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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, 1997
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)
(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 ontained 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 24, 1997 was
approximately $1,563,081.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At September 24,
1997, there was outstanding 2,772,665 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.
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. In September of 1997, the Company opened the
retail restaurant portion of the Collegeville Inn Conference & Training Center.
The revenue from the restaurant operation will be used to defray the costs and
expenses of the training facility. The restaurant is managed by experienced
professionals employed by and recruited by the Company. The remaining three
divisions of the project are expected to open by the third quarter of fiscal
1998. 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.
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.
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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.
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, 1997 the Company provided services under various service agreements at
102 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.
2
The following table shows the number of customer
accounts maintained by the Company during each of the last three fiscal years:
1997 1996 1995
---- ---- ----
Agreements in effect at
beginning of fiscal year 92 95 92
New agreements during
the fiscal year 24 10 16
Purchased contracts -- -- --
Contracts canceled during
the fiscal year 14 13 13
--- --- ---
Agreements in effect at the
end of the fiscal year 102 92 95
--- --- ---
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.
MAJOR CUSTOMER
In fiscal 1997, 13% 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 1998.
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, 1997, the Company employed a total of
approximately 885 employees. Approximately 309 of those employees serve in
various executive, management, administrative, quality assurance and sales
capacities. The remaining 576 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.
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.
4
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").
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 1997 HIGH LOW
-----------------------------------------------
First Quarter 2 1 7/16
Second Quarter 1 9/16 1 1/4
Third Quarter 1 7/8 1 3/8
Fourth Quarter 2 1/8 1 7/16
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
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 19, 1997, 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.
5
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
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(as restated)
Revenue $ 35,293,962 $ 35,138,432 $ 33,352,992 $ 31,464,440 $ 10,152,594
Gross profit 6,782,040 6,801,924 6,337,036 5,711,775 4,023,750
Income from
Operations 1,020,689 418,991 553,050 1,160,541 498,924
Other income
(Expense) 242,383 128,563 (41,187) (306,521) 498,282
Income before effect
of accounting
change 752,276 301,954 265,461 401,151 552,825
============ ============ ============ ============ ============
Net Income $ 752,276 $ 301,954 $ 265,461 $ 656,838 $ 552,825
============ ============ ============ ============ ============
Per share of common stock:
Income before effect of
accounting change $ 0.26 $ 0.10 $ 0.09 $ 0.13 $ 0.18
Net Income $ 0.26 $ 0.10 $ 0.09 $ 0.22 $ 0.18
============ ============ ============ ============ ============
Weighted average
common shares
outstanding 2,921,549 2,956,504 2,975,000 2,989,589 3.088,356
========= ========= ========= ========= =========
As of June, 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(as restated)
Working capital $ 2,800,374 $ 3,921,140 $ 6,131,681 $ 6,518,916 $ 5,370,610
Total Assets 20,381,557 16,962,352 16,366,159 15,556,388 7,645,020
Long-term debt 6,083,851 3,267,808 4,039,474 3,739,150 338,249
Shareholders'
equity 6,972,153 6,309,595 6,037,329 5,771,868 5,341,655
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
Revenues for the year ended June 30, 1997 ("fiscal 1997")
increased by 0.4% to $35,293,962 over revenues for the year ended June 30, 1996
("fiscal 1996"). 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. It is anticipated that revenues will increase in
fiscal year 1998 over 1997 with the opening of the Collegeville Inn Conference &
Training Center in the Fall of 1997.
Direct cost of operations for fiscal 1997 was $28,511,922,
compared to $28,336,508 for similar expenses in fiscal 1996, an increase of
$175,414 or 0.6%. This increase in direct costs is consistent with revenue
growth.
Gross Profit for fiscal 1997 was $6,782,040, compared to
$6,801,924, a decrease of $19,884 or 0.3%. This decrease is due to revenues
decreasing at a greater percentage than direct expenses.
General and administrative expenses for fiscal 1997 were
$4,929,812 or 13.9% of revenue, compared to $5,608,365 or 15.9% of revenue for
fiscal 1996. The expense reductions are the result of lower start-up costs,
increased operating efficiencies and reduced travel expenses.
Depreciation and amortization for fiscal 1997 was $651,539,
compared to $621,285 for fiscal 1996. The increase of $30,254 or 4.8%, was
attributable to additional depreciation related to capital expenditures.
Depreciation and amortization expenses will increase by approximately $250,000
in fiscal 1998 over 1997 with the opening of the Collegeville Inn Conference &
Training Center.
Provisions for doutful accounts for fiscal 1997 was $180,000,
compared to $153,283 for fiscal 1996. The increase of $26,717 or 17.4% was
attributable to the increase in accounts receivable over 90 days for
approximately six (6) accounts.
Income from operations for fiscal 1997 was $1,020,689 or 2.9%
of revenue compared to $418,991 or 1.2% of revenue for fiscal 1996, an increase
of $601,698 or 144%. This increase in operating income is primarily the result
of the decrease in general and administrative expenses of approximately
$600,000.
