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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, 2004
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES: NO X
--- ---
The aggregate market value of voting stock (Class A Common Stock, no par value)
held by non-affiliates of the Registrant as of March 31, 2004 was approximately
$205,576.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At December 7, 2004, there was
outstanding 2,494,000 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 page 21.
(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 renovated the property to serve as a comprehensive
training facility for Company employees. In addition, the facility serves as a
showroom for prospective customers who can 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 through the
issuance of two twenty-year bonds dated December 1996 and working capital. 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. On September 8, 2004 the Company
entered into an agreement of sale for the land adjacent to its Collegeville Inn
Conference & Training Center. The agreement provides for an initial deposit of
$10,000 within ten days of the effective date of the agreement, with additional
deposits of $50,000 and $25,000 payable to the Company upon the occurrence of
certain events, including, but not limited to, zoning approvals. The deposits
are non-refundable upon the end of a 120-day inspection period, which commenced
on the date the Buyer received a fully executed original of the agreement of
sale. Pursuant to the terms of the agreement of sale, the Company may realize
gross proceeds of not less than $1,710,000. However, the Company may realize
gross proceeds in excess of $1,710,000, if the buyer is able to maximize the
yield of the property. The agreement of sale provides that settlement occur
within twenty-four months of the date of the agreement, however, upon payment of
additional deposits, settlement may be extended an additional twelve months.
Upon closing of the transaction, the Company plans on using the proceeds to
retire a proportional amount of outstanding debt associated with the parcel of
land. There can be no assurance that the sale of this land will be completed in
accordance with the terms of the agreement of sale.
1
The Company realizes that in order to reduce continuing operating losses it may
have to dispose of certain assets, including its research and development
facility, the Collegeville Inn Conference and Training Center. The Company is
exploring all reasonable alternatives to improve its operating results,
including but not limited to, increasing food service revenues with targeted
marketing efforts, increasing revenues from the sale of the Company's Cook Chill
products, the sale or lease of all or part of the Collegeville Inn Conference
and Training Center, sale of excess land at the Collegeville Inn Conference and
Training Center and reduction of operating expenses. There can be no assurance
as to the success of any or all of these alternatives.
Financial Information About Industry Segments
See Note P on page F-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.
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.
2
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
publicly traded, 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, 2004, the
Company provided services under various service agreements at 67 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 which range from 30
days to 90 days.
Major Customer
The Company had sales to one customer, Hebrew Hospital Homes, representing
approximately 28%, 26% and 15% of total revenues for the years ended June 30,
2004, 2003 and 2002, respectively. The loss of this customer could have a
material adverse effect on the Company's future results of operations.
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.
3
Employees
At June 30, 2004, the Company employed a total of approximately 370 employees.
Approximately 190 of those employees serve in various executive, management,
administrative, quality assurance and sales capacities. The remaining 180
employees are primarily dietary and housekeeping workers. Approximately
twenty-three (23%) percent of the Company's dietary and housekeeping workers are
covered by a collective bargaining agreement. The Company's collective
bargaining agreement commenced in 2003 and ends in 2006. The Company makes
contributions to the union's benefits funds as required by the collective
bargaining agreement. The Company considers relationships with its employees and
unions to be satisfactory.
Purchasing
For the years ending June 30, 2004, 2003 and 2002, respectively, the Company
purchased 34%, 23% and 24% of its food and non-food products from one vendor,
respectively. While the Company maintains a good relationship with this vendor,
in the event of a disruption in the Company's relationship with this vendor or
any disruption in the vendor's business, the Company has alternate sources of
supply for its food and non-food products.
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, Pennsylvania 19442, which consists of approximately 8,500 square feet
from Ocean 7, Inc., a corporation controlled by the Chief Executive Officer of
the Company. The initial term of the lease expired on June 30, 2003 and
continues on a month-to-month lease based on terms generally similar to those
prevailing to unrelated parties. During the three years ending June 30, 2004,
2003 and 2002, the Company paid the related entity rent in the amounts of
$273,043, $255,587 and $242,252, respectively. 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.
4
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. On September 8, 2004 the Company entered into an
agreement of sale for the land adjacent to its Collegeville Inn facility. The
agreement provides for the initial deposit within ten days of the effective date
of the agreement, with additional deposits due to the Company upon the
occurrence of certain events, including, but not limited to, zoning approvals.
Pursuant to the terms of the agreement of sale, the Company may realize gross
proceeds of not less than $1,710,000. However, the Company may realize gross
proceeds in excess of $1,710,000, if the buyer is able to maximize the yield of
the property.
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 a suit against a major client in the
Court of Common Pleas in Chester County, Pennsylvania. This suit has
subsequently been removed to the United States District Court for the Eastern
District of Pennsylvania. In the lawsuit, the Company made various claims,
including among others a claim that the client failed to pay approximately $2.1
million in invoiced amounts, a claim that the client failed to pay approximately
$1 million in other amounts owing, a claim for reimbursement for start up costs
in an amount in excess of $400,000, a claim for over $2 million in lost profits
(or, alternatively, a claim for reimbursement for over $300,000 in credits
issued in exchange for the promise to extend the arrangement), a claim in the
nature of treble damages and counsel fees, and other claims. The client has
filed a counterclaim which the Company is contesting as part of the overall
proceedings. The case is currently listed for trial in early 2005.
The Company is involved in litigation with two separate construction contractors
related to the renovations of Collegeville Inn Conference and Training Center.
The Company denies its liability for each claim and has asserted offsets against
the amounts claimed. One case is listed for trial in early 2005, while the other
case is in discovery.
Although it is not possible to predict with certainty the outcome of these
unresolved legal actions or the range of possible loss or recovery, the Company
believes these unresolved legal actions will not have a material effect on its
financial position or results of operations.
5
In addition to the litigation described above, the Company is exposed to
asserted and unasserted claims in the normal course of business. In the opinion
of management, the resolution of these matters will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
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 (Ticker Symbol - NMSCA.OB) 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.
6
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 2004 High Low
-------------- ---- ---
Fourth Quarter $1.15 $0.22
Third Quarter 0.22 0.20
Second Quarter 0.21 0.20
First Quarter 0.21 0.20
Fiscal 2003 High Low
----------- ---- ---
Fourth Quarter $0.30 $0.20
Third Quarter 0.20 0.20
Second Quarter 0.39 0.20
First Quarter 0.35 0.21
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 December 7, 2004, there were approximately 43 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 facilities prohibit it from paying any cash
dividends.
7
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
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenue $ 27,999,905 $ 27,306,030 $ 29,906,631 $ 40,870,720 $ 42,613,918
Gross profit 5,257,520 4,621,590 6,223,884 7,621,056 8,588,173
(Loss) Income from
Operations (856,851) (1,099,435) (86,087) 138,720 810,718
Other income
(expense) (195,283) (217,393) (290,616) (462,885) (467,238)
Net (loss) income (850,434) (819,441) (286,724) (315,952) 163,018
Per share of common stock (basic and diluted):
Net (loss) income ($ 0.30) ($ 0.29) ($ 0.10) ($ 0.11) $ .06
============ ============ ============ ============ ============
Weighted average
common shares
outstanding 2,847,000 2,847,000 2,847,000 2,847,000 2,859,959
============ ============ ============ ============ ============
As of June 30
-------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Working capital $ 226,441 $ 1,726,474 $ 2,923,148 $ 2,875,949 $ 4,554,099
Total Assets 14,279,295 15,142,714 17,352,016 18,504,547 20,166,854
Long-term debt 5,376,922 5,339,343 6,273,998 6,453,248 8,002,784
Stockholders' equity 4,629,683 5,480,117 6,299,558 6,586,282 6,902,234
8
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, results of operations of Collegeville Inn Conference & Training
Center, the sale of land adjacent to the Collegeville Inn discussed in Item
1--Business, General and the outcome of the Company's litigation discussed 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.
