate of 7.4%, maturing on May 1, 2004; the acquired
equipment was pledged as collateral 132,744 195,011
Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds payable) 2,120,000 2,205,000
Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds payable)
820,000 860,000
----------- ----------
5,735,666 5,572,933
Less current maturities 191,813 186,813
----------- ----------
$ 5,543,853 $5,386,120
=========== ==========
In February 2001, the Company executed a loan agreement with a bank for a
revolving credit and two irrevocable letters of credit, totaling $4,000,000
and $3,065,000, respectively. The revolving credit is available through
October 2003 and the letters of credit are available for four years with
annual renewals. At June 30, 2002, the Company had available approximately
$1,337,078 under the revolving credit. Advances under the revolving credit
are used for working capital purposes.
(Continued)
11
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - LONG- TERM DEBT - Continued
These credit agreements contain covenants that include the submission of
specified financial information and the maintenance of insurance coverage
for the pledged assets during the term of the loans. The covenants also
include the maintenance of a certain fixed coverage ratio, total
liabilities to consolidated tangible net worth, and minimum working
capital.
Maturities of principal due in the following years are set forth below:
Year ending June 30,
--------------------
2003 $ 191,813
2004 2,868,853
2005 145,000
2006 150,000
2007 165,000
Thereafter 2,215,000
--------------
$ 5,735,666
==============
Bonds Payable - In December 1996, the Company, through its subsidiaries,
authorized two industrial revenue bond issues.
Issue #1
- --------
Title - Montgomery County Industrial Development Authority, $2,500,000
aggregate principal amount, federally taxable variable rate
demand/fixed rate revenue bonds (Collegeville Inn Project) Series of
1996.
Rate - Variable, to a maximum of 17%
Term - 20 years (2016)
Purpose - Rehabilitate, furnish and equip the Collegeville Inn
facility.
Issue #2
- --------
Title - Montgomery County Industrial Development Authority, $1,000,000
aggregate principal amount, federally taxable variable rate
demand/fixed rate revenue bonds (Apple Fresh Foods, Ltd. Project)
Series of 1996.
Rate - Variable, to a maximum of 15%
Term - 20 years (2016)
Purpose - Develop a cook-chill food preparation technology.
Note: This issue is tax-exempt.
(Continued)
12
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE D - LONG- TERM DEBT - Continued
Each series of bonds is guaranteed by the parent company and the other
subsidiaries. The assets of Collegeville Inn and Apple Fresh Foods are
pledged as collateral for both series of bonds.
The Company's bank has issued irrevocable letters of credit in favor of the
bond trustee for the full amount of both bond issues. The letters of credit
have a term of four years and can be renewed on an annual basis by the
bank. The bank holds the mortgage on the Collegeville Inn building and
property. The letters of credit are guaranteed by the parent company.
The sinking fund requirements are as follows:
Collegeville Apple Fresh
Inn Foods Total
------------ -------------- -----------
2002 $ 85,000 $ 40,000 $ 125,000
2003 $ 90,000 $ 40,000 $ 130,000
2004 $ 95,000 $ 40,000 $ 135,000
2005 $ 100,000 $ 45,000 $ 145,000
2006 $ 105,000 $ 45,000 $ 150,000
NOTE E - LONG-TERM PAYABLE
The Company entered into an agreement with a third party in July 2000. As
of June 30, 2002 and 2001, $1,067,128 and $1,404,116 is due to this third
party. The agreement calls for the payment of the full amount outstanding,
in accordance with an agreed upon schedule of payments. Payment terms began
with $100,000 due on August 1, 2000, followed by 35 monthly payments of
$28,000, with a final payment of $702,000 due at the end of the payment
term.