Interest expense for fiscal 1997 was $95,157 compared to
$234,280 for fiscal 1996. This decrease of approximately $140,000 is a result of
7
the increase in the amount of interest expense capitalized due to an increase in
the weighted average investment in Collegeville Inn Conference & Training
Center. Interest expense will increase in fiscal year 1998 over 1997 with the
opening of the Collegeville Inn Conference and Training Center.
Interest and other non-operating income for fiscal 1997 was
$337,540 as compared to $362,843 for fiscal 1996. This decrease is due to a
reduction of gains resulting from dispositions of fixed assets.
For the foregoing reasons, net income before taxes for fiscal
1997 was $1,263,072 or 3.6% of revenue compared to $547,554 or 1.6% of revenue
for fiscal 1996, an increase of $715,518, or 130.7% from fiscal 1996.
Net income for fiscal 1997 was $752,276 or $0.26 per share as
compared to $301,954 and $0.10 per share for fiscal 1996. This increase of
approximately $450,000 is primarily from 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
$5,608,365 or 15.9% of revenue, compared to $5,067,038 or 15.1% 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
8
attributable to the charge-off of deferred costs associated with contracts
canceled during fiscal 1996. (See "Service Contracts").
Provision for doubtful accounts for fiscal 1996 was $153,283
as compared to $186,352 for fiscal 1995. The decrease of $33,069 or 17.7% was
attributable to the Company's increased efforts to collect past due accounts
receivable.
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had working capital of
$2,800,374 as compared to $3,921,140 at June 30, 1996. This decrease in working
capital is primarily attributable to expenses relating to $4,000,000 of
renovation work at the Collegeville Inn Conference & Training Center. The
Company's holdings in cash, cash equivalents and marketable securities decreased
by $758,794 during fiscal 1997 to $2,267,723. 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 the next twelve
months.
9
OPERATING ACTIVITIES
Cash provided by operations for fiscal 1997 and 1996 was
$1,776,147 and $1,629,000 respectively. This is primarily attributable to the
decrease in accounts payable.
INVESTING ACTIVITIES
Investing activities consumed $5,109,103 in cash during fiscal
1997 compared to $754,404 provided by investing activities for fiscal 1996.
Investing activities for fiscal 1997 includes capital
expenditure in the amount of $4,002,864, of which approximately $3,848,361
related to the renovation work at the Collegeville Inn Conference & Training
Center. The Company intends to incur costs between $1,000,000 and $1,250,000 for
the remainder of the renovation. (See "Business - General Description of
Business" for more discussion on the Collegeville Inn project). Additionally,
the Company recorded proceeds of $1,000,000 from a bond issue to restricted
cash. (See "Financing Activities"). For fiscal 1996, investing activities
included capital expenditure in the amount of $2,672,801, of which $2,484,000
related to the renovation work at the Collegeville Inn Conference & Training
Center.
FINANCING ACTIVITIES
During fiscal 1997, financing activities provided a net
$2,574,162 in cash compared to $801,335 in cash consumed from financing
activities in 1996. This is primarily due from the proceeds of two bond
issuance's by the Montgomery County Industrial Development Authority.
The total amount raised was $3,500,000, of which $2,500,000 is
to be used by the Company for the rehabilitation, reconstruction, installation,
furnishing and equipping of a building to be used as a conference center,
training center, a food manufacturing/processing and distribution center and a
retail restaurant. The remaining $1,000,000 is restricted as to use for the
acquisition, construction, installation and renovation of certain equipment to
be used in connection with a cook-chill system of batch food processing.
In addition, during fiscal 1997, the Company restructured its
debt with its primary lender to increase its revolving credit facility to
$4,000,000. Borrowings under the Revolving Credit facility were $2,529,553 at
June 30, 1997.
CAPITAL RESOURCES
The Company has certain credit facilities with its bank
including a line of credit and three term loans. As of June 30, 1997, the
Company had approximately $1,470,447 of unused credit available on its line of
credit. The
10
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 revenue 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 costs attributable to
inflation by continuing to pass through cost increases to its customers.
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 provide to be accurate. Factors that could cause
actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to, expenditures relating to the
renovation work at the Collegeville Inn Conference & Training Center. 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
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
11
Share", and SFAS No. 129, "Disclosure of Information about Capital Structure,"
in February 1997.
SFAS No. 128 simplifies the earnings per share ("EPS")
calculations required by Accounting Principles Board ("APB") Opinion No. 15, and
related interpretations, by replacing the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 requires dual presentation of basic and
diluted EPS by entities with complex capital structures. Basic EPS includes no
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to the fully diluted EPS of APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. When adopted, SFAS No. 128 will require restatement of all
prior-period EPS data presented; however, the Company has not sufficiently
analyzed SFAS No. 128 to determine that effect SFAS No. 128 will have on its
historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure
requirements, but rather consolidates existing disclosure requirements for ease
of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 changes how operating
segments are reported in annual financial statements and requires the reporting
of selected information about operating segments in interim fnancial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data to be provided
pursuant to this Item 8 are included under Part IV, Item 14, of this Form 10-K.
12
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.