RESULT OF OPERATIONS YEAR ENDED JUNE 30, 2004 COMPARED TO YEAR ENDED JUNE 30,
2003
Revenues for the year ended June 30, 2004 ("Fiscal 2004") increased by $693,875
or 2.4% to $27,999,905 compared to revenues of $27,306,030 for the year ended
June 30, 2003 ("Fiscal 2003"). This increase is primarily due to the net impact
of revenues from new contracts versus revenues from lost contracts.
Cost of operations for Fiscal 2004 was $22,742,385 compared to $22,684,440 in
Fiscal 2003, an increase of $57,945 or .3%. This increase in costs of operations
is due to increased revenues during the period.
Gross profit for Fiscal 2004 was $5,257,520 or 18.8% of revenue, compared to
$4,621,590 or 16.9% of revenue in Fiscal 2003, an increase of $635,930 or 13.8%.
The increase in gross profit is due to the additon of new customers,
renegotiation of contract rates in the normal course of business, the
elimination of under preforming customers and other operating efficiencies
implemented in the current year.
General and administrative expenses for Fiscal 2004 were $4,909,172 or 17.5% of
revenue, compared to $4,556,706 or 16.7% of revenue for Fiscal 2003, an increase
of $352,466 or 7.7%. The increase is due to higher fixed costs, including
expenses related to advertising, recruitment and the addition of corporate
overhead personnel to support its new business.
9
Depreciation and amortization for Fiscal 2004 was $620,199, compared to $775,057
for Fiscal 2003. This decrease was due primarily to the end of amortization
expense for investment in contracts in Fiscal 2003.
Provision for doubtful accounts for Fiscal 2004 was $585,000 compared to
$389,262 for Fiscal 2003. Due to the passage of time, the Company made a
decision to increase the provision for doubtful accounts with respect to certain
delinquent customers. The Company believes it will be successful in its
collection efforts related to these outstanding balances.
Loss from operations for Fiscal 2004 was ($856,851) or (3.1%) of revenue
compared to ($1,099,435) or (4.0%) of revenue for Fiscal 2003, a change of
$242,584 or 22.1%. This improvement over Fiscal 2003 is due to an increase in
revenues, gross profit and operating efficiencies.
Interest expense for Fiscal 2004 was $186,699 or .7% of revenue, compared to
$211,953 or .8% of revenue for Fiscal 2003. This decrease is primarily due to
reduction of long-term debt.
For the reasons stated above, loss before income taxes for Fiscal 2004 was
($1,052,134) or (3.8)% of revenue compared to loss before income taxes of
($1,316,828) or (4.8) % of revenue for Fiscal 2003. The Company is exploring all
reasonable alternatives to improve its operating results, including but not
limited to, increasing food service revenues with targeted marketing efforts,
increasing revenues from the sale of the Company's Cook Chill products, the sale
or lease of all or part of the Collegeville Inn Conference and Training Center,
sale of excess land at the Collegeville Inn Conference and Training Center and
reduction of operating expenses. There can be no assurance as to the success of
any or all of these alternatives.
Net loss for Fiscal 2004 was ($850,434) or ($0.30) per share compared to net
loss of ($819,441) or ($0.29) per share for Fiscal 2003.
RESULT OF OPERATIONS YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30,
2002
Revenues for the year ended June 30, 2003 ("Fiscal 2003") decreased by 8.7% to
$27,306,030 compared to revenues of $29,906,631 for the year ended June 30, 2002
("Fiscal 2002"). This decrease is primarily due to the net impact of revenues
from lost contracts versus revenues from new contracts.
Cost of operations for Fiscal 2003 was $22,684,440 compared to $23,682,747 in
Fiscal 2002, a decrease of $998,307 or 4.2%. This decrease in costs of
operations is due to lower revenues during the period partially offset by
inflationary price, wage and expense increases along with payroll and related
costs for new contracts.
10
Gross profit for Fiscal 2003 was $4,621,590 or 16.9% of revenue, compared to
$6,223,884 or 20.8% of revenue in Fiscal 2002, a decrease of $1,602,294 or
25.7 %. The decrease in gross profit as a percent of revenue is due to customer
mix and a change in the term of certain client contracts, which have resulted in
lower gross margins.
General and administrative expenses for Fiscal 2003 were $4,556,706 or 16.7% of
revenue, compared to $4,562,244 or 15.2% of revenue for Fiscal 2002, a decrease
of $5,538. The percentage increase is due to higher fixed costs within the
general and administrative expenses compared to lower sales. General and
administrative expenses for Fiscal 2003 include $138,605 of development costs
related to the Company's Cook-Chill food preparation technology.
Depreciation and amortization for Fiscal 2003 was $775,057, compared to $847,727
for Fiscal 2002. This decrease was due primarily to the end of amortization
expense for investment in contracts.
Provision for doubtful accounts for Fiscal 2003 was $389,262 compared to
$900,000 for Fiscal 2002. The decrease is due to increased collection efforts
and an increased effort by management to attract a credit worthy customer base.
Additionally, bad debt expense was reduced as a result of a cash recovery of
approximately $142,000 relating to accounts receivable written off prior to
Fiscal 2003.
Loss from operations for Fiscal 2003 was ($1,099,435) or (4.0%) of revenue
compared to ($86,087) or (.3%) of revenue for Fiscal 2002, a decrease of
$1,013,348. This decrease is due to lower revenues as well as increased general
and administrative expenses some of which are fixed.
Interest expense for Fiscal 2003 was $211,953 or .8% of revenue, compared to
$261,037 or .9% of revenue for Fiscal 2002. This decrease is primarily due to a
reduction of long-term debt.
For the reasons stated above, loss before income taxes for Fiscal 2003 was
($1,316,828) or (4.8)% of revenue compared to loss before income taxes of
($376,703) or (1.3)% of revenue for Fiscal 2002.
Net loss for Fiscal 2003 was ($819,441) or ($0.29) per share compared to net
loss of ($286,724) or ($0.10) per share for Fiscal 2002.
11
LIQUIDITY AND CAPITAL RESOURCES
Our requirement for capital is to fund (i) sales growth and (ii) financing for
acquisitions. Our primary source of financing during 2004 and 2003 was cash flow
from operations. At June 30, 2004, the Company had working capital of $226,441
as compared to $1,726,474 at June 30, 2003. This decrease in working capital is
primarily attributable to operating losses sustained in the current fiscal year,
a reclassification of a deferred tax asset from short term to long term and a
restriction of cash. The Company's cash and cash equivalents decreased by
$413,989 to $946,523 primarily due to operating losses, a restriction of cash
and an increase in investing activities including the purchase of marketable
securities. Cash provided by operations for fiscal 2004 was $552,136, compared
to $1,444,749 provided by operations for fiscal 2003.
Investing activities consumed $280,656 in cash during fiscal 2004 compared to
$13,407 in cash provided during fiscal 2003. Investing activities for fiscal
2004 include capital expenditures in the amount of $80,314 as well as the
purchase of marketable securities of $200,342. During fiscal 2004, financing
activities consumed $685,469 in cash, compared to $690,954 consumed in cash
during fiscal 2003, primarily due to a restriction of cash.
The Company has certain credit facilities with its bank including a revolving
credit of $3,500,000. At June 30, 2004, the Company had $653,078 available under
its revolving credit. The Company has pledged a $250,000 Certificate of Deposit
as additional collateral against the revolving line of credit. The Company
issued two series of Industrial Bonds totaling $3,560,548 in December 1996. The
outstanding balance on the bonds was $2,675,000 as of June 30, 2004. In December
2004, the Company entered into an agreement whereby the credit loan facility was
extended to December 31, 2005.
