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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, 1998
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 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 21, 1998 was
approximately $3,521,887.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: At September 21,
1998, there was outstanding 2,859,569 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.
On May 31, 1994, the Company purchased twenty-two (22) acres of
land containing a 40,000 square foot building formerly used as a restaurant and
banquet facility. The Company has recently renovated the property to serve as a
comprehensive training facility for Company employees. In addition, the facility
will serve as a showroom for prospective customers who will be able to observe
the Company's programs for nursing and retirement home dining and hospital
cafeteria operations. In September 1997, the Company opened the retail
restaurant portion of the Collegeville Inn Conference & Training Center. In
connection therewith, the Company expended approximately $6,000,000 in
renovation work. The 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 second
quarter of fiscal 1999. 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
See Note N on page 23 of the Financial Statements.
Description of Services
The Company provides contract food service to continuing care
facilities, hospitals, and retirement communities. The Company provides complete
management and supervision of the dietary operations in its customers'
facilities through the use of on-site management staff, quality and cost-control
programs, and training and education of dietary staff. The Company's operational
1
districts are supported by Regional Managers, District Managers, registered
dietitians and quality assurance staff.
The Company seeks to provide food service at a lower cost than
self-managed facilities, while maintaining or improving existing service,
nutritional care standards and regulatory compliance.
Marketing and Sales
The Company's customers include continuing care facilities,
hospitals and retirement communities, which range in size from small individual
facilities to large multi-facility operations. Although many facilities perform
their own food service functions without relying upon outside management firms
such as the Company, the Company expects the market for its services to grow as
facilities increasingly seek to contain costs and are required to comply with
increased governmental regulations.
The Company's services are marketed at the corporate level by its
Chief Executive Officer, its President, and its Marketing Representatives. The
Company's services are marketed primarily through in-person solicitation of
facilities. The Company also utilizes direct mail and participates in industry
trade shows.
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, 1998 the Company provided services under various service agreements at
103 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:
1998 1997 1996
---- ---- ----
Agreements in effect at
beginning of fiscal year 102 92 95
New agreements during
the fiscal year 23 24 10
Contracts canceled during
the fiscal year 22 14 13
-- -- --
Agreements in effect at the
end of the fiscal year 103 102 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.
Major Customer
In fiscal 1998, 15% 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 1999.
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, 1998, the Company employed a total of approximately
657 employees. Approximately 268 of those employees serve in various executive,
management, administrative, quality assurance and sales capacities. The
remaining 389 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 was completed in 1997. The
Company renovated 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 1998 High Low
----------- ---- ---
First Quarter 1 11/16 1 11/16
Second Quarter 1 5/8 1 17/32
Third Quarter 1 3/4 1 3/4
Fourth Quarter 1 9/16 1 9/16
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
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 11, 1998, there were approximately fifty-six
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
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(as restated)
Revenue $36,156,074 $35,293,962 $35,138,432 $33,352,992 $31,464,440
Gross profit 6,629,399 6,782,040 6,801,924 6,337,036 5,711,775
Income from
Operations 39,120 1,020,689 418,991 553,050 1,160,541
Other income
(Expense) 79,608 242,383 128,563 (41,187) (306,521)
Income before
effect
of accounting
change 8,822 752,276 301,954 265,461 401,151
============================================================================
Net Income $ 8,822 $ 752,276 $ 301,954 $ 265,461 $ 656,838
============================================================================
Per share of common stock:
Income before effect of
accounting change $0.00 $0.26 $0.10 $0.09 $0.13
Net Income $0.00 $0.26 $0.10 $0.09 $0.22
============================================================================
Weighted average
common shares
outstanding 2,845,845 2,921,549 2,956,504 2,975,000 2,989,589
============================================================================
As of June, 30
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(as restated)
Working capital $ 213,754 $2,519,348 $3,921,140 $6,131,681 $ 6,518,916
Total Assets 19,210,840 20,381,557 16,962,352 16,366,159 15,556,388
Long-term debt 5,616,552 6,083,851 3,267,808 4,039,474 3,739,150
Shareholders'
equity 6,876,095 6,972,153 6,309,595 6,037,329 5,771,868
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Year Ended June 30, 1998 Compared to year Ended June 30, 1997
Revenues for the year ended June 30, 1998 ("fiscal 1998")
increased by 2.4% to $36,156,074 over revenues for the year ended June 30, 1997
("fiscal 1997"). The increase results from revenues generated by the
Collegeville Inn and Conference Center, 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 1998 was $29,526,675,
compared to $28,511,922 for similar expenses in fiscal 1997, an increase of
$1,014,753 or 3.6%. This increase in direct costs is due to cost of living
adjustments during the year and higher revenues described above.
