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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 the fiscal year ended June 30, 1996
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 offices) (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
-------------------
Shares of Class A Common Stock (no par value)
Warrants to Purchase Common Stock
(COVER PAGE 1 OF 2 PAGES)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchanges Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES / X / NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
The aggregate market value of voting stock (Class A Common Stock, no
par value) held by non-affiliates of the Registrant as of September 20, 1996 was
approximately $1,402,000.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At September 20,
1996, there was outstanding 2,792,569 shares of the Registrant's Class A Common
Stock, no par value, and 100,000 shares of the Registrant's Class B Common
Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III for Form 10-K will be incorporated
by reference to certain portions of a definitive proxy statement which is
expected to be filed by the Registrant pursuant to Regulation 14A within 120
days after the close of its fiscal year.
This report consists of consecutively numbered pages (inclusive of all
exhibits and including this cover page). The Exhibit Index appears on pages
17-19.
(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.
The Company consummated an Initial Public Offering of its
Class A Common Stock and certain Class A Common Stock Purchase
Warrants on January 29, 1992.
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 is currently renovating the
property to serve as a comprehensive training facility for Company
employees. In addition, the facility will serve as a showroom for
prospective customers who will be able to observe the Company's programs
for nursing and retirement home dining and hospital cafeteria
operations. When opened, the Company will operate a restaurant from a
portion of the property and the revenue from such operation will be used
to defray the costs and expenses of the training facility. Construction
and renovation of the facility is substantially underway. The restaurant
will be managed by experienced professionals employed by and to be
recruited by the Company. See "Management's Discussion of Financial
Condition and Results of Operations -- Liquidity and Capital Resources
-- Investing Activities" for a description of the costs relating to the
renovation work.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
1
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
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.
MARKET FOR SERVICES
The market for the Company's services consists of a large
number of facilities involved in various aspects of the continuing care
and health care fields, including nursing homes, retirement
communities, hospitals and rehabilitation centers. Such facilities may
be specialized or general, privately owned or public, profit or
not-for-profit and may serve residents and patients on a continuing or
short-term basis.
2
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, 1996 the Company provided services under various service
agreements at 92 facilities. At certain of these facilities, the
Company has contracts to provide vending 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.
The following table shows the number of customer accounts
maintained by the Company during each of the last three fiscal years:
1996 1995 1994
---- ---- ----
Agreements in effect at
beginning of fiscal year 95 92 63
New agreements during
the fiscal year 10 16 14
Purchased contracts -- -- 29
Contracts canceled during
the fiscal year 13 13 14
-- -- --
Agreements in effect at the
end of the fiscal year 92 95 92
-- -- --
In consideration for providing its services, the Company
expects to be paid by its clients in accordance with the credit terms
agreed upon. Historically, the Company has not incurred any significant
losses related to amounts not collected for services rendered.
3
MAJOR CUSTOMER
In fiscal 1996, 12% of the Company's revenues were derived
from sales to one customer. The loss of such customer could have a
material adverse affect on the Company's results of operations in
fiscal 1997.
COMPETITION
The Company competes mainly with regional and national food
service management companies operating in the continuing care and
health care industries, as well as with the self managed departments
of its potential clients.
Although the competition to service these facilities is
intense, the Company believes that it competes effectively for new
agreements as well as for renewals of existing agreements based upon
the quality and dependability of its services. The Company's ability to
compete successfully depends upon its ability to maintain and improve
quality, service and reliability, to attract and retain qualified
employees and to continue to expand its marketing and service
activities.
EMPLOYEES
At June 30, 1996, the Company employed a total of
approximately 770 employees. Approximately 288 of those employees serve
in various executive, management, administrative, quality assurance and
sales capacities. The remaining 482 employees are primarily dietary
workers. A small percentage of the Company's dietary workers were
covered by collective bargaining agreements. The Company considers
relationships with its employees to be satisfactory.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
Not applicable
ITEM 2 - PROPERTIES
The Company leases its corporate offices, located at 725
Kimberton Road, Kimberton, PA 19442, which consists of approximately
8,500 square feet from a corporation controlled by a related party. The
initial term of the lease expires on June 30, 2002.
4
The Company leases an apartment from a corporation controlled
by a related party to accommodate visiting clients and employees. In
addition, the Company is provided with office space at each of its
client facilities.
The Company owns approximately twenty-two acres of land in
Collegeville, Pennsylvania, upon which construction is currently in
progress. The Company is renovating an existing 40,000 square foot
building to serve as a training facility and restaurant.
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
There are no material legal proceedings pending against the
Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
5
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 Nasdaq Small Cap Market ("NASDAQ"). In
addition, 1,150,000 redeemable warrants to purchase one share of Class
A Common Stock at $6.00 per share, are also separately traded on
NASDAQ.
The following table shows the range of high and low bid
quotations as reported by NASDAQ for the quarters ending during the
last two fiscal years for the Class A Common Stock:
FISCAL 1996 HIGH LOW
----------- ---- ---
First Quarter 2 5/8 1 11/16
Second Quarter 2 3/16 1 5/8
Third Quarter 1 13/16 1 1/8
Fourth Quarter 2 5/16 1 3/16
FISCAL 1995 HIGH LOW
----------- ---- ---
First Quarter 3 5/8 2 1/2
Second Quarter 3 5/8 1 7/8
Third Quarter 2 7/16 1 5/8
Fourth Quarter 4 1 11/16
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 September 20, 1996, there were approximately eighty
holders of record of the Class A Common Stock. It is estimated that
there are in excess of 500 beneficial holders of record.
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.
6
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,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(as restated)
Revenue $35,138,432 $33,352,992 $31,464,440 $10,152,594 $8,656,326
Gross profit 6,801,924 6,337,036 5,711,775 4,023,750 3,729,709
Income from operations 418,991 553,050 1,160,541 498,924 703,314
Other income (expense) 128,563 (41,187) (306,521) 498,282 105,967
Income before effect of
accounting change 301,954 265,461 401,151 552,825 457,813
--------------- --------------- ----------------- --------------- ---------------
Net income $301,954 $265,461 $656,838 $552,825 $457,813
--------------- --------------- ----------------- --------------- ---------------
Per share of common
stock:
Income before effect of
accounting change $0.10 $0.09 $0.13 $0.18 $0.17
Net income $0.10 $0.09 $0.22 $0.18 $0.17
--------------- --------------- ----------------- --------------- ---------------
Weighted average common
shares outstanding 2,967,322 2,975,000 2,989,589 3,088,356 2,632,233
--------------- --------------- ----------------- --------------- ---------------
AS OF JUNE 30,
1996 1995 1994 1993 1992
---- ---- ---- ----- ----
(as restated)
Working capital $3,836,637 $6,131,681 $6,518,916 $5,370,610 $4,477,807
Total assets 16,962,352 16,366,159 15,556,388 7,645,020 7,056,679
Long-term debt 3,267,808 4,039,474 4,785,091 491,011 325,329
Shareholders' equity 6,230,092 6,037,329 5,771,868 5,341,655 4,863,830
[1] See Note 19 of the Consolidated Financial Statements.
7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
Revenues for the year ended June 30, 1996 ("fiscal 1996")
increased by 5.4% to $35,138,432 over revenues for the year ended June
30, 1995 ("fiscal 1995"). The increase results from growth within
existing accounts as well as new accounts opened during the intervening
period, offset by contracts canceled during the period.
Direct cost of operations for fiscal 1996 was $28,336,508,
compared to $27,015,956 for similar expenses in fiscal 1995, an
increase of $1,320,552 or 4.9%. This increase in direct costs is
consistent with revenue growth.