The Loan Facility contains certain covenants that include maintenance of certain
financial ratios, maintenance of minimum levels of working capital as well as
affirmative and negative covenants. At June 30, 2004, the Company was not in
compliance with these covenants required under the credit facility agreement. On
December 15, 2004 the Company entered into an amended agreement whereby the
non-compliance was waived and new financial covenants were negotiated through
June 30, 2005, which reflect the Company's current operating projections. As
part of the amended agreement, the Company's Chief Executive Officer was
required to execute a limited personal guarantee in the amount of $3,000,000.
12
===============================================================================================
Payment Due By Period
===============================================================================================
Less
Contractual Total than 1 1-3 4-5 After 5
Obligations year years years years
============================================================================
Note Payable 154,453 154,453 - - -
Long-Term Debt* 5,521,922 145,000 3,161,922 350,000 1,865,000
Operating Leases 99,770 41,702 58,068 - -
Total Contractual Cash
Obligations 5,776,145 341,155 3,219,990 350,000 1,865,000
o Long-Term Debt includes $2,846,922 outstanding on the revolving line of
credit, leaving $653,078 available under the $3,500,000 revolving line of
credit.
============================================================================================
Amount of Commitment Expiration
Per Period
===============================================
Other Commercial Total Amounts Less than 1-3 4-5 Over
Commitments Committed 1 year years years 5
years
============================================ ==============================
Lines of Credit 3,500,000 - 3,500,000 - -
Standby Letter of
Credit 3,065,000 - 3,065,000 - -
Total Commercial
Commitments 6,565,000 - 6,565,000 - -
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to make
repayments of indebtedness described herein, to meet the working capital cash
needs of the Company and to meet anticipated capital expenditure needs during
the 12 months ending June 2005.
On September 8, 2004 the Company entered into an agreement of sale for the land
adjacent to its Collegeville Inn Conference & Training Center. The agreement
provides for an initial deposit of $10,000 within ten days of the effective date
of the agreement, with additional deposits of $50,000 and $25,000 payable to the
Company upon the occurrence of certain events, including, but not limited to,
zoning approvals. The deposits are non-refundable upon the end of a 120 day
inspection period, which commenced on the date the Buyer received a fully
executed original of the agreement of sale. Pursuant to the terms of the
agreement of sale, the Company may realize gross proceeds of not less than
$1,710,000. However, the Company may realize gross proceeds in excess of
$1,710,000, if the buyer is able to maximize the yield of the property. The
agreement of sale provides that settlement occur within twenty-four months of
the date of the agreement, however, upon payment of additional deposits,
settlement may be extended an additional twelve months. Upon closing of the
transaction, the Company plans on using the proceeds to retire a proportional
amount of outstanding debt associated with the parcel of land. There can be no
13
assurance that the sale of this land will be completed in accordance with the
terms of the agreement of sale.
The Company realizes that in order to reduce continuing operating losses it may
have to dispose of certain assets, including its research and development
facility, the Collegeville Inn Conference and Training Center. The Company is
exploring all reasonable alternatives to improve its operating results,
including but not limited to, increasing food service revenues with targeted
marketing efforts, increasing revenues from the sale of the Company's Cook Chill
products, the sale or lease of all or part of the Collegeville Inn Conference
and Training Center, sale of excess land at the Collegeville Inn Conference and
Training Center and reduction of operating expenses. There can be no assurance
as to the success of any or all of these alternatives.
In an effort to extend our current bank debt, we may seek to access the public
equity market whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. Any additional funding may
result in significant dilution and could involve the issuance of securities with
rights, which are senior to those of existing stockholders. We may also need
additional funding earlier than anticipated, and our cash requirements, in
general, may vary materially from those now planned, for reasons including, but
not limited to, competitive advances and higher than anticipated expenses and
lower than anticipated revenues from operations.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued Financial Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" and in December 2003 the FASB
issued Financial Interpretation No. 46 (revised) ("FIN 46(R)"), "Consolidation
of Variable Interest Entities (revised)". These interpretations of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," address
consolidation by business enterprises of certain variable interest entities
where there is a controlling financial interest in a variable interest entity or
where the variable interest does not have sufficient equity at risk to finance
its activities without additional subordinated financial support from other
parities. The Company will apply the consolidation requirement of FIN 46 and FIN
46(R) in future periods if the Company should own any interests in any variable
interest entity.
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 requires
the Company to make estimates and judgments that affect the reported amount of
14
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.
REVENUE RECOGNITION
Revenue is generated primarily from fees for food service management and
facilities management at continuing care and health care facilities and the
Collegeville Inn restaurant. Revenue is recognized when services are performed.
Ongoing assessments of the credit worthiness of customers provide the Company
reasonable assurance of collectibility upon performance of services.
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. The Company
has increased its reserves in fiscal 2004. Due to the passage of time, the
Company made a decision to increase the provision for doubtful accounts with
respect to certain delinquent customers.
IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS
The carrying value of property, plant, and equipment is evaluated based upon
current and anticipated undiscounted operating cash flows before debt service
charges. An impairment is recognized when it is probable that such estimated
future cash flows will be less than the carrying value of the assets.
Measurement of the amount of impairment, if any, is based upon the difference
between the net carrying value and the fair value, which is estimated based upon
anticipated undiscounted operating cash flows before debt service charges. Based
upon a review of its long-lived assets, the Company did not recognize an
impairment loss for the fiscal year ended June 30, 2004; however, there can be
no assurance that the Company will not recognize an impairment loss on its
long-lived assets in future periods.
15
INCOME TAX ACCOUNTING
The Company determines its provision for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax effects of temporary differences of existing
assets and liabilities and their respective tax bases. Future tax benefits of
tax loss and credit carryforwards also are recognized as deferred tax assets.
When necessary, deferred tax assets are reduced by a valuation allowance to the
extent the Company concludes there is uncertainty as to their ultimate
realization. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that the change is enacted.
As of June 30, 2004 and 2003, the Company maintained a deferred tax asset of
$1,623,841 and $1,422,141, respectively. The Company has not provided a
valuation allowance against its deferred tax assets after consideration of a
future gain on the disposal of certain land adjacent to its Collegeville
facility and anticipated future profitable operating results. However, the
amount realizable may be reduced if future taxable income is reduced or is
insufficient to utilize the entire deferred tax asset.
EMPLOYMENT CONTRACTS
For the fiscal years ended June 30, 2004, 2003 and 2002 the Company paid a base
salary of $326,542, $312,212 and $228,864 to Joseph Roberts, Chairman and Chief
Executive Officer and $228,864, $228,899 and $222,674 to Kathleen Hill,
President and Chief Operating Officer, respectively. The Company currently has
no employment contracts with either of such individuals, additionally all
previous employment contracts with such individuals expired. The Compensation
Committee of the Board of Directors is currently engaged in discussions with Mr.
Roberts and Ms. Hill with respect to their compensation for the fiscal year
ending June 30, 2005.
CAPITAL EXPENDITURES
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,
16
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.
MEDICARE AND MEDICAID REIMBURSEMENTS
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.
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 15, of this Form 10-K.
ITEM 9 - CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 28, 2003, the Company, upon the recommendation and approval of its
Audit Committee, dismissed Grant Thornton, LLP ("Grant") as the Company's
principal independent certified public accountant. On September 2, 2003 the
Company engaged BDO Seidman, LLP ("BDO Seidman") to serve as the Company's
principal independent certified public accountant, effective immediately. The
decision to dismiss Grant was recommended by the Audit Committee of the
Company's Board of Directors and approved by the Company's Board of Directors.