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 of 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
13
year ended June 30, 1994. Deloitte & Touche also advised the Company that it
reports 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. In July of 1996, the firm of
Mortenson & Associates, P.C. changed its name to Moore Stephens, P.C.
There have been no other transactions similar to the one
described herein that resulted in the disagreement.
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 1997 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 1997 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 1997 Annual Meeting of Shareholders under the caption
14
"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 1997 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Independent Auditor's Report F-1
Consolidated Balance Sheets as of
June 30, 1997 and 1996 F-2, 3
Consolidated Statements of Operations for
the Years Ended June 30, 1997, 1996, 1995
and 1994 F-4
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1997
1996 and 1995 F-5
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1997, 1996 and
1995 F-6, 7
Notes to Consolidated Financial Statements F-8 to F-20
Independent Auditor's Report Related
Financial Statement Schedule F-21
Schedule of Valuation Accounts F-22
(B) REPORTS ON FORM 8-K
None
15
(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).
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).
10.8 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-KSB filed September
27, 1994).
16
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).
10.15 Trust Indenture between Montgomery County Industrial
Development Authority and Dauphin Deposit Bank and Trust
Company, as Trustee.
10.16 Loan Agreement between Montgomery County Industrial
Development Authority and Apple Fresh Foods Limited (a wholly-
owned subsidiary of the Company).
10.17 Trust Indenture between the Montgomery County Development
Authority and Dauphin Deposit Bank and Trust Company, as
Trustee.
10.18 Loan Agreement between the Company and Corestates Bank, N.A.
17
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
/s/ James J. Swiniuch
---------------------------------
James J. Swiniuch, Chief Financial Officer
and Principal Accounting Officer
Date: September 22, 1997
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 22, 1996.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
- ------------------------------- ------------------------------
Joseph V. Roberts, Chief Kathleen A. Hill, President and
Executive Officer and Director Director
/s/ Janet Purro /s/ Samuel R. Shipley
- ------------------------------- ------------------------------
Janet Purro, Director Samuel R. Shipley, Director
/s/ Michael M. Gosman /s/ Jane Scaccetti Fumo
- ------------------------------- ------------------------------
Michael M. Gosman, Director Jane Scaccetti Fumo, Director
18
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Independent Auditor's Report........................................ F-1
Consolidated Balance Sheets as of June 30, 1997 and 1996............ F-2 - F-3
Consolidated Statements of Operations for the years ended
June 30, 1997, 1996 and 1995........................................ F-4
Consolidated Statements of Stockholders' Equity for
the years ended June 30, 1997, 1996 and 1995........................ F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995.................................. F-6 - F-7
Notes to Consolidated Financial Statements.......................... F-8 - 20
. . . . . . . . .
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,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1997. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997,
in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
September 10, 1997
F-1
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30,
--------
1 9 9 7 1 9 9 6
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,267,813 $ 3,026,607
Accounts Receivable [Net of Allowance for Doubtful Accounts
of $531,428 and $362,065 in 1997 and 1996, Respectively] 5,900,572 5,863,105
Unbilled Revenue 244,107 273,132
Notes and Leases Receivable [Net of Allowance for Doubtful
Accounts of $-0- and $-0- in 1997 and 1996, Respectively] 202,124 823,602
Advances to Employees 281,026 262,415
Deferred Income Taxes 599,000 387,183
Inventory and Other 409,068 407,221
--------------- ---------------
Total Current Assets 9,903,710 11,043,265
--------------- ---------------
Property and Equipment - Net 1,203,429 1,358,968
--------------- ---------------
Construction in Progress 6,939,702 3,091,341
--------------- ---------------
Other Assets:
Restricted Cash 1,096,076 146,827
Long-Term Accounts Receivable [Net of Allowance for
Doubtful Accounts of $57,509 in 1997 and 1996] 50,815 50,815
Investment in Contracts [Net of Accumulated Amortization
of $1,278,561 and $937,263 in 1997 and 1996, Respectively] 427,928 769,226
Lease Receivable 157,952 289,882
Deferred Income Taxes 233,000 112,000
Deferred Costs and Other Assets 368,945 100,028
--------------- ---------------
Total Other Assets 2,334,716 1,468,778
--------------- ---------------
Total Assets $ 20,381,557 $ 16,962,352
=============== ===============
See Notes to Consolidated Financial Statements.