Gross Profit for fiscal 1996 was $6,801,924, compared to
$6,337,036, an increase of $464,888 or 7.3%. This increase is due to
revenues increasing at a greater percentage than direct expenses.
General and administrative expenses for fiscal 1996 were
$5,761,648 or 16.4% of revenue, compared to $5,253,390 or 15.8% of
revenue for fiscal 1995. These increases are due to additional
administrative personnel being employed during the current year and
additional expenses incurred for the installation of a company-wide
computer network, as well as operating losses associated with the
start-up costs of two major customers, of which one relationship has
been terminated.
Depreciation and amortization for fiscal 1996 was $621,285,
compared to $530,596 for fiscal 1995. The increase of $90,689 or 17.1%,
was attributable to the charge-off of deferred costs associated with
contracts canceled during fiscal 1996. (See "Service Contracts")
Income from operations for fiscal 1996 was $418,991 or 1.2% of
revenue compared to $553,050 or 1.7% of revenue for fiscal 1995, a
decrease of $134,059. This decrease in operating income is the result
of the increase in expenses.
8
Interest expense for fiscal 1996 was $234,280 or 0.7% of
revenue, compared to $360,886 or 1.1% of revenue for fiscal 1995. This
decrease is attributable to a decline in the average debt outstanding
due to the Company's compliance with scheduled repayments.
Interest and other non-operating income for fiscal 1996 was
$362,843 as compared to $319,699 for fiscal 1995. This increase is due
to "Other Income" consisting of discounts from making timely payments
and gains resulting from dispositions of fixed assets.
For the foregoing reasons, net income before taxes for fiscal
1996 was $547,554 or 1.6% of revenue compared to $511,863 or 1.5% of
revenue for fiscal 1995, an increase of $35,691, an increase of 7.0%
from fiscal 1995.
Net income for fiscal 1996 was $301,954 or $0.10 per share as
compared to $265,461 and $0.09 per share for fiscal 1995.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Food service revenue for the year ended June 30, 1995 ("fiscal
1995") increased $1,888,552 to $33,352,992 over $31,464,440 in revenue
for the year ended June 30, 1994 ("fiscal 1994"), an increase of 6.0%.
This increase in revenue, was generated by new accounts and contracts
acquired during the fiscal year.
Direct cost of operations for fiscal 1995 was $27,015,956,
compared to $25,752,665 for similar expenses in fiscal 1994, an
increase of $1,263,291 or 4.9%. This increase in direct costs is
consistent with the revenue growth.
Gross profit for fiscal 1995 was $6,337,036, compared to
$5,711,775 for fiscal 1994, an increase of $625,261 or 10.9%. This
increase in gross profit results principally from the company's growth
in revenues.
Depreciation and amortization expense for fiscal 1995 was
$530,596 compared to $442,096 in similar expenses for fiscal 1994, an
increase of $88,500, which is attributable to the property and
equipment placed in service during fiscal 1995 and fiscal 1994
Income from operations for fiscal 1995 was $553,050 or 1.7% of
revenue compared to $1,160,541, or 3.7% of revenue for fiscal 1994, a
decrease of $607,491. This decrease in operating income results
primarily from the increased general and administrative expenses.
Interest expense for fiscal 1995 was $360,886 or 1.1% of
revenue, compared to $324,849 or 1.0% of revenue for fiscal 1994. This
increase in interest expense is primarily related to the increase in
average debt outstanding during fiscal 1995 as compared to fiscal 1994.
(See "Liquidity and Capital Resources").
9
Interest and other non-operating income for fiscal 1995 was
$319,699 compared to $18,328 for fiscal 1994. The increase reflects the
effect of the unrealized loss of $281,000 on the Company's investments
in a GNMA fund recorded in fiscal 1994. When the GNMA fund investments
were sold in fiscal 1995, a loss of $316,000 was realized of which only
$35,000 was charged to fiscal 1995 operations.
Net income before taxes for fiscal 1995 was $511,863 or 1.5%
of revenues compared to $854,020 or 2.7% of revenue for fiscal 1994, a
decrease of 33.8%.
Net income before the cumulative effect of an accounting
change for fiscal 1995 was $265,461, or 0.8% of revenue, compared to
$401,151 or 1.3% of revenues for fiscal 1994, an decrease of 33.8%.
The cumulative effect of adopting the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" was recorded in 1994 and resulted in a
benefit of $255,687.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $3,836,637
as compared to $6,131,681 at June 30, 1995 and $6,518,916 at June 30,
1994. This decrease in working capital is attributable to expenses
relating to renovation work at the Collegeville Inn Conference and
Training Center. (See "Investing Activities" for a description of
estimated fiscal 1997 expenditures). The Company's holdings in cash,
cash equivalents and marketable securities decreased by $1,388,050 and
$913,349 during fiscal 1996 and 1995 to $3,026,607 and to $4,414,657,
respectively. The Company believes that its existing cash and cash
equivalents, investments, and anticipated revenues will be sufficient
to meet its liquidity and cash requirements for at least the next
twelve months.
OPERATING ACTIVITIES
Cash provided by operations for fiscal 1996 was $1,708,503
compared to $36,264 in cash consumed by operations for fiscal 1995.
This is primarily attributable to the increase in accounts payable as a
result of pre-opening activity at the Collegeville Inn, and from
modifications to several existing contracts for which the Company has
assumed payment of all food service related costs.
Operating activities for fiscal 1995 used $36,264 in cash and
cash equivalents compared to $461,899 provided by similar activities in
fiscal 1994. This difference is primarily due to payments of income
taxes of approximately $870,000 made during 1995 that primarily related
to the prior year.
INVESTING ACTIVITIES
10
Investing activities provided $754,404 in cash during fiscal
1996 compared to $185,734 consumed by investing activities for fiscal
1995. The net investment activity reflects the Company's shifting of
its holdings into more liquid investments classified as cash
equivalents (see discussion on page 12).
Investing activities for fiscal 1996 also included purchases
on property and equipment in the amount of $2,672,801, of which
approximately $2,484,000 related to the renovation work at the
Collegeville Inn Conference and Training Center. The Company intends to
incur costs between $3,000,000 and $3,500,000 for the remainder of the
renovation, the majority of which is expected to be expended during
fiscal 1997. (See "Business - General Description of Business" for more
discussion on the Collegeville Inn project).
For fiscal 1995, investing activities used $185,734 in cash
compared to $3,497,136, used in fiscal 1994. Cash used in investing
activities for 1995 reflects a net $842,401 provided from the sale of
investments. Investments in certain GNMA funds were sold and used to
purchase U.S. Treasury bills and similar investments all with
maturities of one year or less when purchased.
Investing activities also consumed $1,300,277 during 1995 for
the purchase of property and equipment of which approximately $600,000
related to the renovation work at the Collegeville Inn.
FINANCING ACTIVITIES
During fiscal 1996, financing activities consumed $880,858 in
cash compared to $151,050 in cash provided by similar activities for
fiscal 1995. This is primarily due to the repayment of continuing debt
borrowings in the approximate amount of $897,000, offset by proceeds of
$125,000.
Financing activities during fiscal 1995 provided $151,050 in
cash compared to $4,062,348 provided in fiscal 1994. 1995's amount
reflects cash of $1,493,950 used to repay continuing debt offset by
additional proceeds from the issuance of debt of $1,645,000. In the
prior year, proceeds from continuing debt borrowings were over $5.1
million.