In connection with the audits for the most recent fiscal year ended June 30,
2002 and the subsequent interim period through September 2, 2003 there were no
disagreements between the Company and Grant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Grant, would have caused
Grant to make reference to the subject matter of such disagreements in
connection with its reports on the Company's consolidated financial statements
for such years. During the fiscal years ended June 30, 2002 and the subsequent
interim period through September 2, 2003, there were no reportable events as
defined in item 304(a) (1) (v) of Regulation S-K.
The report of Grant on the consolidated financial statements of the Company as
of and for the fiscal year ended June 30, 2002 did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
17
The foregoing disclosures were previously reported in Item 4 of the Company's
current report on Form 8-K filed with the SEC on September 2, 2003. The Company
provided Grant with a copy of the foregoing disclosures and requested that Grant
furnish the Company with a letter addressed to the SEC stating that it agreed
with such statements. A copy of such letter, dated September 5, 2003 was filed
as Exhibit 16.1 to Form 8-K, dated September 5, 2003.
During the fiscal year ended June 30, 2002 and through September 2, 2003,
neither the Company nor someone on its behalf consulted BDO Seidman, LLP
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
matters or reportable events as set forth in Items 304 (a) (1) (iv) and (a) (1)
(v) of Regulation S-K.
ITEM 9A - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and its Chief
Financial Officer/Principal Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
In connection with the completion of its audit of, and the issuance of an
unqualified report on, the Company's consolidated financial statements for the
fiscal year ended June 30, 2004, the Company's independent auditors, BDO
Seidman, LLP ("BDO"), communicated to the Company that the following matter
involving the Company's internal controls and operation were considered to be a
"reportable condition", as defined under standards established by the American
Institute of Certified Public Accountants, or AICPA.
The Company did not have sufficient competent accounting personnel and as a
result processes relating to preparation of the Company's income tax accrual,
including lack of timely management review, contributed to a material adjustment
of the income tax accounts in the fourth quarter of the current fiscal year.
18
Reportable conditions are matters coming to the attention of the independent
auditors that, in their judgment, relate to significant deficiencies in the
design or operation of internal controls and could adversely affect the
Company's ability to record, process, summarize and report financial data
consistent with the assertions of management in the financial statements. In
addition, BDO has advised the Company that they consider this matter, which is
listed above, to be a "material weakness" that, by itself or in combination
could result in a more than remote likelihood that a material misstatement in
the financial statements will not be prevented or detected by our employees in
the normal course of performing their assigned functions.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of its management of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of June 30, 2004. Based on the foregoing, the Company's Chief
Executive Officer ("CEO") and Principal Financial Manager ("PFM") have
determined that the Company's disclosure controls and procedures were not
effective at a reasonable assurance level based upon the deficiency identified
by BDO. However, the CEO and PFM noted that the Company has remedied this
deficiency and did not note any other material weaknesses or significant
deficiencies in the Company's disclosure controls and procedures during their
evaluation. In November 2004, the Company has hired a Director of Finance with
relevant education and work experience who will assume responsibility for the
preparation of all of the income tax analyses.
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
2004 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
2004 Annual Meeting of Shareholders under the caption "Executive Compensation
and Compensation of Directors" and is incorporated herein by reference.
19
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of the Company for the
2004 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 2004 Annual Meeting of Shareholders under the caption "Certain Relationships
and Related Transactions" and is incorporated herein by reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The accounting firm of BDO Seidman, LLP ("BDO Seidman") served as the Company's
independent registered public accounting firm for the fiscal year ended June 30,
2004. Such firm has no other relationship to the Company or its affiliates.
AUDIT FEES
BDO Seidman, LLP billed the Company $53,000 for audit fees for the
Company's annual consolidated financial statements for the fiscal year ended
June 30, 2004, and $41,000 for audit fees for the fiscal year ended June 30,
2003.
AUDIT RELATED FEES
BDO Seidman, LLP did not bill the Company for any for audit related
services for fiscal year ended June 30, 2004 and June 30, 2003, respectively.
TAX FEES
BDO Seidman, LLP billed the Company $12,000 for tax services for fiscal
year ended June 30, 2003.
ALL OTHER FEES
BDO Seidman, LLP did not bill for any other professional services.
PRE-APPROVAL POLICIES AND PROCEDURES
All audit and non-audit services to be performed by the Company's independent
accountant must be approved in advance by the Audit Committee. Consistent with
applicable law, limited amounts of services, other than audit, review or attest
services, may be approved by one or more members of the Audit Committee pursuant
20
to authority delegated by the Audit Committee, provided each such approved
service is reported to the full Audit Committee at its next meeting.
All of the engagements and fees for the Company's fiscal year ended June 30,
2004 were approved by the Audit Committee.
The Audit Committee of the Board of Directors considered whether the provision
of non-audit services by BDO Seidman LLP was compatible with its ability to
maintain independence from an audit standpoint and concluded that BDO Seidman
LLP's independence was not compromised.
21
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms F-2
to
F-3
Consolidated Balance Sheets as of
June 30, 2004 and 2003 F-4
Consolidated Statements of Operations for the
Years Ended June 30, 2004, 2003 and 2002 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2004, 2003 and 2002 F-7
Notes to Consolidated Financial Statements F-8
to
F-21
Schedule of Valuation Accounts F-23
(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).
4.1 Specimen Stock Certificate of the Company (Incorporated by reference
to Exhibit 4.1 of the S-1).
22
4.5 Registration Rights Agreement between the Company and Kathleen Hill
(Incorporated by reference to Exhibit 4.5 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 Form 10-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).
10.17 Trust Indenture between the Montgomery County Development Authority
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).
23
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).
31.1 Section 302 Certification of Principal Executive Officer
31.2 Section 302 Certification of Principal Financial Manager
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Principal Financial Manager. The Company
does not have a Chief Financial Officer.
24
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this annual 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: December 21, 2004
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, this annual report has been signed by the following persons on behalf
of the registrant and in the capacities indicated as of December 21, 2004.