F-2
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
June 30,
--------
1 9 9 7 1 9 9 6
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 4,322,662 $ 5,042,025
Accrued Expenses 757,286 273,054
Accrued Payroll 460,898 471,806
Accrued Professional 392,012 124,000
Current Portion of Long-Term Debt 744,504 896,667
Accrued Income Taxes 232,521 45,063
Other 193,453 269,510
--------------- ---------------
Total Current Liabilities 7,103,336 7,122,125
--------------- ---------------
Long-Term Liabilities:
Long-Term Debt - Net of Current Portion 6,083,851 3,267,808
Other 222,217 262,824
--------------- ---------------
Total Long-Term Liabilities 6,306,068 3,530,632
--------------- ---------------
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; 3,000,000 and 3,000,000
Issued, 2,797,665 and 2,850,000
Outstanding in 1997 and 1996, Respectively 3,801,926 3,801,926
Class B - No Par, 100,000 Shares Authorized;
100,000 Shares Issued and Outstanding 48 48
Retained Earnings 3,591,210 2,838,934
--------------- ---------------
Totals 7,393,184 6,640,908
Less: Treasury Stock - [Common - Class A: 202,335 and 150,000
Shares in 1997 and 1996, Respectively] - At Cost (421,031) (331,313)
--------------- ---------------
Total Stockholders' Equity 6,972,153 6,309,595
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 20,381,557 $ 16,962,352
=============== ===============
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Food Service Revenue $ 35,293,962 $ 35,138,432 $ 33,352,992
---------------- --------------- ---------------
Cost of Operations:
Payroll and Related Expenses 13,918,106 13,128,099 13,204,316
Other Costs of Operations 14,593,816 15,208,409 13,811,640
---------------- --------------- ---------------
Total Cost of Operations 28,511,922 28,336,508 27,015,956
---------------- --------------- ---------------
Gross Profit 6,782,040 6,801,924 6,337,036
---------------- --------------- ---------------
Expenses:
General and Administrative Expenses 4,929,812 5,608,365 5,067,038
Depreciation and Amortization 651,539 621,285 530,596
Provision for Doubtful Accounts 180,000 153,283 186,352
---------------- --------------- ---------------
Total Expenses 5,761,351 6,382,933 5,783,986
---------------- --------------- ---------------
Income from Operations 1,020,689 418,991 553,050
---------------- --------------- ---------------
Other Income [Expenses]:
Interest Expense (95,157) (234,280) (360,886)
Interest Income 309,158 292,819 307,912
Other 28,382 70,024 11,787
---------------- --------------- ---------------
Other Income [Expenses] - Net 242,383 128,563 (41,187)
---------------- --------------- ---------------
Income Before Income Taxes 1,263,072 547,554 511,863
Income Tax Expense 510,796 245,600 246,402
---------------- --------------- ---------------
Net Income $ 752,276 $ 301,954 $ 265,461
================ =============== ===============
Net Income Per Share $ .26 $ .10 $ .09
================ =============== ===============
Weighted Average Number of Shares 2,921,549 2,956,504 2,975,000
================ =============== ===============
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,
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
Sale of 12,500
Treasury Shares
of Class A Stock 12,500 -- -- -- -- 12,500 25,000 25,000
Repurchase of
Company Stock (37,500) -- -- -- -- (37,500) (54,688) (54,688)
Net Income -- -- -- -- 301,954 -- -- 301,954
------------ ------------ ---------- -------- ------------ ----------- ------------ -------------
Balance - June 30,
1996 2,850,000 3,801,926 100,000 48 2,838,934 (150,000) (331,313) 6,309,595
Repurchase of
Company Stock (52,335) -- -- -- -- (52,335) (89,718) (89,718)
Net Income -- -- -- -- 752,276 -- 752,276
------------ ------------ ---------- -------- ------------ ----------- ------------ -------------
Balance - June 30,
1997 2,797,665 $ 3,801,926 100,000 $ 48 $ 3,591,210 (202,335) $ (421,031) $ 6,972,153
============ ============ ========== ======== ============ =========== ============ =============
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Operating Activities:
Net Income $ 752,276 $ 301,954 $ 265,461
Adjustments to Reconcile Net Income to Net
Cash Provided by [Used for] Operating Activities:
Depreciation and Amortization 651,539 621,285 530,596
Provision for Bad Debts 180,000 153,283 186,352
Amortization of Deferred Gain (26,372) (26,372) (26,372)
Provision for Deferred Taxes (333,000) (156,000) 62,615
Amortization of Lease Receivable (28,438) (44,460) (54,584)
Gain on Sale of Fixed Assets -- (43,472) --
Changes in Assets and Liabilities:
Accounts Receivable (217,467) (618,087) (1,474,826)
Notes Receivable 637,057 199,129 202,762
Unbilled Revenue 29,025 64,544 (5,190)
Accounts Payable (719,363) 1,084,369 975,882
Accrued Legal and Expenses 752,244 42,820 149,938
Accrued Payroll (10,908) 57,844 55,369
Accrued Income Taxes 187,458 (34,863) (753,849)
Other (77,904) 27,026 (150,418)
--------------- ---------------- ---------------
Net Cash - Operating Activities 1,776,147 1,629,000 (36,264)
--------------- ---------------- ---------------
Investing Activities:
Payment of Mortgage Receivable from Related Party -- 55,577 23,715
Proceeds from Sale of Marketable Securities -- 2,970,099 6,690,667
Investment in Marketable Securities -- -- (5,848,266)
Purchase of Property and Equipment (154,503) (188,780) (702,891)
Construction in Progress Expenditures (3,848,361) (2,484,021) (597,386)
Proceeds from Sale of Fixed Assets -- 71,645 --
Investment in Contracts -- -- (232,053)
Transfers From [To] Restricted Cash (949,249) -- 452,017