During 1995, the Company restructured its debt with its
primary bank to include the permanent increase of the line-of-credit to
$2,900,000. Borrowings under the line of credit were $2,404,552 at June
30, 1995. Additionally during 1995, the Company obtained two term
loans, from the bank to finance the purchase of equipment totaling
$895,000 (the first term loan totals $395,000, the second, $500,000).
These loans have three and four year terms, respectively.
11
CAPITAL RESOURCES
The Company has certain credit facilities with its bank
including a line of credit and three term loans. As of June 30, 1996,
the Company had approximately $370,000 of unused credit available on
its line of credit. The Company is current with all its obligations to
its bank and has met all financial covenants in its loan documents.
A substantial portion of the Company's revenues are 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.
The Company has no other material commitments for capital
expenditures (aside from the Collegeville Inn) and believes that its
cash from operations, existing balances and available credit line will
be sufficient to satisfy the needs of its operations and its capital
commitments for the foreseeable future. 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
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. The Company believes that it will be able to recover increased
in costs attributable to inflation by continuing to pass through cost
increases to its customers.
12
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934 as
amended, which are intended to be covered by the safe harbors created
thereby. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of
the assumptions could be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included in this Form
10-K will prove to be accurate. Factors that could cause actual results
to differ from the results discussed in the forward-looking statements
include, but are not limited to, expenditures relating to the
renovation work at the Collegeville Inn Conference and Training Center.
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.
NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used by an entity, including goodwill, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company does not
anticipate this statement will have a material impact on its financial
statements. In addition, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation , " in October 1995. SFAS No. 123 uses fair
value based method of accounting for stock options and similar equity
instruments as contrasted to the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." The Company has not
decided if it will adopt SFAS No. 123 or continue to apply APB Opinion
No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial statement note disclosure purposes. The
accounting requirement of SFAS No. 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995; the
disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data to be provided
pursuant to this Item 8 are included under Part IV, Item 14, of this
Form 10-K.
13
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In its filing on Form 8-K dated August 11, 1995, the Company
reported that it had dismissed Mortenson & Associates, P.C. of
Cranford, New Jersey (Mortenson) as its independent accountants.
Mortenson had served as the Company's independent accountants as of and
for the years ended June 30, 1994, 1993, 1992 and 1991. None of
Mortenson's reports on these years contained any adverse opinions or
disclaimers of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
In its filing on Form 8-K dated August 29, 1995, the Company
reported that it had engaged Deloitte & Touche, LLP (Deloitte & Touche)
of Philadelphia, Pennsylvania to serve as its new independent
accountants.
On October 12, 1995, the Company dismissed Deloitte & Touche,
LLP, 1700 Market Street, Philadelphia, PA 19103 as its independent
accountants. The Company and Deloitte & Touche had a disagreement
regarding the accounting for a loss on a sale of investments. Both
members of management and of the board of directors have discussed the
subject matter of the disagreement with Deloitte & Touche. (See below
for further description of the matter of disagreement.)
Deloitte & Touche has never issued any report on the Company's
financial statements.
Also effective October 12, 1995, the Company re-engaged
Mortenson to serve as its principal independent accountants to audit
the Company's financial statements as of and for the year ended June
30, 1995.
14
On September 27, 1994, the Company liquidated its holdings in
certain GNMA funds and realized a loss of $316,000 which represented
the difference between the funds' carrying value (cost) of $4,139,000
and the sale proceeds of $3,823,000. The loss was recognized as a
charge to earnings for the quarter ended September 30, 1994 and was
reported in the Company's Form 10-QSB for that quarter. At June 30,
1994, the Company's holdings in the GNMA funds were carried at cost
which exceeded the market value at that time by approximately $281,000.
In connection with its audit, which it did not complete, of the
Company's financial statements for the year ended June 30, 1995,
Deloitte & Touche advised the Company that the GNMA funds should have,
in its opinion, been reported at the lower of cost or market at June
30, 1994 and an unrealized loss should have been recorded as a charge
against earnings in the Company's financial statements for the year
ended June 30, 1994. Deloitte & Touche advised the Company that the
fiscal 1994 financial statements and the interim fiscal 1995 financial
statements should, in its opinion, be restated to reflect the loss in
the fiscal year ended June 30, 1994. Deloitte & Touche also advised the
Company that its report on the Company's fiscal 1995 financial
statements would be qualified if the fiscal 1994 financial statements
were not restated to report the loss in that year.
Mortenson did not believe that restatement of the financial
statements as of and for the year ended June 30, 1994 was required
believing that the transaction in question had been accounted for in
accordance with generally accepted accounting principles. Mortenson
concurred with the Company's accounting for the holdings in the GNMA
funds and that the unrealized loss of $281,000 as of June 30, 1994 was
a temporary market decline. Mortenson's position was also based on the
Company's belief that, as of June 30, 1994, it had both the intent and
ability to hold these GNMA funds until the temporary decline reversed.
The Company changed its intent due to events occurring in the first
quarter of 1995 and, in turn, sold the GNMA fund holdings and realized
the loss at that time. Mortenson believed that the accounting of the
full loss in the first quarter of 1995 was appropriate. At the time of
the change in independent accountants, the Company's management also
believed that restatement of 1994's financial statements was not
necessary.
There have been no other transactions similar to the one
described herein that resulted in the disagreement.
Subsequent to the Company's filing on Form 8-K on October 12,
1995, the staff of the Securities and Exchange Commission has issued a
letter to the Company outlining the staff's position on the accounting
for the circumstances described above and therein required a
restatement of the Company's fiscal 1994 financial statements to
reflect the unrealized loss of $281,000 in that year. Accordingly, the
fiscal 1994 financial statements have been restated as described in
Note 19 to the financial statements to conform to the SEC staff's
position.
15
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 1996 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 1996 Annual Meeting of Shareholders under the
caption "Executive Compensation and Compensation of Directors" and is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Proxy Statement of
the Company for the 1996 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 1996 Annual Meeting of Shareholders under the
caption "Certain Relationships and Related Transactions" and is
incorporated herein by reference.
16
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Independent Auditor's Report F-1
Consolidated Balance Sheets as of
June 30, 1996 and 1995 F-2, 3
Consolidated Statements of Operations for
the Years Ended June 30, 1996, 1995
and 1994 F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1996,
1995 and 1994 F-5
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1996, 1995 and 1994 F-6, 7
Notes to Consolidated Financial Statements F-8 to F-19
Independent Auditor's Report Related
Financial Statement Schedule F-20
Schedule of Valuation Accounts F-21
(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
Registration Statement on Form S-1 ( File No. 33-4281)).
17
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).
4.5 Registration Rights Agreement between the Company and Kathleen
Hill (Incorporated by reference to Exhibit 4.5 of the S-1).
10.1 Employment Agreement between the Company and Joseph Roberts
(Incorporated by reference to Exhibit 10.1 of the S-1).
10.3 Employment Agreement between the Company and Kathleen Hill
(Incorporated by reference 10.3 of the S-1).
10.4 Company's 1991 Stock Option Plan (Incorporated by reference to
Exhibit 10.4 of the S-1).
10.5 Loan Agreement between the Company and Meridian Bank as amended
(Incorporated by reference to Exhibit 10.5 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).
10.12 Loan Agreement between the Company and Meridian Bank
(Incorporated by reference to Exhibit 10.12 Annual Report on Form
10-KSB filed September 27, 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-KSB filed September 27,
1994.)
16.1 Letter on change in certifying accountant from Mortenson &
Associates, P.C. (Incorporated by reference to Exhibit I to Form
8-KA dated August 11, 1995.)