/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/ Samuel R. Shipley
- ------------------------------ ------------------------------------
Richard Kresky, Director Samuel R. Shipley, Director
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
25
Financial Statements and Reports of Registered Public Accounting Firms
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
June 30, 2004, 2003 and 2002
TABLE OF CONTENTS
Page
----
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F-2
to
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
to
F-21
SUPPLEMENTAL INFORMATION
SCHEDULE OF VALUATION ACCOUNTS F-23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Nutrition Management Services Company
Kimberton, Pennsylvania
We have audited the accompanying consolidated balance sheets of Nutrition
Management Services Company as of June 30, 2004 and 2003 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended June 30, 2004. We have also audited
the schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedules are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedules. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and
schedules. 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 financial position of Nutrition Management
Services Company at June 30, 2004 and 2003, and the results of their operations
and their cash flows for each of the two years in the period ended June 30,
2004, in conformity with accounting principles generally accepted in the United
States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Philadelphia, Pennsylvania
September 17, 2004 except
for Note E which is as of
December 15, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
Nutrition Management Service Company
We have audited the accompanying equity and cash flows of Nutrition
Management Services Company and its subs as of June 30, 2002. for each of the
three years in the period ended June 30, 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 the standards of the
Public Company Accounting Oversight Board. These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements. An audit also includes asserting the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated operations and
their cash flows of Nutrition Management Services Company, its subsidiaries for
the year ended June 30, 2002, 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 Company and its subsidiaries for the year 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
- ----------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
September 20, 2002
F-3
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
2004 2003
------------ ------------
Current assets
Cash and cash equivalents $ 946,523 $ 1,360,512
Marketable securities 202,969 -
Accounts receivable (net of allowance for doubtful accounts of $2,877,336
and $2,292,336 in 2004 and 2003, respectively) 2,259,582 2,843,764
Unbilled revenue 89,263 51,147
Deferred income taxes 405,320 1,209,454
Inventory 159,181 155,945
Prepaid and other 372,945 365,558
Income tax refund 63,348 63,348
------------ ------------
Total current assets 4,499,131 6,049,728
------------ ------------
Property and equipment - net 7,563,568 8,103,456
------------ ------------
Other assets
Restricted cash 250,000 -
Note receivable 120,608 136,110
Advances to officers 435,283 435,283
Deferred income taxes 1,218,521 212,687
Bond issue costs (net of accumulated amortization of $110,461
and $95,892 in 2004 and 2003, respectively) 180,863 195,430
Other assets 11,321 10,020
------------ ------------
Total other assets 2,216,596 989,530
------------ ------------
Total assets $ 14,279,295 $ 15,142,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 145,000 $ 196,813
Current portion of note payable 154,453 575,687
Accounts payable 3,303,947 2,883,496
Accrued expenses 286,527 303,756
Accrued payroll 222,176 246,622
Other 160,587 116,880
------------ ------------
Total current liabilities 4,272,690 4,323,254
------------ ------------
Long-term liabilities
Long-term debt-net of current portion 5,376,922 5,184,891
Long-term note payable - 154,452
------------ ------------
Total long-term liabilities 5,376,922 5,339,343
------------ ------------
Commitments and contingencies
Stockholders' equity
Undesignated preferred stock-no par, 2,000,000 shares authorized, none issued and outstanding
Common stock
Class A-no par, 10,000,000 shares authorized; 3,000,000
issued, 2,747,000 outstanding 3,801,926 3,801,926
Class B-no par, 100,000 shares authorized; 100,000 shares issued and outstanding 48 48
Retained earnings 1,327,272 2,177,706
------------ ------------
5,129,246 5,979,680
Less treasury stock - (common - Class A: 253,000 shares - at cost ) (499,563) (499,563)
------------ ------------
Total stockholders' equity 4,629,683 5,480,117
------------ ------------
Total liabilities and stockholders' equity $ 14,279,295 $ 15,142,714
============ ============
The accompanying notes are an integral part of these statements
F-4
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2004 2003 2002
------------ ------------ ------------
Food service revenue $ 27,999,905 $ 27,306,030 $ 29,906,631
Cost of operations
Payroll and related expenses 11,178,474 10,938,468 10,170,603
Other costs of operations 11,563,911 11,745,972 13,512,144
------------ ------------ ------------
Cost of operations 22,742,385 22,684,440 23,682,747
------------ ------------ ------------
Gross profit 5,257,520 4,621,590 6,223,884
------------ ------------ ------------
Expenses
General and administrative expenses 4,909,172 4,556,706 4,562,244
Depreciation and amortization 620,199 775,057 847,727
Provision for doubtful accounts 585,000 389,262 900,000
------------ ------------ ------------
Expenses 6,114,371 5,721,025 6,309,971
------------ ------------ ------------
(Loss) from operations (856,851) (1,099,435) (86,087)
------------ ------------ ------------
Other (expense) income
Interest expense (186,699) (211,953) (261,037)
Interest income 9,564 9,763 9,131
Other (18,148) (15,203) (38,710)
------------ ------------ ------------
Other expense - net (195,283) (217,393) (290,616)
------------ ------------ ------------
Loss before income taxes (1,052,134) (1,316,828) (376,703)
Income tax benefit (201,700) (497,387) (89,979)
------------ ------------ ------------
Net loss $ (850,434) $ (819,441) $ (286,724)
============ ============ ============
Net loss per share - basic and diluted $ (0.30) $ (0.29) $ (0.10)
============ ============ ============
Weighted average number of shares 2,847,000 2,847,000 2,847,000
============ ============ ============
The accompanying notes are an integral part of these statements
F-5
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three years ended June 30, 2004
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, 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
Net loss - - - - (819,441) - - (819,441)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2003 2,747,000 3,801,926 100,000 48 2,177,706 (253,000) (499,563) 5,480,117
Net loss - - - - (850,434) - - (850,434)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance - June 30, 2004 2,747,000 $ 3,801,926 100,000 $ 48 $ 1,327,272 (253,000) ($ 499,563) $ 4,629,683
The accompanying notes are an integral part of these statements
F-6
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2004 2003 2002
----------- ----------- -----------
Operating activities
Net loss $ (850,434) $ (819,441) $ (286,724)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 620,199 775,057 847,727
Amortization of bond costs 14,567 14,566 14,567
Provision for bad debts 585,000 389,262 900,000
Amortization of deferred gain - - (50)
Unrealized gain on trading securities (2,627) - -
(Benefit) for deferred taxes (201,700) (436,565) (156,690)
Changes in assets and liabilities
Accounts receivable 14,682 2,290,854 (135,361)
Unbilled revenue (38,116) (4,642) 131,462
Inventory (3,236) 74,293 2,631
Prepaid and other (7,390) (76,479) 127,930
Income tax refund - (63,348) -
Accounts payable 420,451 (590,629) (726,630)
Accrued expenses (17,229) (139,727) 102,198
Accrued payroll (24,446) (14,239) (12,356)
Accrued income taxes - - -
Other 42,415 45,687 (54,812)
----------- ----------- -----------
Net cash provided by operating activities 552,136 1,444,749 753,892
----------- ----------- -----------
Investing activities
Purchase of property and equipment (80,314) (74,800) (243,698)
Purchase of marketable securities (200,342) - -
(Advances) repayments to employees and officers - 88,207 (194,503)
----------- ----------- -----------
Net cash (used in) provided by investing activities (280,656) 13,407 (438,201)
----------- ----------- -----------
Financing activities
Restricted cash (250,000) - -
Proceeds from long-term borrowings 4,225,000 1,775,900 1,217,000
Repayment of long-term borrowings (4,084,783) (2,129,866) (1,054,268)
Repayment of long-term accounts payable (575,686) (336,988) (336,988)
----------- ----------- -----------
Net cash used in financing activities (685,469) (690,954) (174,256)
----------- ----------- -----------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (413,989) 767,202 141,435
Cash and cash equivalents - beginning of year 1,360,512 593,310 451,875
----------- ----------- -----------
Cash and cash equivalents - end of year $ 946,523 $ 1,360,512 $ 593,310
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for
Interest $ 185,000 $ 213,625 $ 270,483
Income taxes $ 2,040 $ 6,475 $ (113,473)
The accompanying notes are an integral part of these statements
F-7
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company ("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.
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. Restricted cash
is comprised of a certificate of deposit which is pledged as additional
collateral against the revolver note.
3. MARKETABLE SECURITIES
Nutrition Management Services Company classifies its investments in
marketable securities as trading, which are carried at their fair value
based upon the quoted market prices of those investments at period end.
Accordingly, net realized and unrealized gains of $2,969 on trading
securities are included in net earnings as of June 2004.
Cost Fair Value
--------- ---------
Common and Preferred Stock $ 119,284 $ 122,187
Mutual Funds $ 80,716 $ 80,782
--------- ---------
Total $ 200,000 $ 202,969
========= =========
4. Accounts Receivable and Allowance for Doubtful Accounts
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 a customer's financial condition. Accounts
receivable are generally due within thirty days. The allowance for doubtful
accounts represents an estimate of amounts considered uncollectible and is
determined based on specifically identified amounts that we believe to be
based on historical collection experience, adverse situations that may
affect the customer's ability to repay and prevailing economic conditions.