Other (296,079) 53,517 57,007
Payment of Lease Receivable 144,790 157,953 157,953
Advances to Employees and Officers (18,611) (133,305) (92,526)
Deferred Costs 12,910 251,719 (93,971)
--------------- ---------------- ---------------
Net Cash - Investing Activities (5,109,103) 754,404 (185,734)
--------------- ---------------- ---------------
Financing Activities:
Proceeds from Long-Term Borrowings 3,560,547 125,000 1,645,000
Repayment of Long-Term Borrowings (896,667) (896,667) (1,493,950)
Purchase of Treasury Stock (89,718) (54,688) --
Sale of Treasury Stock -- 25,000 --
--------------- ---------------- ---------------
Net Cash - Financing Activities 2,574,162 (801,355) 151,050
--------------- ---------------- ---------------
Net [Decrease] Increase in Cash and
Cash Equivalents - Forward $ (758,794) $ 1,582,049 $ (70,948)
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Net [Decrease] Increase in Cash and
Cash Equivalents - Forwarded $ (758,794) $ 1,582,049 $ (70,948)
Cash and Cash Equivalents - Beginning of Years 3,026,607 1,444,558 1,515,506
--------------- ---------------- ---------------
Cash and Cash Equivalents - End of Years $ 2,267,813 $ 3,026,607 $ 1,444,558
=============== ================ ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest [Net of Amounts Capitalized] $ 100,987 $ 234,280 $ 356,596
Income Taxes $ 674,903 $ 250,000 $ 870,138
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the year ended June 30, 1997 and 1996, the Company exchanged accounts
receivable and property and equipment of approximately $500,873 and $62,085,
respectively, for a note receivable.
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. Apple Fresh Foods, Ltd.
["Apple Fresh Foods"] was organized on November 14, 1996, 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.
[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 $304,579 and
$374,850 has been included in inventory and other as of June 30, 1997 and 1996,
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 have been included in deferred costs and other as of June 30, 1996.
During the years ended June 30, 1997, 1996 and 1995, amortization expense was
$341,298, $341,298 and $329,695, respectively.
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.
F-8
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Accounting for Stock-Based Compensation - Effective July 1, 1996, the Company
adopted the disclosure provisions of Financial Accounting Standards ["SFAS"] No.
123, "Accounting for Stock- Based Compensation." The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its employee stock option plans. Note 11 to the Consolidated Financial
Statements contains a summary of the pro forma effects on reported net income
and earnings per share for fiscal 1997 and 1996 based on the fair value of
options and shares granted as prescribed by SFAS No. 123.
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.
Impairment - Certain long-term assets of the Company including goodwill are
reviewed at least annually as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations [undiscounted and without interest charges]. If impairment is
deemed to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 1997, management
expects these assets to be fully recoverable.
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, 1997, 1996 and 1995. Stock options and warrants did not impact earnings per
share each year as they were anti-dilutive.
Reclassification - Certain 1996 items have been reclassified to conform to the
current year presentation.
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] Property and Equipment and Construction in Progress
The following details the composition of property and equipment:
June 30,
--------
1 9 9 7 1 9 9 6
------- -------
Property and Equipment:
Land $ 497,967 $ 497,967
Machinery and Equipment 1,481,032 1,409,270
Other, Principally Autos and Trucks 193,605 110,864
-------------- ---------------
Totals 2,172,604 2,018,101
Less: Accumulated Depreciation 969,175 659,133
-------------- ---------------
Totals $ 1,203,429 $ 1,358,968
------ ============== ===============
F-9
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[3] Property and Equipment and Construction in Progress [Continued]
Depreciation expense amounted to $310,241, $299,978 and $206,984 for the years
ended June 30, 1997, 1996 and 1995, respectively.
The Company capitalized interest costs of $366,492, $164,702 and $-0- in 1997,
1996 and 1995, respectively, for qualifying construction projects. Total
interest costs incurred before recognition of the capitalized amounts were
$461,649, $398,982 and $360,886 for the years ended June 30, 1997, 1996 and
1995, respectively.
The Company has capitalized salary of $90,000 paid to the Chairman of the Board
for his additional supervisory services for the Collegeville Inn project. These
services commenced January 1997 for a monthly fee of $15,000.
[4] Restricted Cash
At June 30, 1997 and 1996, the Company had $1,096,076 and $146,827 of restricted
cash, respectively of which $154,782 and $145,627, respectively, is held in
escrow in connection with the acquisition of various service facility contracts
[See Note 2]. The remaining balance is attributable to the Industrial Revenue
Bond proceeds of $1,000,000 to finance the acquisition, construction,
installation and renovation of certain equipment to be used in connection with a
cook-chill system of batch food processing; and the payment of a portion of the
costs and expenses of issuing the Bonds [See Note 6].