18
16.2 Letter on change in certifying accountant from Deloitte & Touche
LLP (Incorporated by reference to Exhibit 1 to Form 8-KA dated
October 12, 1995.)
24.1 Power of Attorney included on Page 19.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Nutrition Management Services Company
(Registrant)
/s/ Joseph V. Roberts
-----------------------------------
Joseph V. Roberts, Chief Executive
Officer and Director
Date: September 20, 1996
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities indicated as of September 20, 1996.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
---------------------------------- ------------------------------
Joseph V. Roberts, Chief Executive Kathleen A. Hill, President and
Officer and Director Director
/s Kenneth D. Bleakly /s/ Samuel R. Shipley
---------------------------------- ------------------------------
Kenneth D. Bleakly, Director Samuel R. Shipley, Director
/s Michael M. Gosman /s/ Jane Scaccetti Fumo
---------------------------------- ------------------------------
Michael M. Gosman, Director Jane Scaccetti Fumo, Director
/s/ Frank Fletcher
-------------------------------
Frank Fletcher, (Principal
Financial and Accounting Officer)
20
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
Independent Auditor's Report...................................... F-1
Consolidated Balance Sheets as of June 30, 1996 and 1995.......... F-2 - F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1995 and 1994...................................... F-4
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1996, 1995 and 1994...................... F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994................................ F-6 - F-7
Notes to Consolidated Financial Statements........................ F-8 - F-19
. . . . . . . . .
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Nutrition Management Services Company
Kimberton, Pennsylvania
We have audited the accompanying consolidated balance sheets
of Nutrition Management Services Company and its subsidiaries as of June 30,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Nutrition Management Services Company and its subsidiaries as of
June 30, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial
statements, the Company changed its method of accounting for income taxes in the
year ended June 30, 1994 to adopt the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
As discussed in Note 19 to the consolidated financial
statements, the Company restated its consolidated financial statements as of and
for the year ended June 30, 1994, to reflect a reclassification of certain GNMA
funds from cash and cash equivalents to short-term marketable securities, and to
record an unrealized loss on these GNMA funds for a decline in the market value.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
September 11, 1996
F-1
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30,
--------
1 9 9 6 1 9 9 5
------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 3,026,607 $ 1,444,558
Marketable Securities -- 2,970,099
Accounts Receivable [Net of Allowance for Doubtful Accounts
of $362,065 and $381,669 in 1996 and 1995, Respectively] 5,863,105 5,892,480
Unbilled Revenue 273,132 337,676
Notes and Leases Receivable [Net of Allowance for Doubtful
Accounts of $-0- and $121,448 in 1996 and 1995, Respectively] 823,602 453,810
Advances to Employees and Related Party Mortgage in 1995 257,415 144,539
Deferred Income Taxes 387,183 420,265
Inventory and Other 407,221 428,246
--------------- ---------------
TOTAL CURRENT ASSETS 11,038,265 12,091,673
--------------- ---------------
PROPERTY AND EQUIPMENT - NET 4,450,309 2,147,753
--------------- ---------------
OTHER ASSETS:
Restricted Cash 146,827 146,827
Long-Term Accounts Receivable [Net of Allowance for
Doubtful Accounts of $57,509 in 1996 and 1995] 50,815 57,509
Investment in Contracts [Net of Accumulated Amortization
of $937,263 and $595,965 in 1996 and 1995, Respectively] 769,226 1,110,524
Lease Receivable 289,882 403,375
Advances to Employees and Related Party Mortgage 5,000 40,148
Deferred Income Taxes 112,000 --
Deferred Costs and Other Assets 100,028 386,350
--------------- ---------------
TOTAL OTHER ASSETS 1,473,778 2,126,733
--------------- ---------------
TOTAL ASSETS $ 16,962,352 $ 16,366,159
=============== ===============
See Notes to Consolidated Financial Statements.
F-2
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30,
--------
1 9 9 6 1 9 9 5
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 5,042,025 $ 3,957,656
Accrued Expenses 397,054 354,234
Accrued Payroll 471,806 413,962
Current Portion of Long-Term Debt 896,667 896,667
Accrued Income Taxes 45,063 79,926
Other 349,013 257,547
--------------- ---------------
TOTAL CURRENT LIABILITIES 7,201,628 5,959,992
--------------- ---------------
LONG-TERM LIABILITIES:
Long-Term Debt - Net of Current Portion 3,267,808 4,039,474
Deferred Income Taxes -- 77,082
Other 262,824 252,282
--------------- ---------------
TOTAL LONG-TERM LIABILITIES 3,530,632 4,368,838
--------------- ---------------
COMMITMENTS AND CONTINGENCIES -- --
--------------- ---------------
STOCKHOLDERS' EQUITY:
Undesignated Preferred Stock - No Par,
2,000,000 Shares Authorized, None Outstanding -- --
Common Stock:
Class A - No Par, 10,000,000 Shares Authorized; 3,012,500 and 3,000,000
Issued, 2,810,569 and 2,875,000
Outstanding in 1996 and 1995, Respectively 3,826,926 3,801,926
Class B - No Par, 100,000 Shares Authorized;
100,000 Shares Issued and Outstanding 48 48
Retained Earnings 2,838,934 2,536,980
--------------- ---------------
Totals 6,665,908 6,338,954
Less: Treasury Stock - [Common - Class A: 201,931 and 125,000
Shares in 1996 and 1995, Respectively] - At Cost (435,816) (301,625)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 6,230,092 6,037,329
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,962,352 $ 16,366,159
=============== ===============
See Notes to Consolidated Financial Statements.
F-3
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y E A R S E N D E D
J U N E 3 0,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[RESTATED]
FOOD SERVICE REVENUE $ 35,138,432 $ 33,352,992 $ 31,464,440
---------------- --------------- ---------------
COST OF OPERATIONS:
Payroll and Related Expenses 13,128,099 13,204,316 14,173,277
Other Costs of Operations 15,208,409 13,811,640 11,579,388
---------------- --------------- ---------------
TOTAL COST OF OPERATIONS 28,336,508 27,015,956 25,752,665
---------------- --------------- ---------------
GROSS PROFIT 6,801,924 6,337,036 5,711,775
---------------- --------------- ---------------
EXPENSES:
General and Administrative Expenses 5,761,648 5,253,390 4,109,138
Depreciation and Amortization 621,285 530,596 442,096
---------------- --------------- ---------------
TOTAL EXPENSES 6,382,933 5,783,986 4,551,234
---------------- --------------- ---------------
INCOME FROM OPERATIONS 418,991 553,050 1,160,541
---------------- --------------- ---------------
OTHER INCOME [EXPENSES]:
Interest Expense (234,280) (360,886) (324,849)
Interest Income 292,819 307,912 262,582
Unrealized Loss on Marketable Securities -- -- (281,000)
Other 70,024 11,787 36,746
---------------- --------------- ---------------
TOTAL OTHER INCOME [EXPENSES] - NET 128,563 (41,187) (306,521)
---------------- --------------- ---------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 547,554 511,863 854,020
INCOME TAX EXPENSE 245,600 246,402 452,869
---------------- --------------- ---------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 301,954 265,461 401,151
CUMULATIVE EFFECT OF CHANGE IN INCOME
TAX ACCOUNTING -- -- 255,687
---------------- --------------- ---------------
NET INCOME $ 301,954 $ 265,461 $ 656,838
================ =============== ===============
NET INCOME PER SHARE:
Income Before Cumulative Effect of
Accounting Change $ .10 $ .09 $ .13
Cumulative Effect of Change in Income Tax
Accounting -- -- .09
---------------- --------------- ---------------
NET INCOME PER SHARE $ .10 $ .09 $ .22
================ =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,967,322 2,975,000 2,989,589
================ =============== ===============
See Notes to Consolidated Financial Statements.