NOTE F - INCOME TAXES
The components of income tax (benefit) expense are:
2002 2001 2000
--------- ---------- ---------
Current
Federal $ 24,736 $ 13,898 $ 17,716
State 41,975 30,889 41,746
--------- --------- ---------
66,711 44,787 59,462
--------- --------- ---------
Deferred
Federal (125,650) (71,000) 87,000
State (31,040) 18,000 34,000
--------- --------- ---------
Total deferred (benefit) expense (156,690) (53,000) 121,000
--------- --------- ---------
$ (89,979) $ (8,213) $ 180,462
========= ========= =========
(Continued)
13
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE F - INCOME TAXES - Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
approximately:
2002 2001
------------ -----------
Deferred tax assets
Provision for doubtful accounts $ 763,000 $ 506,000
Excess of tax over financial statement
basis of investments in contracts 222,000 259,000
Deferred gains 2,000 11,000
Vacation accrual 119,000 131,000
Charitable contribution carryforward 39,000 34,000
Federal net operating loss -- 32,000
Other 64,000 74,000
---------- ----------
Total deferred tax assets 1,209,000 1,047,000
---------- ----------
Deferred tax liabilities
Depreciation 223,000 218,000
---------- ----------
Total deferred tax liabilities 223,000 218,000
---------- ----------
Net deferred tax assets $ 986,000 $ 829,000
========== ==========
These amounts are classified in the balance sheet as follows:
2002 2001
---- ----
Current asset $ 882,000 $637,000
Non-current asset 103,000 192,000
-------- --------
$986,000 $829,000
======== ========
The following reconciles the tax provision with the U.S. statutory tax rates:
2002 2001 2000
---- ---- ----
Income taxes at U.S. statutory rates 34.0% 34.0% 34.0%
States taxes, net of federal tax benefit (7.4) (6.3) 8.1
Nondeductible expenses (8.6) (14.8) 13.9
Decrease in valuation allowance -- -- (8.2)
Other 5.9 (10.4) 4.7
---- ---- ----
23.9% 2.5% 52.5%
==== ==== ====
The Company has charitable contribution carryforwards in the amount of
$90,000, which begin to expire in the year 2004.
14
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE G - RELATED PARTY
During 1992, the Company sold its building for a purchase price of $610,000
to a related party (a corporation wholly-owned by the principal stockholder
of the Company). At the time of the sale a lease was entered into for ten
years, whereby the Company will lease back the building from the purchaser.
The sale resulted in a gain of $263,717, which has been deferred and will
be amortized over the life of the lease. During each of the three years in
the period ended June 30, 2002, the Company recognized a gain of $26,426.
As of June 30, 2002 and 2001, the balance of the unamortized gain on the
sale was $ 0 and $26,426, respectively.
The Company leases its corporate office building from the above-mentioned
related party under a month to month lease. During the years ended June 30,
2002, 2001 and 2000, rent expense was $248,252, $254,859 and $256,304,
respectively.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Company leases real estate facilities from a corporation owned by a
principal stockholder under month to month operating leases.
The Company is also obligated under various operating leases for operating
equipment for periods expiring through 2003. During the years ended June
30, 2002, 2001 and 2000, rent expense was $275,054, $285,295 and $341,781,
respectively, for all operating leases.
Minimum annual rentals under non-cancelable operating leases subsequent to
June 30, 2002, are as follows:
Operating
Year ending June 30, equipment
-------------------- ------------
2003 $ 15,971
2. Litigation
----------
On February 7, 2001, the Company filed suit against a major client, which
represented 25% of the Company's revenues during 2001, in the Court of
Common Pleas of Chester County, Pennsylvania. In the lawsuit, the Company
claims that the customer failed to pay $2.4 million for services rendered
by the Company and the customer should reimburse the Company for over
$400,000 in start up expenses, in addition to other claims. The client has
filed a counterclaim which the company is contesting as part of the overall
proceedings.
In the normal course of its business, the Company is exposed to asserted
and unasserted claims. In the opinion of management, the resolution of
these matters will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows.
15
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE I - STOCKHOLDERS' EQUITY
1. Class A Common Stock
The Company is authorized to issue 10,000,000 shares of Class A Common
Stock, no par value, of which holders of Class A Common Stock have the
right to cast one vote for each share held of record in all matters
submitted to a vote of holders of Class A Common Stock. The Class A Common
Stock and Class B Common Stock vote together as a single class on all
matters on which shareholders may vote, except when class voting is
required by applicable law.
Holders of Class A Common Stock are entitled to dividends, together with
the holders of Class B Common Stock, pro rata based on the number of shares
held. In the event of the liquidation, dissolution or winding up of the
affairs of the Company, all assets and funds of the Company remaining after
the payment to creditors and to holders of Preferred Stock, if any, shall
be distributed, pro rata, among the holders of the Class A Common Stock and
Class B Common Stock.
During the fiscal year ended June 30, 1999, the Company repurchased 23,000
shares of common stock, for an aggregate price of $22,000.