[5] 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,
1998 $ 157,953
1999 157,953
---------------
Total 315,906
Less: Amount Representing Unearned Interest Income (28,882)
---------------
Minimum Lease Payments Receivable $ 287,024
--------------------------------- ===============
These amounts are classified
in the balance sheet as follows:
Current Assets $ 129,072
Noncurrent Assets 157,952
---------------
Total $ 287,024
----- ===============
F-10
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[6] Long-Term Debt
Long-term debt consisted of the following:
June 30,
1 9 9 7 1 9 9 6
------- -------
Bank revolving credit, interest due monthly at the bank's prime rate plus 0.5%,
secured by all corporate assets as well as a negative pledge
on all assets. Converts to a 5 year term loan in December 1998. $ 2,529,553 $ 2,529,553
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 March 5, 1998. 453,671 1,093,672
Note payable, term loan incurred in connection with purchased equipment, payable
in equal monthly installments of $10,417 bearing interest at 9.5%,
matures in fiscal 1999. The acquired equipment is pledged as collateral. 218,750 343,750
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. 65,833 197,500
Industrial Revenue Bonds [Collegeville Inn Projects][See Bonds Payable]. 2,560,548 --
Industrial Revenue Bonds [Apple Fresh Foods Projects][See Bonds Payable]. 1,000,000 --
------------- -------------
Totals 6,828,355 4,164,475
Less: Current Maturities 744,504 896,667
------------- -------------
Totals $ 6,083,851 $ 3,267,808
------ ============= =============
In December 1996, the Company executed a loan agreement with a bank for a
revolving credit and two irrevocable letters of credit, totaling approximately
$7,500,000. The revolving credit is available for two years, at which time, it
converts to a term loan, and the letters of credit are available for four years,
with annual renewals. At June 30, 1997, the Company has approximately $1,500,000
available under the revolving credit. Advances under the revolving credit are
used for working capital purposes and the acquisition and renovation of the
Collegeville Inn.
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 current ratio, minimum net worth, minimum cash and cash
equivalents balance and other ratios. As of June 30, 1997, the Company was in
compliance with the covenant provisions of these agreements.
The bank's prime rate at June 30, 1997 was 8.25%. All borrowing is from a single
lender.
F-11
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[6] Long-Term Debt [Continued]
Maturities of principal due in the following years are set forth below:
Year ending
June 30,
1998 $ 744,504
1999 198,750
2000 110,000
2001 120,000
2002 125,000
Thereafter 5,530,101
---------------
Total $ 6,828,355
----- ===============
Bonds Payable - In December 1996, the Company, through its subsidiaries,
authorized two industrial revenue bond issues.
Issue #1
Title - Montgomery County Industrial Development Authority, $2,500,000 aggregate
principal amount, federally taxable variable rate demand/fixed rate revenue
bonds [Collegeville Inn Project] Series of 1996.
Rate - Variable, to a maximum of 17%
Term - 20 years [2016]
Purpose - Rehabilitate, furnish and equip the Collegeville Inn facility.
Issue #2
Title - Montgomery County Industrial Development Authority, $1,000,000 aggregate
principal amount, federally taxable variable rate demand/fixed rate revenue
bonds [Apple Fresh Foods Ltd. Project] Series of 1996.
Rate - Variable, to a maximum of 15%
Term - 20 years [2016]
Purpose - Develop a "cook/chill" food preparation technology at the Collegeville
Inn side for the Company.
Note: This issue is tax-exempt.
Each series of bonds is guaranteed by the parent company and the other
subsidiaries. The assets of Collegeville Inn and Apple Fresh Foods are pledged
as collateral for both series of bonds.
The Company's bank has issued irrevocable letters of credit in favor of the bond
trustee for the full amount of both bond issues. The letters of credit have a
term of four years and can be renewed on an annual basis by the bank. The bank
holds the mortgage on the Collegeville Inn building and property. The letters of
credit are guaranteed by the parent company.