F-4
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
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,
1993 2,950,000 $ 3,801,926 100,000 $ 48 $ 1,614,681 (50,000) $ (75,000) $ 5,341,655
Repurchase of
Company Stock (75,000) -- -- -- -- (75,000) (226,625) (226,625)
Net Income
[Restated] -- -- -- -- 656,838 -- -- 656,838
------------ ------------ ---------- ---------- ------------ ----------- ------------ -------------
BALANCE - JUNE 30,
1994 [RESTATED] 2,875,000 3,801,926 100,000 48 2,271,519 (125,000) (301,625) 5,771,868
Net Income -- -- -- -- 265,461 -- -- 265,461
------------ ------------ ---------- ---------- ------------ ----------- ------------ -------------
BALANCE - JUNE 30,
1995 2,875,000 3,801,926 100,000 48 2,536,980 (125,000) (301,625) 6,037,329
Issuance of 12,500
Shares of Class A
Stock 12,500 25,000 -- -- -- -- -- 25,000
Repurchase of
Company Stock (76,931) -- -- -- -- (76,931) (134,191) (134,191)
Net Income -- -- -- -- 301,954 -- -- 301,954
------------ ------------ ---------- ---------- ------------ ----------- ------------ -------------
BALANCE - JUNE 30,
1996 2,810,569 $ 3,826,926 100,000 $ 48 $ 2,838,934 (201,931) $ (435,816) $ 6,230,092
============ ============ ========== ========== ============ =========== ============ =============
See Notes to Consolidated Financial Statements.
F-5
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y E A R S E N D E D
J U N E 3 0,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[RESTATED]
OPERATING ACTIVITIES:
Net Income $ 301,954 $ 265,461 $ 656,838
Adjustments to Reconcile Net Income to Net
Cash Provided by [Used for] Operating Activities:
Depreciation and Amortization 621,285 530,596 442,096
Valuation Allowance on Marketable Securities -- -- 281,000
Provision for Bad Debts 153,283 186,352 73,278
Amortization of Deferred Gain (26,372) (26,372) (26,372)
Provision for Deferred Taxes (156,000) 62,615 (436,377)
Amortization of Lease Receivable (44,460) (54,584) (63,070)
Gain on Sale of Fixed Assets (43,472) -- --
Changes in Assets and Liabilities:
Accounts Receivable (618,087) (1,474,826) (2,621,990)
Notes Receivable 199,129 202,762 (403,217)
Unbilled Revenue 64,544 (5,190) (232,719)
Accounts Payable 1,084,369 975,882 2,464,171
Accrued Expenses 42,820 149,938 61,278
Accrued Payroll 57,844 55,369 115,709
Accrued Income Taxes (34,863) (753,849) 435,691
Other 106,529 (150,418) (284,417)
--------------- ---------------- ---------------
NET CASH - OPERATING ACTIVITIES 1,708,503 (36,264) 461,899
--------------- ---------------- ---------------
INVESTING ACTIVITIES:
Payment of Mortgage Receivable from Related Party 55,577 23,715 22,116
Proceeds from Sale of Marketable Securities 2,970,099 6,690,667 449,625
Investment in Marketable Securities -- (5,848,266) (773,203)
Purchase of Property and Equipment (2,672,801) (1,300,277) (1,660,018)
Proceeds from Sale of Fixed Assets 71,645 -- --
Investment in Contracts -- (232,053) (1,443,261)
Transfer From [To] Restricted Cash -- 452,017 (141,545)
Other 53,517 57,007 (14,133)
Payment of Lease Receivable 157,953 157,953 157,953
Advances to Employees and Officers (133,305) (92,526) 5,680
Deferred Costs 251,719 (93,971) (100,350)
--------------- ---------------- ---------------
NET CASH - INVESTING ACTIVITIES 754,404 (185,734) (3,497,136)
--------------- ---------------- ---------------
FINANCING ACTIVITIES:
Proceeds from Long-Term Borrowings 125,000 1,645,000 5,133,699
Repayment of Long-Term Borrowings (896,667) (1,493,950) (844,726)
Purchase of Treasury Stock (134,191) -- (226,625)
Proceeds from Issuance of Common Stock 25,000 -- --
--------------- ---------------- ---------------
NET CASH - FINANCING ACTIVITIES (880,858) 151,050 4,062,348
--------------- ---------------- ---------------
NET INCREASE [DECREASE] IN CASH AND
CASH EQUIVALENTS - FORWARD $ 1,582,049 $ (70,948) $ 1,027,111
See Notes to Consolidated Financial Statements.
F-6
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y E A R S E N D E D
J U N E 3 0,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[RESTATED]
NET INCREASE [DECREASE] IN CASH AND
CASH EQUIVALENTS - FORWARDED $ 1,582,049 $ (70,948) $ 1,027,111
CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 1,444,558 1,515,506 488,395
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 3,026,607 $ 1,444,558 $ 1,515,506
=============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest [Net of Amounts Capitalized] $ 234,280 $ 356,596 $ 303,613
Income Taxes $ 250,000 $ 870,138 $ 257,677
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended June 30, 1996, the Company exchanged accounts
receivable and property and equipment of approximately $500,873 and $62,085,
respectively, to a note receivable.
During the year ended June 30, 1994, the Company acquired machinery and
equipment in the amount of $715,121 and subsequently leased it back to a service
facility under a direct financing type lease. The gross lease receivable at
inception was $934,553 and included unearned interest income of $219,432
resulting in a net lease receivable of $715,121.
See Notes to Consolidated Financial Statements.
F-7
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] ORGANIZATION AND BUSINESS
Nutrition Management Services Company [the "Company"] was organized on March 28,
1979 to provide professional management expertise and food services to
continuing care and health care facilities in the domestic United States. The
Company competes mainly with regional and national food service management
companies as well as self managed departments. Apple Management Services ["Apple
Management"], a wholly-owned subsidiary, was organized on November 25, 1991 to
provide management service expertise. The Collegeville Inn Conference and
Training Center, Inc. ["Collegeville Inn"], a wholly-owned subsidiary, was
organized on April 29, 1994 to acquire the land and a building located in Lower
Providence Township, Pennsylvania. This facility will be utilized to operate a
training center which will be open to the public.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - 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.
CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
UNBILLED REVENUE - Unbilled revenue represents amounts for services provided,
but not billed as of the balance sheet date.
INVENTORY - Inventory, which consists primarily of food, is stated at the lower
of cost [first-in, first-out method] or market. Inventory of $374,850 and
$399,000 has been included in inventory and other as of June 30, 1996 and 1995,
respectively.
PROPERTY AND EQUIPMENT AND DEPRECIATION - Property and equipment are stated at
cost. Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets or the remaining lease term. Estimated useful
lives of the principal items of property and equipment range from 2 to 7 years.
INVESTMENT IN CONTRACTS - During 1993, the Company entered into an agreement for
the acquisition of various service facility contracts. The costs associated with
this acquisition were capitalized and are being amortized over a period of five
years using the straight-line method.
DEFERRED COSTS - Costs for contracts which are incurred in connection with the
commencement of providing services to a new customer are capitalized. These
costs are amortized over a period of twelve months. Unamortized deferred costs
of $10,557 and $262,000 have been included in deferred costs and other as of
June 30, 1996 and 1995, respectively.