2. Class B Common Stock
--------------------
The Company has authorized 100,000 shares of Class B Common Stock, all of
which were issued to the Chief Executive Officer and majority shareholder
of the Company, in exchange for 100,000 shares of Class A Common Stock.
Each share of Class B Common Stock is entitled to seven votes on all
matters on which shareholders may vote, including the election of
directors. The Class A Common Stock and Class B Common Stock vote together
as a single class on all matters on which shareholders may vote, except
when class voting is required by applicable law.
Each share of Class B Common Stock also is convertible at any time upon the
option of the holder into one share of Class A Common Stock. There are no
preemptive, redemption, conversion or cumulative voting rights applicable
to the Class B Common Stock.
3. Preferred Stock
---------------
The Company is authorized to issue 2,000,000 shares of Preferred Stock, no
par value, of which no shares have been issued. The Preferred Stock may be
issued by the Company's Board of Directors from time to time in one or more
series.
16
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
1. Stock Options
-------------
In September 1991, the Company adopted the 1991 Stock Option Plan for
officers, directors and key employees to receive incentive stock options.
The options are exercisable for a period up to 10 years from date of grant
at an exercise price not less than fair market value of the common stock at
date of grant. The Plan expired in September 2001. There have been 500,000
shares of common stock reserved for the Plan.
The following is a summary of transactions:
Number
of options Non- Weighted
outstanding qualified average
incentive stock exercise
stock options options Total price
------------- --------- -------- --------
Outstanding at June 30, 1999 67,000 60,000 127,000 4.00
Exercisable at June 30, 1999 55,800 60,000 115,800 4.00
Forfeited/exercised (4,000) (15,000) (19,000) 4.00
------ ------ ------
Outstanding at June 30, 2000 63,000 45,000 108,000 4.00
Exercisable at June 30, 2000 56,000 45,000 101,000 4.00
Forfeited/exercised (18,250) -- (18,250) 4.00
------ ------ ------
Outstanding at June 30, 2001 44,750 45,000 89,750 4.00
Exercisable at June 30, 2001 44,750 45,000 89,750 4.00
Outstanding at June 30, 2002 44,750 45,000 89,750 4.00
Exercisable at June 30, 2002 44,750 45,000 89,750 4.00
All options were granted at exercise prices above market price. In 2002 and
2001 respectively, there were no options granted.
The remaining contractual life of outstanding and exercisable options is
approximately three years and two years, respectively.
(Continued)
17
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued
2. Employee Stock Purchase Plan
----------------------------
The Company has a stock purchase plan that allows participating employees
to purchase, through payroll deductions, shares of the Company's common
stock at 85 percent of the fair market value at specified dates. At June
30, 2002, all employees were eligible to participate in the plan. A summary
of stock purchased under the plan is shown below.
2002 2001 2000
---------- --------- ---------
Aggregate purchase price $ 4,445 $ 5,390 $ 9,310
Shares purchased 19,202 17,505 18,316
Employee participants 16 23 26
NOTE K - DEFINED CONTRIBUTION PENSION PLAN
The Company sponsors a 401(k) plan for all employees who have attained the
age of twenty-one and have completed one year of service. Eligible
employees may contribute up to 15% of their annual compensation to the
plan. The Company can match 100% up to the first 6% of employee plan
contributions. Participants are vested 20% for each year of service
beginning after year 3 and are fully vested after seven service years.
During the years ended June 30, 2002, 2001 and 2000, company contributions
to the plan, which were charged to expense, amounted to $25,630, $32,534
and $30,252, respectively.
NOTE L - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. A substantial portion of the Company's
revenues are dependent upon the payment by customers who are dependent upon
third-party payers, such as state governments, Medicare and Medicaid.
Generally, the Company does not require collateral or other security to
support customer receivables. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit
risk of its customers, establishes an allowance for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
As of June 30, 2002, the Company has cash accounts with various financial
institutions having high credit standings and periodically has cash
balances subject to credit risk beyond insured amounts. As a consequence,
it believes that its exposure to credit risk loss is limited. The Company
does not require collateral and other security to support financial
instruments subject to credit risk.
NOTE M - MAJOR CUSTOMERS
The Company had sales to one customer representing approximately 15%, 25%
and 17% of total revenues for the years ending June 30, 2002, 2001 and 2000
respectively. The loss of such customer could have a material adverse
effect on the Company's future results of operations.