F-12
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[6] Long-Term Debt [Continued]
The sinking fund requirements are as follows:
Collegeville Apple Fresh
Inn Foods Total
1998 $ 70,000 $ 30,000 $ 100,000
1999 $ 70,000 $ 35,000 $ 105,000
2000 $ 75,000 $ 35,000 $ 110,000
2001 $ 80,000 $ 40,000 $ 120,000
2002 $ 85,000 $ 40,000 $ 125,000
[7] Income Taxes
The components of income tax expense are:
J u n e 3 0,
--------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Current:
Federal $ 618,839 $ 267,900 $ 115,656
State 224,957 133,700 68,131
---------------- --------------- ----------------
Total Current 843,796 401,600 183,787
---------------- --------------- ----------------
Deferred:
Federal (266,000) (121,000) 44,590
State (67,000) (35,000) 18,025
---------------- --------------- ----------------
Total Deferred [Benefit] Expense (333,000) (156,000) 62,615
---------------- --------------- ----------------
Totals $ 510,796 $ 245,600 $ 246,402
------ ================ =============== ================
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 7 1 9 9 6
------- -------
Deferred Tax Assets:
Provision for Doubtful Accounts $ 265,000 $ 191,000
Excess of Tax Over Financial Statement
Basis of Investments in Contracts 228,000 108,000
Deferred Gains 47,000 62,000
Vacation Accrual 205,000 169,000
Other Compensation Accrual 80,000 28,183
Federal Capital Loss Carryforwards 51,680 51,680
Other 109,000 --
------------- --------------
Gross Deferred Tax Assets 985,680 609,863
Deferred Tax Asset Valuation Allowance (51,680) (51,680)
------------- --------------
Total Deferred Tax Assets - Forward $ 934,000 $ 558,183
F-13
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[7] Income Taxes [Continued]
June 30,
--------
1 9 9 7 1 9 9 6
------- -------
Total Deferred Tax Assets - Forwarded $ 934,000 $ 558,183
--------------- ----------------
Deferred Tax Liabilities:
Deferred Costs Capitalized for Financial Statement Purposes 17,000 5,000
Depreciation 85,000 54,000
--------------- ----------------
Total Deferred Tax Liabilities 102,000 59,000
--------------- ----------------
$ 832,000 $ 499,183
=============== ================
These amounts are classified in the balance sheet as follows:
Current Asset $ 599,000 $ 387,183
Non-Current Asset 233,000 112,000
--------------- ----------------
Totals $ 832,000 $ 499,183
------ =============== ================
The following reconciles the tax provision with the U.S. statutory tax rates:
J u n e 3 0,
--------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Income Taxes at U.S. Statutory Rates 34.0% 34.0% 34.0%
States Taxes, Net of Federal Tax Benefit 7.3 9.5 11.3
Other, Principally Nondeductible Expenses 0.6 1.4 2.8
-------- -------- --------
Totals 41.9% 44.9% 48.1%
------ ======== ======== ========
The Company has available federal capital loss carryforwards in the amount of
$152,000, which expire in the year 2000.
[8] Related Party
During 1992, the Company sold its building for a purchase price of $610,000, to
a related party [a corporation wholly-owned by the principal stockholder of the
Company]. At the time of the sale a lease was entered into for ten years,
whereby the Company will lease back the building from the purchaser. The sale
resulted in a gain of $263,717, which has been deferred and will be amortized
over the life of the lease. During each of the three years in the period ended
June 30, 1997, the Company recognized a gain of $26,372. As of June 30, 1997 and
1996, the balance of the unamortized gain on the sale was $131,882 and $158,246,
respectively.
The Company leases its corporate office building from the above-mentioned
related party [See Note 9]. During the years ended June 30, 1997, 1996 and 1995,
rent expense was $195,178, $178,651 and $169,347, respectively.
F-14
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[9] Commitments and Contingencies
Operating Leases - The Company leases real estate facilities from a corporation
owned by a principal stockholder under operating leases. In addition to the
minimum annual rentals, the lease requires additional rentals based upon
increases in the consumer price index. These leases range from one to five years
[See Note 8].
The Company is also obligated under various operating leases for operating
equipment for periods expiring through 1997. During the years ended June 30,
1997, 1996 and 1995, rent expense was $216,778, $228,211 and $203,873,
respectively.
Minimum annual rentals under non-cancelable operating leases subsequent to June
30, 1997 are as follows:
Year Ending Operating Real Estate
June 30, Equipment Facilities
1998 $ 34,322 $ 163,862
1999 9,178 163,862
2000 2,811 163,862
2001 2,811 163,862
2002 -- 163,862
Thereafter -- --
------------- -------------
Totals $ 49,122 $ 819,310
------ ============= =============
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 extends 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 five-years. 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 - 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.
[10] Stockholders' Equity
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.
F-15
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[10] Stockholders' Equity [Continued]
Class A Common Stock [Continued] - During the fiscal years ended June 30, 1997
and 1996, the Company repurchased 52,335 and 37,500 shares of common stock,
respectively, for an aggregate price of $89,718 and $54,688, respectively. The
repurchase price is recorded as a reduction of stockholders' equity.
During 1996, the Company sold from treasury 12,500 shares of Class A common
stock for $25,000.
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.
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.
[11] Stock Options and Employee Stock Purchase Plan
[A] 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:
Number of Options
Outstanding
Incentive Non-Qualified Weighted
Stock Stock Average
Underwriters Options Option Total Exercise Price
Outstanding at June 30, 1994 100,000 221,000 30,000 351,000 $ 4.85
Granted -- 225,000 30,000 255,000 $ 4.00
Forfeited/Exercised -- (122,000) -- (122,000) $ 4.00
------------ ------------ ----------- -----------
Outstanding at June 30, 1995 100,000 324,000 60,000 484,000 $ 4.62
Exercisable at June 30, 1995 100,000 -- -- 100,000 $ 7.00
Granted -- 7,000 -- 7,000 $ 4.00
Forfeited/Exercised -- (139,750) (15,000) (154,750) $ 4.00
------------ ------------ ----------- -----------
Outstanding at June 30, 1996 100,000 191,250 45,000 336,250 $ 4.89
Exercisable at June 30, 1996 100,000 184,250 45,000 329,250 $ 4.91
Granted -- 80,000 -- 80,000 $ 4.00
Forfeited/Exercised (100,000) -- -- (100,000) $ 7.00
------------ ------------ ----------- -----------
Outstanding at June 30, 1997 -- 271,250 45,000 316,250 $ 4.00
============
Exercisable at June 30, 1997 -- 185,650 45,000 230,650 $ 4.00
F-16
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[11] Stock Options and Employee Stock Purchase Plan [Continued]
[A] Stock Options [Continued] - All options were granted at exercise prices
above market price. The exercise price was $4.00 per share at June 30, 1997 for
both the incentive and non-qualified stock options.