INCOME TAXES - Income taxes consist of taxes currently due plus deferred taxes
related primarily to temporary differences between the basis of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
EARNINGS PER SHARE - Earnings per share amounts are based on the weighted
average number of shares of common stock outstanding during the years ended June
30, 1996, 1995 and 1994. Shares issued in connection with the employee stock
purchase plan were included as common stock equivalents. Stock options and
warrants did not impact earnings per share each year as they were anti-dilutive.
RECLASSIFICATION - Certain 1995 and 1994 items have been reclassified to conform
to the current year presentation.
F-8
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
- --------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[3] MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards ["SFAS"] No.
115, "Accounting for Certain Investments in Debt and Equity Securities," on July
1, 1994. SFAS No. 115 addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified into the
following three categories: held-to-maturity debt securities; trading
securities; and available-for-sale securities. In accordance with SFAS No. 115,
prior years' financial statements are not to be restated to reflect the change
in adopting the new accounting method. There was no cumulative effect as a
result of adopting SFAS No. 115.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with the Company's investment in equity securities. Securities available
for sale are carried at fair value, with any unrealized holding gains and
losses, net of tax, reported in a separate component of shareholders' equity
until realized. Trading securities are securities bought and held principally
for the purpose of selling them in the near term and are reported at fair value,
with unrealized gains and losses included in operations for the current year.
Held-to-maturity debt securities are reported at amortized cost. There were no
investments held at June 30, 1996. The Company's investments at June 30, 1995
consisted of short-term treasury bills, due within one year classified as
held-to-maturity, and were stated at amortized cost, which approximated market.
[4] PROPERTY AND EQUIPMENT
The following details the composition of property and equipment:
JUNE 30,
--------
1 9 9 6 1 9 9 5
------- -------
Property and Equipment:
Land $ 497,967 $ 497,967
Machinery and Equipment 1,409,270 1,541,430
Other, Principally Autos and Trucks 110,864 149,597
Construction in Progress 3,091,341 607,320
-------------- ---------------
Totals 5,109,442 2,796,314
Less: Accumulated Depreciation 659,133 648,561
-------------- ---------------
TOTALS $ 4,450,309 $ 2,147,753
------ ============== ===============
Depreciation expense amounted to $299,978, $206,984 and $175,827 for the years
ended June 30, 1996, 1995 and 1994, respectively.
The Company capitalized interest cost of $164,702 in 1996 and $51,835 in 1995
with respect to qualifying construction projects. Total interest costs incurred
before recognition of the capitalized amount was $398,982 in 1996 and $412,721
in 1995.
F-9
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
- --------------------------------------------------------------------------------
[5] RESTRICTED CASH
At June 30, 1996 and 1995, the Company had $146,827 in both years of restricted
cash, of which $145,627 is held in escrow in connection with the acquisition of
various service facility contracts and the outcome of related pending litigation
[See Notes 2 and 10].
[6] LEASE RECEIVABLE
The Company leases equipment to a service facility under a direct financing type
lease as defined in Statement of Financial Accounting Standards No. 13.
Future minimum gross lease payments to be received for the following years
consist of:
JUNE 30,
- --------
1997 $ 157,953
1998 157,953
1999 144,789
---------------
Total 460,695
Less: Amount Representing Unearned Interest Income 57,320
---------------
MINIMUM LEASE PAYMENTS RECEIVABLE $ 403,375
--------------------------------- ===============
These amounts are classified in the balance sheet as follows:
Current Assets $ 113,493
Noncurrent Assets 289,882
---------------
TOTAL $ 403,375
----- ===============
[7] LONG-TERM DEBT
Long-term debt consisted of the following:
JUNE 30,
--------
1 9 9 6 1 9 9 5
------- -------
Bank line of credit, interest only is due monthly bearing interest at the bank's
prime rate plus 0.5%, unsecured. The line of credit is available until October
1, 1997. $ 2,529,553 $ 2,404,552
Note payable, term loan incurred in connection with acquisition of various
service facility contracts, payable in equal monthly installments of $53,334
plus interest of 7.5%, note is unsecured, matures on July 5, 1998. 1,093,672 1,733,672
Note payable, term loan incurred in connection with purchased equipment, payable
in equal monthly installments of $10,417 plus interest of 0.5% above the
bank's prime rate, matures in fiscal 1999. The acquired equipment is pledged
as collateral. 343,750 468,750
------------- -------------
Totals - Forward $ 3,966,975 $ 4,606,974
F-10
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
- --------------------------------------------------------------------------------
[7] LONG-TERM DEBT [CONTINUED]
JUNE 30,
1 9 9 6 1 9 9 5
Totals - Forwarded $ 3,966,975 $ 4,606,974
Note payable, term loan incurred in connection with the purchase of equipment
payable in monthly installments of $10,972 bearing interest at 8.5%, matures
in fiscal 1998. The acquired equipment is pledged as collateral. 197,500 329,167
------------- -------------
Totals 4,164,475 4,936,141
Less: Current Maturities 896,667 896,667
------------- -------------
TOTALS $ 3,267,808 $ 4,039,474
------ ============= =============
During 1993, the Company executed a loan agreement with a bank for a line of
credit and a term loan. The line of credit is not to exceed $2,900,000 and is
available until October 1, 1997. As of June 30, 1996, the Company had
approximately $370,000 of unused credit available on its line of credit. The
term loan was originally for $3,200,000 with interest at 7.5% per annum and is
due on July 5, 1998.
In accordance with the agreement, advances under the line shall be used for
working capital purposes and the acquisition and renovation of the Collegeville
Inn.
The term loan and line of 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 current ratio, minimum net worth, minimum
cash and cash equivalents balance and other ratios. As of June 30, 1996, the
Company was in compliance with the covenant provisions of these agreements.
The bank's prime rate at June 30, 1996 was 8.25%.
Maturities of principal due in the following years are set forth below:
YEAR ENDING
-----------
JUNE 30,
--------
1997 $ 896,667
1998 2,720,386
1999 547,422
---------------
TOTAL $ 4,164,475
----- ===============
[8] INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial Accounting
Standards ["SFAS"] No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
the asset and liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Prior to the adoption of SFAS No.
109, income tax expense was determined using the deferred method. Deferred tax
expense was based on items of income and expense that were reported in different
years in the financial statements and tax returns and were measured at the tax
rate in effect in the year the difference originated. The $255,687 cumulative
effect of this change in accounting principle was included in determining net
income for 1994.