Gross Profit for fiscal 1998 was 6,629,399, compared to
$6,782,040, a decrease of $152,641 or 2.3%. This decrease is due to revenues
increasing at a lesser percentage than direct expenses.
General and administrative expenses for fiscal 1998 were
$5,191,218 or 14.4% of revenue, compared to $4,929,812 or 14.0% of revenue for
fiscal 1997. These increases are due to additional administrative personnel
being employed during the current year to support field operations and the
Collegeville Inn and Conference Center.
Depreciation and amortization for fiscal 1998 was $869,422,
compared to $651,539 for fiscal 1997. The increase of $217,883 or 33.4%, was
largely attributable to the transfer of construction-in-progress to capital
assets related to the Collegeville Inn and Conference Center.
Provision for doubtful accounts for fiscal 1998 was $529,639
as compared to $180,000 for fiscal 1997. The increase of $349,639 or 194.2% was
attributable to the Company providing for additional past due accounts,
especially those facilities in bankruptcy and terminated status.
Income from operations for fiscal 1998 was $39,120 or .1% of
revenue compared to $1,020,689 or 2.9% of revenue for fiscal 1997, a decrease of
$981,569. This decrease in operating income is primarily the result of the
operating losses incurred by the Collegeville Inn Conference & Training Center.
Interest expense for fiscal 1998 was $391,861 or 1.1% of
revenue, compared to $95,157 or .3% of revenue for fiscal 1997. This increase is
primarily
7
due from the issuance of two bonds for the Collegeville Inn Conference &
Training Center in 1997.
For the foregoing reasons, net income before taxes for fiscal
1998 was $118,728 or .3% of revenue compared to $1,263,072 or 3.6% of revenue
for fiscal 1997, a decrease of $1,144,344, or 90.1% from fiscal 1997.
Net income for fiscal 1998 was $8,822 or $0.00 per share as
compared to $752,276 and $0.26 per share for fiscal 1997.
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.
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.
Provisions for doubtful 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.
8
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
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 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 1995.
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.
Liquidity and Capital Resources
At June 30, 1998, the Company had working capital of $213,754
as compared to $2,519,348 at June 30, 1997. This decrease in working capital is
primarily attributable to expenses relating to $6,000,000 of renovation work at
the Collegeville Inn Conference & Training Center. The Company's holdings in
cash, cash equivalents and marketable securities decreased by $2,136,296 during
fiscal 1998 to $131,517. The Company believes that its existing cash and cash
equivalents, investments, accounts receivable, and anticipated revenues will be
sufficient to meet its liquidity and cash requirements for the next twelve
months.
Operating Activities
Cash provided by operations for fiscal 1998 and 1997 was
$1,045,616 and $1,776,147 respectively. This is primarily attributable to the
decrease in accounts payable and accrued expenses and the decrease in
profitability due to the Collegeville Inn and Training Center's activities from
1997 to 1998.
9
Investing Activities
Investing activities consumed $2,272,540 in cash during fiscal
1998 compared to $5,109,103 provided by investing activities for fiscal 1997.
Investing activities for fiscal 1998 include capital expenditures in the amount
of $2,852,748, of which $2,146,453 related to the renovation work at the
Collegeville Inn Conference & Training Center. (See "Business - General
Description of Business" for more discussion on the Collegeville Inn project).
For fiscal 1997, investing activities included capital expenditure in the amount
of $4,002,864, of which $3,848,361 related to the renovation work at the
Collegeville Inn Conference & Training Center.
Financing Activities
During fiscal 1998, financing activities provided a decrease
of $909,372 in cash compared to an increase of $2,574,162 in cash from financing
activities in fiscal 1997. The fiscal 1998 and 1997 financing activities
primarily consisted of two bond issuances by the Montgomery County Industrial
Development Authority. The total amount raised was $3,500,000, of which
$2,600,000 has been 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 approximately $900,000 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, 1998. The Company intends to convert this debt to a five year term loan
in December 1998.
Capital Resources
The Company has certain credit facilities with its bank
including a line of credit and three term loans. As of June 30, 1998, the
Company had $1,470,447 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 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.
10
The Company has no other material commitments for capital
expenditures 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.