If our actual collections experience changes, revisions to our allowance
may be required. In the fourth quarter 2004, the Company recorded an
adjustment of $330,000 to increase the allowance for doubtful accounts. Due
to the passage of time, the Company made a decision to increase the
provision for doubtful accounts with respect to certain delinquent
customers. The Company believes it will be successful in its collection
efforts related to these outstanding balances.
5. Unbilled Revenue
Unbilled revenue represents amounts for services provided, but not billed
as of the balance sheet date.
6. 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 by the Company. For the remaining
customers, the Company purchases inventory on their behalf and a payable or
receivable is recorded for the change in the value of these goods, which is
then collected from or paid to customers. As of June 30, 2004 and 2003,
inventory is $159,181 and $155,945, respectively. As of June 30, 2004 and
2003, inventory receivable from customers is $17,186 and $21,730
respectively, while inventory payable to customers is $0 and $15,525
respectively.
F-8
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
7. REVENUE RECOGNITION
The Company recognizes revenue when services have been rendered and the
contract price is determinable, and collectibility is reasonably assured.
Revenue is generated primarily from fees for food service management and
facilities management at continuing care and health care facilities, and
the Collegeville Inn restaurant. Revenue is recognized when services are
performed. Revenues are recorded net of discounts and rebates. The Company
has no other obligation with respect to its services once services are
performed.
8. 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.
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. 148, "Accounting
for Stock-Based Compensation-Transaction and Disclosure, an amendment of
FASB Statement 123" ("SFAS 148") for its stock options. SFAS 148 amends
FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board
Opinion No. 28, Interim Financial Reporting, to require disclosure about
those effects in interim financial information. The Company expects to
continue to utilize the intrinsic valuation method for recoding employee
stock based compensation. There are no elements of compensation that
require disclosure.
11. INCOME TAXES
The Company determines its provision for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax effects of temporary differences of
existing assets and liabilities and their respective tax bases. Future tax
benefits of tax loss and credit carryforwards also are recognized as
deferred tax assets. When necessary, deferred tax assets are reduced by a
valuation allowance to the extent the Company concludes there is
uncertainty as to their ultimate realization. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that the change is enacted.
As of June 30, 2004 and 2003, the Company maintained a deferred tax asset
of $1,623,841 and $1,422,141, respectively. The Company has not provided a
valuation allowance against its deferred tax assets after consideration of
a future gain on the disposal of certain land adjacent to its Collegeville
facility and anticipated future profitable operating results. However, the
amount realizable may be reduced if future taxable income is reduced or is
insufficient to utilize the entire deferred tax asset. See Note G for
additional information.
F-9
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. EARNINGS/LOSS PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share."
Basic earnings/loss per share excludes dilution and is computed by dividing
income/loss available to common shareholders by the weighted average common
shares outstanding during the period. Diluted earnings/loss 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 82,750, 82,750 and 89,750 shares of common stock at
$4.00 per share were outstanding during 2004, 2003 and 2002, respectively.
The Company has sustained a net loss for each of the fiscal years
presented. As a result, the common stock equivalents of stock options
issued and outstanding at June 30, 2004 were not included in the
computation of diluted earnings per share for the three years then ended as
they were antidilutive.
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,
2004, 2003 and 2002 was $112,404, $53,196 and $62,448, respectively.
14. RECLASSIFICATION
Certain 2003 and 2002 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.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts we have reported in the
accompanying balance sheet for cash and cash equivalents approximate their
fair values.
Investments: We estimate the fair values of investments based on quoted
market prices. The carrying amounts are reported in the accompanying
balance sheet for investments in contracts approximate their fair values.
Long- and short-term debt: We base the fair values of debt instruments on
quoted market prices. Where quoted prices are not available, we base the
fair values on the present value of future cash flows discounted as
estimated borrowing rates for similar debt instruments or on estimated
prices based on current yields for debt issues of similar quality and
terms. The carrying amounts are reported in the accompanying balance sheet
for debt approximate their fair values. See footnotes E and F for further
discussion.
17. IMPAIRMENT OR DISPOSAL OF LONG LIVED ASSETS
The Company adopted SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS" ("SFAS 144"). Under the requirements of SFAS 144, the
Company assesses the potential impairment of property, plant and equipment
whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. An asset's value is impaired if management's
estimate of the aggregate future cash flows, undiscounted and without
interest charges, to be generated by the asset are less than the carrying
value of the asset. Such cash flows consider factors such as expected
future operating income and historical trends, as well as the effects of
demand and competition. To the extent impairment has occurred, the loss
will be measured as the excess of the carrying amount of the asset over the
fair value of the asset. Such estimates require the use of judgment and
numerous subjective assumptions, which, if actual experience varies, could
result in material differences in the requirements for impairment charges.
F-10
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
18. RESEARCH AND DEVELOPMENT
The Company incurred research and development costs related to the
Company's Cook-Chill food preparation technology in the amounts of
$159,893, $138,605 and $43,730 for the years ended June 30, 2004, 2003 and
2002, respectively.
19. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued Financial Interpretation No. 46 ("FIN 46"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES" and in December 2003 the FASB
issued Financial Interpretation No. 46 (revised) ("FIN 46(R)"),
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES (REVISED)". These
interpretations of Accounting Research Bulletin No. 51, "CONSOLIDATED
FINANCIAL STATEMENTS," address consolidation by business enterprises of
certain variable interest entities where there is a controlling financial
interest in a variable interest entity or where the variable interest does
not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parities. The Company
will apply the consolidation requirement of FIN 46 and FIN 46(R) in future
periods if the Company should own any interest in any variable interest
entity.
NOTE C - BUSINESS CONDITIONS
The Company's primary sources of revenues are the management fees it
receives from contracts to provide food and housekeeping services to
continuing care facilities, hospitals, and retirement communities, as well
as the Collegeville Inn which includes the Conference and Training Center,
Catering facilities and the Cook Chill operations. See Note P for segment
reporting information. The Company has a business plan in place to improve
the operating results from the Collegeville Inn Conference and Training
Center.
On September 8, 2004 the Company entered into an agreement of sale for the
land adjacent to its Collegeville Inn Conference & Training Center. The
agreement provides for an initial deposit of $10,000 within ten days of the
effective date of the agreement, with additional deposits of $50,000 and
$25,000 payable to the Company upon the occurrence of certain events,
including, but not limited to, zoning approvals. The deposits are
non-refundable upon the end of a 120-day inspection period, which commenced
on the date the Buyer received a fully executed original of the agreement
of sale. Pursuant to the terms of the agreement of sale, the Company may
realize gross proceeds of not less than $1,710,000. However, the Company
may realize gross proceeds in excess of $1,710,000, if the buyer is able to
maximize the yield of the property. The agreement of sale provides that
settlement occur within twenty-four months of the date of the agreement,
however, upon payment of additional deposits, settlement may be extended an
additional twelve months. Upon closing of the transaction, the Company
plans on using the proceeds to retire a proportional amount of outstanding
debt associated with the parcel of land. There can be no assurance that the
sale of this land will be completed in accordance with the terms of the
agreement of sale.
The Company realizes that in order to reduce continuing operating losses it
may have to dispose of certain assets, including its research and
development facility, the Collegeville Inn Conference and Training Center.
The Company is exploring all reasonable alternatives to improve its
operating results, including but not limited to, increasing food service
revenues with targeted marketing efforts, increasing revenues from the sale
of the Company's Cook Chill products, the sale or lease of all or part of
the Collegeville Inn Conference and Training Center, sale of excess land at
the Collegeville Inn Conference and Training Center and reduction of
operating expenses. There can be no assurance as to the success of any or
all of these alternatives.
Management believes that operating cash flow, the proceeds from the sale of
the land, available cash and available credit resources will be adequate to
make repayments of indebtedness, meet the working capital needs, satisfy
the needs of its operations, and to meet anticipated capital expenditures
during the next twelve months ending June 30, 2005.