F-11
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
- --------------------------------------------------------------------------------
[8] INCOME TAXES [CONTINUED]
The components of income tax expense are:
J U N E 3 0,
---------------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
CURRENT:
Federal $ 267,900 $ 115,656 $ 433,869
State 133,700 68,131 199,689
---------------- --------------- ----------------
TOTAL CURRENT 401,600 183,787 633,558
---------------- --------------- ----------------
DEFERRED:
Federal (121,000) 44,590 (129,064)
State (35,000) 18,025 (51,625)
---------------- --------------- ----------------
TOTAL DEFERRED [BENEFIT] EXPENSE (156,000) 62,615 (180,689)
---------------- --------------- ----------------
TOTALS $ 245,600 $ 246,402 $ 452,869
------ ================ =============== ================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
JUNE 30,
--------
1 9 9 6 1 9 9 5
------- -------
DEFERRED TAX ASSETS:
Provision for Doubtful Accounts $ 191,000 $ 248,417
Excess of Tax Over Financial Statement
Basis of Investments in Contracts 108,000 11,961
Deferred Gains 62,000 70,880
Vacation Accrual 169,000 148,848
Other Compensation Accrual 28,183 23,000
Federal Capital Loss Carryforwards 51,680 --
--------------- ----------------
Gross Deferred Tax Assets 609,863 503,106
Deferred Tax Asset Valuation Allowance (51,680) --
--------------- ----------------
TOTAL DEFERRED TAX ASSETS 558,183 503,106
--------------- ----------------
DEFERRED TAX LIABILITIES:
Deferred Costs Capitalized for Financial Statement Purposes 5,000 116,066
Depreciation 54,000 43,857
--------------- ----------------
TOTAL DEFERRED TAX LIABILITIES 59,000 159,923
--------------- ----------------
$ 499,183 $ 343,183
=============== ================
These amounts are classified in the balance sheet as follows:
Current Asset $ 387,183 $ 420,265
Non-Current Asset 112,000 --
Non-Current Liability -- 77,082
--------------- ----------------
TOTALS $ 499,183 $ 343,183
------ =============== ================
F-12
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
- --------------------------------------------------------------------------------
[8] INCOME TAXES [CONTINUED]
The following reconciles the tax provision with the U.S. statutory tax rates:
J U N E 3 0,
-------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Income Taxes at U.S. Statutory Rates 34.0% 34.0% 35.0%
States Taxes, Net of Federal Tax Benefit 9.5 11.3 11.0
Other, Principally Nondeductible Expenses 1.4 2.8 7.0
-------- -------- --------
TOTALS 44.9% 48.1% 53.0%
------ ======== ======== ========
The Company has available federal capital loss carryforwards in the amount of
$152,000, which expire in the year 2000.
[9] RELATED PARTY
During 1992, the Company sold its building for a purchase price of $610,000, to
a related party [a corporation wholly-owned by the principal stockholder of the
Company]. A promissory note was also received from the related party corporation
for $120,000. This note is secured by a mortgage on the building and is
personally guaranteed by the Company's principal stockholder. At June 30, 1996
and 1995, the balance of the note receivable was $-0- and $55,577, respectively.
At the time of the sale a lease was entered into for ten years, whereby the
Company will lease back the building from the purchaser. The sale resulted in a
gain of $263,717, which has been deferred and will be amortized over the life of
the lease. During each of the three years in the period ended June 30, 1996, the
Company recognized a gain of $26,372. As of June 30, 1996 and 1995, the balance
of the unamortized gain on the sale was $158,246 and $184,610, respectively.
The Company leases its corporate office building from the above-mentioned
related party [See Note 10]. During the years ended June 30, 1996, 1995 and
1994, rent expense was $178,651, $169,347 and $168,742, respectively.
[10] COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - The Company entered into an employment agreement with
one officer for a term of five years expiring September 1996. As of June 30,
1996, the total remaining commitment on this agreement was $67,500.
OPERATING LEASES - The Company leases real estate facilities from a corporation
owned by a principal stockholder under operating leases. These leases range from
one to ten years.
The Company is also obligated under various operating leases for operating
equipment for periods expiring through 1997. During the years ended June 30,
1996, 1995 and 1994, rent expense was $228,211, $203,873 and $139,646,
respectively.
F-13
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7
- --------------------------------------------------------------------------------
[10] COMMITMENTS AND CONTINGENCIES [CONTINUED]
OPERATING LEASES [CONTINUED] - Minimum annual rentals under non-cancelable
operating leases subsequent to June 30, 1996 are as follows:
YEAR ENDING OPERATING REAL ESTATE
----------- --------- -----------
JUNE 30, EQUIPMENT FACILITIES
-------- --------- ----------
1997 $ 43,555 $ 163,862
1998 12,410 163,862
1999 -- 163,862
2000 -- 163,862
2001 -- --
Thereafter -- 327,725
------------- -------------
TOTALS $ 55,965 $ 983,173
------ ============= =============
PURCHASE COMMITMENT - The Company has entered into a commitment to purchase a
minimum of $5,000,000 in supplies between February 1995 and January 2000 from
one of its vendors. If the Company does not meet this commitment during the term
of the agreement, the agreement automatically renews until the minimum
commitment is met. There is no penalty to the Company for its failure to meet
the minimum purchase requirement during the agreement period. In exchange for
this commitment, the vendor made a donation to the Company to be used to acquire
equipment for the Collegeville Inn. The amount of the donation is being
amortized over the commitment period. In the event the agreement is terminated
prior to January 2000, the Company is required to repay to the vendor a
proportionate amount of the donation received.
LITIGATION - A civil action is pending against the Company for approximately
$105,000. The action relates to the alleged purchase price of equipment
purchased by the Company [via assignment from Service America Corporation]. The
Company has responded by answering the complaint and asserting a number of
defenses and counterclaims. The parties are in the discovery phase of the
litigation. The Company has contested the case vigorously and will continue to
do so.
In the normal course of its business, the Company is exposed to asserted and
unasserted claims. In the opinion of management, the resolution of these matters
will not have a material adverse affect on the Company's financial position,
results of operations or cash flows.
[11] STOCKHOLDERS' EQUITY
During January 1992, the Company issued 1,150,000 warrants which entitles the
holder to purchase one share of Class A common stock at an exercise price of
$6.00 for a period of five years expiring on January 29, 1997.
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.
F-14
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------
[11] STOCKHOLDERS' EQUITY [CONTINUED]
CLASS A COMMON STOCK [CONTINUED] - Holders of Class A Common Stock are entitled
to dividends, together with the holders of Class B Common Stock, pro rata based
on the number of shares held. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment to creditors and to holders of Preferred Stock, if
any, shall be distributed, pro rata, among the holders of the Class A Common
Stock and Class B Common Stock.
During the fiscal years ended June 30, 1996 and 1994, the Company repurchased
76,931 and 75,000 shares of common stock, respectively, for an aggregate price
of $134,191 and $226,625, respectively. The repurchase price is recorded as a
reduction of stockholders' equity.
During the fiscal year ended June 30, 1996, the Company issued 12,500 shares of
Class A common stock ($25,000 at fair value) which is recorded as an addition to
stockholders' equity.
The Company, in connection with its initial public offering, granted to its
underwriters options to purchase an aggregate of 100,000 units exercisable for
four years commencing January 29, 1993, at an exercise price of $7.00 per unit.
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 sole
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.
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-15
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
- --------------------------------------------------------------------------------
[12] STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
[A] QUALIFIED 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 expires in September 2001. There have been
500,000 shares of common stock reserved for the Plan.
The following is a summary of transactions:
INCENTIVE STOCK OPTIONS
-----------------------
OUTSTANDING AT JUNE 30, 1993 121,250
Granted during the year 129,500
Terminated during the year (29,750)
-------------
OUTSTANDING AT JUNE 30, 1994 221,000
Granted during the year 225,000
Terminated during the year (122,000)
-------------
OUTSTANDING AT JUNE 30, 1995 324,000
Granted during the year 7,000
Terminated during the year (139,750)
-------------
OUTSTANDING AT JUNE 30, 1996 191,250
---------------------------- =============
All options under this plan have an exercise price of $4.00 per share and are
exercisable as of June 30, 1996.
[B] NON-QUALIFIED STOCK OPTIONS - The following is a summary of non-qualified
stock options issued by the Company:
NON-QUALIFIED STOCK OPTIONS
---------------------------
OUTSTANDING AT JUNE 30, 1993 30,000
Granted during the year --
Terminated during the year --
-------------
OUTSTANDING AT JUNE 30, 1994 30,000
Granted during the year 30,000
Terminated during the year --
-------------
OUTSTANDING AT JUNE 30, 1995 60,000
Granted during the year --
Terminated during the year (15,000)
-------------
OUTSTANDING AT JUNE 30, 1996 45,000
---------------------------- =============
The above options have an exercise price of $4.00 per share and are exercisable
as of June 30, 1996.