The remaining contractual life of outstanding and exercisable options is
approximately six years and five years, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations for stock options issued
to employees in accounting for its stock option plan. No compensation expense
has been recognized for the Company's stock-based compensation plan because no
stock options were issued below the stock price at the date of grant.
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the fair value methodology prescribed under
Statement of Financial Accounting Standards ["SFAS"] No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and earnings per share would
have been reduced, on a pro forma basis, by approximately $71,314 or $.02 per
share for the year ended June 30, 1997, and $23,930 or $.01 per share for the
year ended June 30, 1996. The weighted average fair value of the stock options
granted to employees used in determining the pro forma amounts is estimated at
$.89 and $3.42 during the years ended June 30, 1997 and 1996, respectively,
using the Black-Sholes option-pricing model with the following weighted average
assumptions used for grants in fiscal year 1997 and 1996: dividend yields of 0%
and 0%, respectively; expected volatility of 84% and 84%, respectively;
risk-free interest rate of 6.7% and 5.8%, respectively; and an expected life of
5 years for both periods.
Net income [loss] and net income [loss] per share as reported, and on a pro
forma basis as if compensation cost had been determined on the basis of fair
value pursuant to SFAS No. 123 is as follows:
Years ended
June 30,
1 9 9 7 1 9 9 6
------- -------
Net Income:
As Reported $ 752,276 $ 301,954
Pro Forma $ 709,488 $ 278,024
Per Share:
As Reported $ .26 $ .10
Pro Forma $ .24 $ .09
The Company has been advised that a consultant believes that he and an entity
controlled by him were granted options in November 1995 to purchase an aggregate
112,500 shares of Common Stock of the Company at an exercise price of $2.125 per
share. The Company is not aware of any documentation supporting the grant of
these stock options and is currently in the process of determining whether in
fact such stock options were granted. If the Company determines that such stock
options were granted, the grant of such options would not have a financial
statement impact under APB 25 because the options would have been granted at a
price at least equal to or above the fair value of the underlying stock.
However, under the guidelines of FAS 123 the Company estimates that on a pro
forma basis the Company's net income would have been reduced by $92,000 or $.03
per share for the fiscal year ended June 30, 1996.
[B] 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. A summary of stock purchased under the plan is shown below:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Aggregate Purchase Price $ 30,871 $ 55,611 $ 22,815
Shares Purchased 21,388 37,126 12,238
Employee Participants 40 34 35
F-17
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[12] 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, 1997, 1996 and 1995,
company contributions to the plan, which were charged to expense, amounted to
$25,976, $25,398 and $20,085, respectively.
[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, 1997, 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. At June 30, 1997,
approximately $500,000 of cash exceeds insured amounts. The Company does not
require collateral and other security to support financial instruments subject
to credit risk.
[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, 1997, $154,782
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.
[15] Major Customers
The Company had sales to one customer representing approximately 13%, 12%, and
14% of total revenues for the years ending June 30, 1997, 1996 and 1995,
respectively. The loss of such customer could have a material adverse effect on
the Company's future results of operations.
F-18
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[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 Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," in February 1997.
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
F-19
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[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:
F i s c a l 1 9 9 7
---------------------------------------------
September 30, December 31, March 31, June 30,
Revenues $ 8,552,087 $ 8,428,595 $ 8,947,786 $ 9,365,494
============== ============== ============== ==============
Gross Profit $ 1,488,330 $ 1,681,297 $ 1,778,730 $ 1,833,683
============== ============== ============== ==============
Net Income $ 124,493 $ 174,425 $ 170,574 $ 282,784
============== ============== ============== ==============
Net Income Per Share $ .04 $ .06 $ .06 $ .10
============== ============== ============== ==============
F i s c a l 1 9 9 6
---------------------------------------------
September 30, December 31, March 31, June 30,
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
============== ============== ============== ==============
F i s c a l 1 9 9 5
---------------------------------------------
September 30, December 31, March 31, June 30,
[Restated]
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 $ --
============== ============== ============== ==============
[19] Subsequent Events [Unaudited]
In September of 1997, the Company opened the retail restaurant portion of the
Collegeville Inn Training and Conference Center. The remaining three divisions
of the project are anticipated to open in the third quarter of fiscal 1998.
. . . . . . . . . . . . . . .
F-20
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 F-1 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-22
of this Form 10-K.
In our opinion, the financial statement 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 10, 1997
F-21
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE II - 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
Provision for Bad Debts 180,000 -- --
Writeoffs (10,637) -- --
------------ ---------- ----------
Balance At June 30, 1997 $ 531,428 $ -- $ 57,509
============ ========== ==========
F-22