11
New Authoritative Pronouncements
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 disclosures of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data to be provided
pursuant to this Item 8 are included under Part IV, Item 14, of this Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Audit Committee of the Board of Directors of the
Registrant has dismissed Moore Stephens, P.C. ("Moore Stephens") as independent
accountants to the Registrant and appointed Grant Thornton LLP as the new
independent accountants to the Registrant. Moore Stephens' accountant's report
on the financial statements of the Registrant for the past two years and any
subsequent interim period through the date of dismissal did not contain an
adverse opinion or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope, or accounting principles. There were no other
reportable events or disagreements with Moore Stephens to report in response to
item 304(a) of Regulation S-K.
12
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" and is incorporated herein by
reference.
13
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Reports of Independent Certified Public Accountants F-3, 4
Consolidated Balance Sheets as of
June 30, 1998 and 1997 F-5
Consolidated Statements of Operations for
the Years Ended June 30, 1998, 1997 and 1996 F-6
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1998
1997 and 1996 F-7
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1998, 1997 and
1996 F-8
Notes to Consolidated Financial Statements F-9 to F-23
Schedule of Valuation Accounts F-25
(B) Reports on Form 8-K
None
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(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 andKathleen
Hill (Incorporated by reference to Exhibit 4.5 of the S-1).
10.1 Employment Agreement between the Company andJoseph 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-K filed September
27, 1994).
10.14 Loan Agreement between the Montgomery County Industrial
Development Authority and Collegeville Inn Conference &
Training Center, Inc. (a wholly-owned subsidiary of the
Company). (Incorporated by reference to exhibit 10.14, annual
report on Form 10-K Filed on September 27, 1997.)
15
10.15 Trust Indenture between Montgomery County Industrial
Development Authority and Dauphin Deposit Bank and Trust
Company, as Trustee. (Incorporated by reference to exhibit
10.15, annual report on Form 10-K filed September 27, 1997.)
10.16 Loan Agreement between Montgomery County Industrial
Development Authority and Apple Fresh Foods Limited (a wholly-
owned subsidiary of the Company). (Incorporated by reference
to exhibit 10.16, annual report on Form 10-K Filed on
September 27, 1997.)
10.17 Trust Indenture between the Montgomery County Development
Authority and Dauphin Deposit Bank and Trust Company, as
Trustee. (Incorporated by reference to exhibit 10.17, annual
report on Form 10-K Filed on September 27, 1997.)
10.18 Loan Agreement between the Company and Corestates Bank, N.A.
(Incorporated by reference to exhibit 10.18, annual report on
Form 10-K Filed on September 27, 1997.)
16
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Nutrition Management Services Company
(Registrant)
/s/ Joseph V. Roberts
----------------------------------
Joseph V. Roberts, Chief Executive Officer
and Director
Date: September 28, 1998
Pursuant to the requirements of the Securities and Exchange
Act of 1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities indicated as of September 28, 1998.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
- -------------------------- ------------------------------
Joseph V. Roberts, Chief Kathleen A. Hill, President and
Executive Officer and Director Director
/s/ Janet Paroo /s/ Samuel R. Shipley
- -------------------------- ------------------------------
Janet Paroo, Director Samuel R. Shipley, Director
/s/ Michael M. Gosman /s/ Michelle L. Roberts
- -------------------------- ------------------------------
Michael M. Gosman, Director Michelle L. Roberts
17
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
June 30, 1998 and 1997
TABLE OF CONTENTS
Page
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED BALANCE SHEETS 5
CONSOLIDATED STATEMENTS OF OPERATIONS 6
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
SUPPLEMENTAL INFORMATION
SCHEDULE OF VALUATION ACCOUNTS 25
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Nutrition Management Services Company
We have audited the accompanying consolidated balance sheets of
Nutrition Management Services Company and its subsidiaries as of June 30, 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended June 30, 1998. 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, 1998,
and the consolidated results of their operations and their cash flows for the
year ended June 30, 1998, in conformity with generally accepted accounting
principles.
We have also audited the schedule of valuation accounts for Nutrition
Management Services Company and its subsidiaries as of June 30, 1998. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Philadelphia, Pennsylvania
September 18, 1998
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 the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two 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
accounting 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 the consolidated results of their operations and their cash flows for each
of the two years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
We have also audiated the schedule of valuation accounts for Nutrition
Management Services Company and its subsidiaries as of June 30, 1997 and 1996.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ MOORE STEPHENS, P.C.
------------------------
MOORE STEPHENS, P.C.