F-11
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - BUSINESS CONDITIONS-continued
At June 30, 2004 the Company was not in compliance with its bank covenants,
which have been waived. The Company has amended its agreement with the bank
that has extended the terms of the Company's credit line through December
31, 2005. See Note E for additional information.
NOTE D - PROPERTY AND EQUIPMENT
The following details the composition of property and equipment.
Estimated
useful lives 2004 2003
----------- -----------
Property and equipment
Land - $ 497,967 $ 497,967
Building 40 7,491,984 7,491,984
Machinery and equipment 2-8 3,864,941 3,812,628
Furniture and fixtures 2-8 749,434 749,434
Other, principally autos and trucks 2-10 407,117 379,119
----------- -----------
13,011,443 12,931,132
Less accumulated depreciation 5,447,875 4,827,676
----------- -----------
$ 7,563,568 $ 8,103,456
=========== ===========
NOTE E - LONG- TERM DEBT
Long-term debt consisted of the following:
2004 2003
----------- -----------
Bank revolving credit, interest due monthly at the National Consumer
rate minus .25% (effectively 4.1% as of June 30, 2004), secured by
all corporate assets and limited personal guarantee of the Chief
Executive Officer; matures on December 31, 2005 $ 2,846,922 $2,505,922
Note payable, term loan incurred in connection with purchased computer
equipment, payable in equal monthly installments of $6,722 at a
fixed rate of interest at 7.4%, maturing on May 1, 2004; the
acquired equipment was pledged as collateral 0 65,782
Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds payable) 1,940,000 2,030,000
Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds
payable) 735,000 780,000
----------- -----------
5,521,922 5,381,704
Less current maturities 145,000 196,813
----------- -----------
$5,376,922 $5,184,891
=========== ===========
F-12
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG- TERM DEBT-continued
In February 2001, the Company executed a loan agreement with a bank for a
revolving credit and two irrevocable letters of credit issued in
conjunction with the issuance of the Industrial Revenue Bonds, totaling
$4,000,000 and $3,065,000, respectively. In October 2003 the Company
entered into an amended credit agreement whereby the $4,000,000 Revolving
Credit Loan Facility was reduced to $3,500,000 and $500,000 was placed in a
cash collateral account and pledged as additional collateral against the
revolving credit line. At June 30, 2004, the Company had available
approximately $653,078 under the revolving credit. Advances under the
revolving credit are used for working capital purposes.
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 consolidated fixed debt service
coverage ratio, ratio of total consolidated liabilities to consolidated
tangible net worth, and minimum working capital. At June 30, 2004 the
Company was not in compliance with these covenants. As of June 30, 2004 and
2003 the Company maintained restricted cash balances of $250,000 and $0,
respectively, which was not available for operating purposes. On December
15, 2004 the Company entered into an amended agreement whereby the
non-compliance was waived and new financial covenants were negotiated
through June 30, 2005, which reflect the Company's current operating
projections. As part of the amended agreement, the Company's Chief
Executive Officer was required to execute a limited personal guarantee in
the amount of $3,000,000.
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% (Variable Rate at June 30, 2004 was
1.6%)
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% (Variable Rate at June 30, 2004 was
1.25%)
Term - 20 years (2016)
Purpose - Develop a cook-chill food preparation technology
Each series of bonds is guaranteed by the Company and each of its 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.
F-13
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E - LONG- TERM DEBT-continued
The sinking fund requirements of the bonds are as follows:
Collegeville Apple Fresh
Inn Foods Total
------- ------ -------
2004 $100,000 $45,000 $145,000
2005 105,000 45,000 150,000
2006 115,000 50,000 165,000
2007 120,000 50,000 170,000
2008 130,000 50,000 180,000
Maturities of principal due in the following years are set forth below:
Year ending June 30,
2005 $ 150,000
2006 3,011,922
2007 170,000
2008 180,000
2009 190,000
Thereafter 1,675,000
-----------
$ 5,376,922
===========
NOTE F - LONG-TERM NOTE PAYABLE
The Company entered into an agreement with a third party in July 2000. The
agreement calls for the following payment terms: $100,000 due on August 1,
2000, followed by 37 monthly payments of $28,000, $323,000 due on October
1, 2003, and the remaining balance paid at a rate of $28,000 per month
until paid in full. The payment schedule includes total payments of
$154,453 in 2005.
NOTE G - INCOME TAXES
The components of income tax (benefit) expense are: Year Ended June 30,
-----------------------------------
2004 2003 2002
--------- --------- ---------
Current
Federal $ 0 $ (47,422) $ 24,736
State 0 (13,400) 41,975
--------- --------- ---------
0 (60,822) 66,711
--------- --------- ---------
Deferred
Federal (157,662) (345,191) (125,650)
State (44,038) (91,374) (31,040)
--------- --------- ---------
(201,700) (436,565) (156,690)
--------- --------- ---------
$(201,700) $(497,387) $ (89,979)
========= ========= =========
F-14
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - 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:
June 30
2004 2003
---------- ----------
Deferred tax assets
Provision for doubtful accounts $1,095,349 $1,093,627
Excess of tax over financial statement
basis of investments in contracts 147,970 184,825
Vacation accrual 114,956 115,827
Charitable contribution carryforward 36,690 26,905
Federal net operating loss 324,893 165,322
Other 107,879 63,842
Total deferred tax assets 1,827,737 1,650,348
---------- ----------
Deferred tax liabilities
Depreciation 203,896 228,207
---------- ----------
Net deferred tax assets $1,623,841 $1,422,141
========== ==========
These amounts are classified in the balance sheet as follows:
June 30
2004 2003
---------- ----------
Current asset $ 405,320 $1,209,454
Non-current asset 1,218,521 212,687
---------- ----------
$1,623,841 $1,422,141
The Company has not provided a valuation allowance against its deferred tax
assets after consideration of a future gain on the disposal of certain land
adjacent to its Collegeville facility and anticipated future profitable
operating results.
The following reconciles the tax provision with the U.S. statutory tax rates:
Year Ended June 30
2004 2003 2002
---- ---- ----
Income taxes at U.S. statutory rates 34.0% 34.0% 34.0%
States taxes, net of federal tax benefit (4.2) 5.3 (7.4)
Nondeductible expenses (10.2) (3.5) (8.6)
Other (.4) 2.0 5.9
---- ---- ----
19.2% 37.8% 23.9%
==== ==== ====
The Company also has a federal net operating loss carry forward of $755,565
expiring on December 31, 2017. The Company has charitable contribution carry
forwards in the amount of $85,326, which begin to expire in the fiscal year
2004.
F-15
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - RELATED PARTY TRANSACTIONS
The Company leases its corporate offices, located at 725 Kimberton Road,
Kimberton, Pennsylvania, which consists of approximately 8,500 square feet
from Ocean 7, Inc., a corporation controlled by the Chief Executive Officer
of the Company, The initial term of the lease expired on June 30, 2003 and
continues on a month to month lease based on terms generally similar to
those prevailing to unrelated parties. The Company leases an apartment from
a corporation controlled by a related party to accommodate visiting clients
and employees. See Note I for additional information.
Joseph V. Roberts, Chief Executive Officer and Director of the Company,
received long term advances of which $375,373 remain outstanding as of June
30, 2004 and 2003, respectively. Kathleen A. Hill, President, Chief
Operating Officer and Director of the Company, received long term advances
of which $59,910 remain outstanding as of June 30, 2004 and 2003,
respectively. The Company will enter into a shareholder note as part of a
compensation agreement, currently being reviewed by the compensation
committee, for all notes to be repaid over a five-year period at the
Federal adjusted interest rate.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases its corporate office building from the above-mentioned
related party under a month-to-month lease based on terms management
believes to be generally similar to those prevailing to unrelated parties.