18
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE N - BUSINESS SEGMENTS
The Company follows the disclosure provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. This management
approach focuses on internal financial information that is used by
management to assess performance and to make operating decisions. SFAS No.
131 also requires disclosures about products, services, geographic areas,
and major customers. The adoption of SFAS No. 131 had no effect on the
Company's results of operations or financial position.
The financial information of the Company's reportable segments have been
compiled utilizing the accounting policies described in Note A Organization
and Business. The Company's reportable segments are (1) food service
management and (2) training and conference center. The Company reports
segment performance on an after tax basis. Deferred taxes are not allocated
to segments. The management accounting policies and processes utilized in
compiling segment financial information are highly subjective and, unlike
financial accounting, are not based on authoritative guidance similar to
accounting principles generally accepted in the United States of America.
As a result, reported segment results are not necessarily comparable with
similar information reported by other similar companies.
Training and
Food Service Conference
Management Center Total
------------- ------------ ---------------
As of and for the year ended June 30, 2002:
Food service revenue $ 28,951,584 $ 955,047 $ 29,906,631
Depreciation and amortization 322,245 525,482 847,727
Income (loss) from operations 1,129,630 (1,215,717) (86,087)
Interest income 9,131 - 9,131
Interest expense (147,652) (113,385) (261,037)
Income (loss) before taxes (benefit) (177,199) (199,504) (376,703)
Net income (loss) (87,220) (199,504) (286,724)
Total assets 8,612,982 8,739,035 17,352,016
Capital expenditures 29,323 188,167 217,490
As of and for the year ended June 30, 2001:
Food service revenue $ 39,960,645 $ 910,075 $ 40,870,720
Depreciation and amortization 177,237 501,005 678,242
Income (loss) from operations 1,155,834 (1,017,114) 138,720
Interest income 32,773 - 32,773
Interest expense (249,161) (237,351) (486,512)
Income (loss) before taxes (benefit) (643,768) 319,603 (324,165)
Net income (loss) (635,555) 319,603 (315,952)
Total assets 9,452,365 9,052,182 18,504,547
Capital expenditures 222,523 - 222,523
(Continued)
19
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2002 and 2001
NOTE N - BUSINESS SEGMENTS - Continued
Training and
Food Service Conference
Management Center Total
------------ ------------- --------------
As of and for the year ended June 30, 2000:
Food service revenue $ 41,476,456 $ 1,137,522 $ 42,613,978
Depreciation and amortization 218,533 512,738 731,271
Income (loss) from operations 1,809,219 (998,501) 810,718
Interest income 68,188 -- 68,188
Interest expense (365,663) (240,143) (605,806)
Income (loss) before taxes (benefit) (80,504) 423,984 343,480
Net income (loss) (260,966) 423,984 163,018
Total assets 10,779,442 9,387,412 20,166,854
Capital expenditures 403,169 -- 403,169
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial data is unaudited, but in the opinion of
management includes all necessary adjustments for a fair presentation of
the interim results.
Fiscal 2002
----------------------------------------------------------
September 30, December 31, March 31, June 30,
------------ ------------ ----------- -----------
Revenues $ 7,422,218 $ 7,871,823 $ 6,945,186 $ 7,667,404
Gross profit 1,594,594 1,616,800 1,469,724 1,542,766
Net income (loss) (175,135) (36,428) (79,774) 4,613
Net income (loss) per share - basic
and diluted $ (.06) $ (.01) $ (.03) $ --
Fiscal 2001
-------------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------- ------------ -----------------
Revenues $ 12,192,563 $ 12,214,557 $ 9,012,310 $ 7,451,290
Gross profit 1,982,123 2,297,584 1,665,541 1,675,808
Net income (loss) (66,922) 136,056 (297,325) (87,761)
Net income (loss) per share - basic
and diluted $ (0.02) $ 0.05 $ (0.10) $ (0.03)
20
SUPPLEMENTAL INFORMATION
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
For the three years ended June 30, 2002
The following sets forth the activity in the Company's valuation accounts:
Accounts
Receivable
----------
Balance at June 30, 1999 $ 637,900
Provision for bad debts 584,193
Write-offs (369,088)
-----------
Balance at June 30, 2000 853,005
Provision for bad debts 850,000
Write-offs (527,409)
-----------
Balance at June 30, 2001 1,175,596
Provision for bad debts 900,000
Write-offs (300,843)
-----------
Balance at June 30, 2002 $ 1,774,753
===========
22