F-16
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10
- --------------------------------------------------------------------------------
[12] STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN [CONTINUED]
[C] 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, 1996, all
employees were eligible to participate in the plan. The stock is restricted
until the Company files an S-8 Registration Statement with the Securities and
Exchange Commission ["SEC"]. A summary of stock purchased under the plan is
shown below:
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Aggregate Purchase Price $ 55,611 $ 22,815 $ --
Shares Purchased 37,126 12,238 --
Employee Participants 34 35 --
[13] CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, accounts
receivable, and notes receivable. A substantial portion of the Company's
revenues are dependent upon the payment by customers who are dependent upon
third-party payors 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, 1996, the Company has cash accounts with various financial
institutions having high credit standings. As a consequence, it believes that
its exposure to credit risk loss is limited.
[14] ACQUISITION
During 1993, the Company acquired from Service America Corporation ["SAC"]
certain food service management contracts to provide services to health care and
retirement facilities. The aggregate purchase price for the contracts was
$2,099,258, of which $1,099,258 was paid in July 1993 and $1,000,000 was placed
in escrow. The purchase price was subject to adjustment in the event the
contracts did not remain in effect or were not assigned within a period of 120
days following the closing and, accordingly, adjustments to reduce the purchase
price in the amount of $365,601 were made during the year ended June 30, 1995.
With respect to the $1,000,000 placed in escrow, at June 30, 1996, $145,627
remains in escrow. In addition, the Company agreed to pay SAC an amount of up to
$750,000 for SAC's inventory and equipment at such facilities.
The acquisition has been accounted for as a purchase and, accordingly, the
purchase price has been allocated to the assets acquired based on fair market
value.
F-17
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11
- --------------------------------------------------------------------------------
[14] ACQUISITION [CONTINUED]
The unaudited consolidated results of operations on a pro forma basis as though
the acquisition had occurred as of the beginning of the Company's fiscal year
1994 are as follows:
JUNE 30,
--------
1 9 9 4
-------
Revenues $ 32,118,752
Net Income $ 661,314
Net Income Per Share $ .22
[15] MAJOR CUSTOMERS
The Company had sales to one customer representing approximately 12%, 14%, and
14% of total revenues for the years ending June 30, 1996, 1995 and 1994,
respectively. The loss of such customer could have a material adverse effect on
the Company's future results of operations.
[16] FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective June 30, 1996, the Company adopted Statement of Financial Accounting
Standard ["SFAS"] No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires the disclosure of the fair value of off- and
on-balance sheet financial instruments.
For certain financial instruments, including cash and cash equivalents, accounts
and notes receivables, advances to employees and accounts payables, the carrying
amount approximated fair value for the majority of these instruments because of
their short maturities. It was estimated that the carrying amount of the
Company's long-term debt approximates its fair value based on the Company's cost
of capital.
[17] NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity, including goodwill,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company does
not anticipate this statement will have a material impact on its financial
statements. In addition, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," in October 1995. SFAS No. 123 uses a fair value based
method of accounting for stock options and similar equity instruments as
contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has not decided if it will adopt SFAS No. 123 or
continue to apply APB Opinion No. 25 for financial reporting purposes. SFAS No.
123 will have to be adopted for financial statement note disclosure purposes.
The accounting requirements of SFAS No. 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995; the disclosure
requirements of SFAS No. 123 are effective for financial statements for fiscal
years beginning after December 15, 1995.
F-18
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12
- --------------------------------------------------------------------------------
[18] 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.
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------ --------- --------
FISCAL 1996
------------------------------------------------------------------------
Revenues $ 9,246,352 $ 8,850,795 $ 8,728,220 $ 8,313,065
================ =============== ============== =============
Gross Profit $ 1,709,805 $ 1,637,621 $ 1,659,287 $ 1,795,211
================ =============== ============== =============
Net Income $ 40,572 $ 17,742 $ 85,984 $ 157,656
================ =============== ============== =============
Net Income Per Share $ .01 $ .01 $ .03 $ .05
================ =============== ============== =============
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------ --------- --------
[RESTATED]
FISCAL 1995
------------------------------------------------------------------------
Revenues $ 7,548,714 $ 8,091,258 $ 8,583,376 $ 9,129,644
================ =============== ============== =============
Gross Profit $ 1,399,099 $ 1,709,343 $ 1,513,326 $ 1,715,268
================ =============== ============== =============
Net Income $ 60,074 $ 115,036 $ 71,671 $ 18,680
================ =============== ============== =============
Net Income Per Share $ .02 $ .04 $ .03 $ .00
================ =============== ============== =============
[19] RESTATEMENT OF FINANCIAL STATEMENTS
Included in cash and cash equivalents, at June 30, 1994, were holdings in
certain GNMA funds of $4,093,500. The securities underlying these funds were
investments in federal government backed mortgages. The market value of these
funds was $3,812,500 at June 30, 1994. No accounting recognition was made
regarding a $281,000 market decline in the GNMA funds because management had no
plan to sell these investments and believed that the market decline was
temporary. At the end of the first quarter of fiscal 1995, management changed
its strategy regarding the GNMA funds and liquidated its investment on September
27, 1994, incurring a loss on sale of $316,000 which was recorded as a loss in
the first quarter of fiscal 1995.
The staff of the SEC believes that the most authoritative accounting literature
directly bearing on the issue of accounting for the market decline in the GNMA
funds at June 30, 1994, and the subsequent sale of the Company's investment in
that fund on September 27, 1994, requires the Company to record an unrealized
loss of $281,000 for the year ended June 30, 1994, representing the market
decline of the GNMA funds at that time. Additionally, as of June 30, 1994, the
investments in the GNMA funds have been reclassified as short-term marketable
securities from cash and cash equivalents.
As of June 30, 1994, marketable securities were carried at market, which
reflected a $281,000 valuation allowance for market decline. An unrealized loss
of $281,000 [$165,000 net of tax effect] was included in the Company's results
of operations for the year ended June 30, 1994.
. . . . . . . . . . . . . . .
F-19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Nutrition Management Services Company
Kimberton, Pennsylvania
Our report on the consolidated financial statements of
Nutrition Management Services Company is referenced on page 17 and included in
this Form 10-K. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed on page F-21
of this Form 10-K.
In our opinion, the financial statements schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
September 11, 1996
F-20
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE OF VALUATION ACCOUNTS
- --------------------------------------------------------------------------------
The following sets forth the activity in the Company's valuation accounts:
NOTES AND LONG-TERM
--------- ---------
ACCOUNTS LEASE ACCOUNTS
-------- ----- --------
RECEIVABLE RECEIVABLE RECEIVABLE
---------- ---------- ----------
BALANCE AT JUNE 30, 1994 $ 288,831 $ -- $ 165,730
Provision for Bad Debts 186,352 -- --
Writeoffs (52,066) -- (28,221)
Other - Reclasses (41,448) 121,448 (80,000)
---------------- --------------- ---------------
BALANCE AT JUNE 30, 1995 381,669 121,448 57,509
Provision for Bad Debts 153,283 -- --
Writeoffs (172,887) (121,448) --
---------------- --------------- ---------------
BALANCE AT JUNE 30, 1996 $ 362,065 $ -- $ 57,509
================ =============== ===============
F-21