During the years ended June 30, 2004, 2003 and 2002, rent expense was
$273,043, $255,587 and $248,252, respectively.
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 2007. During the years ended June
30, 2004, 2003 and 2002, rent expense was $287,440, $260,698 and $275,054,
respectively, for all operating leases.
Minimum annual rentals under non-cancelable operating leases subsequent to
June 30, 2004, are as follows:
Operating
Year ending June 30, equipment
2005 $ 41,702
2006 41,702
2007 16,366
2008 0
2. LITIGATION
On February 7, 2001, the Company filed a suit against a major client in the
Court of Common Pleas in Chester County, Pennsylvania. This suit has
subsequently been removed to the United States District Court for the
Eastern District of Pennsylvania. In the lawsuit, NMSC has made various
claims, including among others a claim that the client failed to pay
approximately $2.1 million in invoiced amounts, a claim that the client
failed to pay approximately $1 million in other amounts owing, a claim for
reimbursement for start up costs in an amount in excess of $400,000, a
claim for over $2 million in lost profits (or, alternatively, a claim for
reimbursement for over $300,000 in credits issued in exchange for the
promise to extend the arrangement), a claim in the nature of treble damages
and counsel fees, and other claims. The client has filed a counterclaim
which the Company is contesting as part of the overall proceedings. The
case is currently docketed for trial in early 2005.
F-16
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - COMMITMENTS AND CONTINGENCIES-continued
The Company is involved in litigation with two separate construction
contractors related to the renovations of Collegeville Inn Conference and
Training Center. The Company denies each claim and has asserted offsets
against the amounts claimed. One case is docketed for early 2005, while the
other case is in discovery.
Although it is not possible to predict with certainty the outcome of these
unresolved legal actions or the range of possible loss or recovery, the
Company believes these unresolved legal actions will not have a material
effect on its financial position or results of operations.
In addition to the litigation described above, 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 effect on the
Company's financial position, results of operations or cash flows.
NOTE J - 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.
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.
F-17
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - 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, 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
Forfeited/exercised (7,000) - (7,000) 4.00
------- ------- ------- -----
Outstanding at June 30, 2003 37,750 45,000 82,750 4.00
Exercisable at June 30, 2003 37,750 45,000 82,750 4.00
Outstanding at June 30, 2004 37,750 45,000 82,750 4.00
Exercisable at June 30, 2004 37,750 45,000 82,750 4.00
All options were granted at exercise prices above market price. In addition
the Company has not granted any stock options since 1998.
The remaining contractual life of outstanding and exercisable options is
approximately four years with respect to the incentive stock options and
three years with respect to non-qualified stock options.
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, 2004, all employees were eligible to participate in the plan. A summary
of stock purchased under the plan is shown below.
2004 2003 2001
------ -------- ---------
Aggregate purchase$ $ - $ 720 $ 4,445
Shares purchased - 4,235 19,202
Employee participants 14 14 16
The Company accounts for employee stock plans under the intrinsic value method
prescribed by Accounting Principles Board ("APB") No. 25. The effect of the
pro-forma information in accordance with Financial Accounting Standards Board
SFAS No. 123, "Accounting for Stock-Based Compensation," was determined
immaterial.
F-18
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - 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, 2004, 2003 and 2002, Company contributions
to the plan, which were charged to expense, amounted to $23,889, $23,649
and $25,630, respectively.
NOTE M - 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, 2004, 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 N - MAJOR CUSTOMERS
The Company's Food Service Management Segment had sales to one customer
representing approximately 28%, 26% and 15% of total revenues for the years
ending June 30, 2004, 2003 and 2002, respectively. The loss of such
customer could have a material adverse effect on the Company's future
results of operations.
NOTE O - MAJOR SUPPLIERS
The Company's Food Service Management Segment purchased approximately 34%,
23% and 24% of its food and non-food products from one vendor for the years
ending June 30, 2004, 2003 and 2002, respectively. In the event of a
disruption in the Company's relationship with this vendor or any disruption
in the vendor's business, the Company has alternate sources of supply for
its food and non-food products.
NOTE P - 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.
F-19
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - BUSINESS SEGMENTS-continued
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. 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, 2004:
Food service revenue $ 27,074,155 $ 925,750 $ 27,999,905
Depreciation and amortization 123,193 497,007 620,199
Income (loss) from operations 568,029 (1,424,886) (856,851)
Interest expense (117,524) (69,175) (186,699)
Interest income 9,564 - 9,564
Loss before taxes (benefit) (623,018) (429,116) (1,052,134)
Net loss (421,318) (429,116) (850,434)
Total assets 6,427,248 7,852,047 14,279,295
Capital expenditures 60,785 19,529 80,314
As of and for the year ended June 30, 2003:
Food service revenue $ 26,462,980 $ 843,050 $ 27,306,030
Depreciation and amortization 253,328 521,729 775,057
Income (loss) from operations 452,565 (1,552,000) (1,099,435)
Interest expense (116,558) (95,395) (211,953)
Interest income 9,763 - 9,763
Loss before taxes (benefit) (726,133) (590,695) (1,316,828)
Net loss (228,746) (590,695) (819,441)
Total assets 6,881,864 8,260,850 15,142,714
Capital expenditures 40,392 34,408 74,800
As of and for the year ended June 30, 2002:
Food service revenue $ 28,951,584 $ 955,047 $ 29,906,632
Depreciation and amortization 322,245 525,482 847,726
Income (loss) from operations 1,129,630 (1,215,717) (86,087)
Interest expense (147,652) (113,385) (261,037)
Interest income 9,131 - 9,131
Loss before taxes (benefit) (177,199) (199,504) (376,703)
Net loss (87,220) (199,504) (286,724)
Total assets 8,612,981 8,739,035 17,352,016
Capital expenditures 29,323 214,375 243,698
F-20
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - 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 2004
--------------------------------------------------------
September 30, December 31, March 31, June 30,
----------- ----------- ----------- -----------
Revenues $ 6,706,854 $ 7,175,557 $ 7,141,972 $ 6,975,523
Gross profit 1,313,334 1,339,557 1,341,253 1,263,377
Net income (loss) (125,956) (116,649) (120,378) (487,451)
Net income (loss) per share - basic
and diluted $ (0.04) $ (0.04) $ (0.04) $ (0.22)
Fiscal 2003
--------------------------------------------------------
September 30, December 31, March 31, June 30,
----------- ----------- ----------- -----------
Revenues $ 7,256,400 $ 7,166,653 $ 6,358,301 $ 6,524,676
Gross profit 1,312,420 1,217,980 1,097,190 994,000
Net income (loss) (174,945) (282,217) (306,759) (55,520)
Net income (loss) per share - basic
and diluted $ (0.06) $ (0.10) $ (0.11) $ (0.02)
The Company's net loss for the quarter ending June 30, 2004 includes the
increase in reserve for allowance for doubtful accounts of $330,000. See
Note B-Accounts Receivable and Allowance for Doubtful Accounts for
additional information. In addition, an adjustment to recorded income taxes
amounting to $201,700 was also recorded in the fourth quarter. See Note G-
Income Taxes for additional information.
F-21
SUPPLEMENTAL INFORMATION
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
For the three years ended June 30, 2004
The following sets forth the activity in the Company's valuation accounts:
Allowance for
Doubtful Accounts
-----------------
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
Provision for bad debts 389,262
Recovery net of write-offs 128,321
-----------
Balance at June 30, 2003 2,292,336
Provision for bad debts 585,000
Write-offs -
-----------
Balance at June 30, 2004 $ 2,877,336
===========
F-23