Cranford, New Jersey
September 10, 1997
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1998 1997
---- ----
Current assets
Cash and cash equivalents $ 131,517 $ 2,267,813
Accounts receivable (net of allowance for doubtful accounts of $702,406 and
$531,428 in 1998 and 1997, respectively) 5,665,739 5,900,572
Unbilled revenue 201,950 244,107
Notes and leases receivable - 202,124
Deferred income taxes 469,797 599,000
Inventory and other 336,380 409,068
------------ ------------
Total current assets 6,805,383 9,622,684
----------- -----------
Property and equipment - net 9,959,691 1,203,429
----------- -----------
Construction in progress 427,084 6,939,702
------------ -----------
Other assets
Restricted cash 906,838 1,096,076
Long-term accounts receivable (net of allowance for doubtful
accounts of $-0- and $57,509 in 1998 and 1997, respectively) - 50,815
Investment in contracts (net of accumulated amortization of $1,630,859 and
$1,278,561 in 1998 and 1997, respectively) 90,630 427,928
Lease receivable - 157,952
Advances to officers 289,623 281,026
Deferred income taxes 453,209 233,000
Bond issue costs 268,260 281,826
Deferred costs and other assets 10,122 87,119
------------- -------------
Total other assets 2,018,682 2,615,742
----------- -----------
$19,210,840 $20,381,557
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 407,311 $ 744,504
Accounts payable 4,984,804 4,322,662
Accrued expenses 375,238 757,286
Accrued payroll 440,356 460,898
Accrued professional 226,288 392,012
Accrued income taxes 5,092 232,521
Other 152,540 193,453
----------- ------------
Total current liabilities 6,591,629 7,103,336
----------- -----------
Long-term liabilities
Long-term debt - net of current portion 5,616,552 6,083,851
Other 126,564 222,217
------------ ------------
Total long-term liabilities 5,743,116 6,306,068
------------ -----------
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 issued,
2,742,734 and 2,797,665 outstanding in
1998 and 1997, 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 3,600,032 3,591,210
----------- -----------
7,402,006 7,393,184
Less treasury stock - (common - Class A: 257,266 and 202,335, shares in
1998 and 1997, respectively) - at cost (525,911) (421,031)
------------ ------------
Total stockholders' equity 6,876,095 6,972,153
----------- -----------
$19,210,840 $ 20,381,557
========== ===========
The accompanying notes are an integral part of these statements.
5
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
1998 1997 1996
-------------- -------------- ---------
Food service revenue $36,156,074 $ 35,293,962 $35,138,432
Cost of operations
Payroll and related expenses 14,864,985 13,918,106 13,128,099
Other costs of operations 14,661,690 14,593,816 15,208,409
---------- ---------- ----------
Cost of operations 29,526,675 28,511,922 28,336,508
---------- ---------- ----------
Gross profit 6,629,399 6,782,040 6,801,924
----------- ----------- -----------
Expenses
General and administrative expenses 5,191,218 4,929,812 5,608,365
Depreciation and amortization 869,422 651,539 621,285
Provision for doubtful accounts 529,639 180,000 153,283
------------ ------------ ------------
Expenses 6,590,279 5,761,351 6,382,933
----------- ----------- -----------
Income from operations 39,120 1,020,689 418,991
---------- ---------- ----------
Other income (expenses)
Interest expense (391,861) (95,157) (234,280)
Interest income 194,727 309,158 292,819
Other 276,742 28,382 70,024
---------- ------------- -------------
Other income - net 79,608 242,383 128,563
---------- ------------ ------------
Income before income taxes 118,728 1,263,072 547,554
Income tax expense 109,906 510,796 245,600
---------- ------------- ------------
Net income $ 8,822 $ 752,276 $ 301,954
========== ============ ============
Net income per share - basic and diluted $ .00 $ 0.26 $ 0.10
========== =========== ============
Weighted average number of shares 2,845,845 2,921,549 2,956,504
========== =========== ==========
The accompanying notes are an integral part of these statements.
6
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30,
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,
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
Repurchase of
company stock (54,931) - - - - (54,931) (104,880) (104,880)
Net income - - - - 8,822 - - 8,822
--------- ---------- ---------- -------------- ----------- ---------- --------- ------------
Balance - June 30,
1998 2,742,734 $3,801,926 100,000 $ 48 $ 3,600,032 (257,266) $(525,911) $ 6,876,095
========= ========== ========== ============== ========== ========== ========= ============
The accompanying notes are an integral part of this statement.
7
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
1998 1997 1996
-------------- --------- ---------
Operating activities
Net income $ 8,822 $ 752,276 $ 301,954
Adjustments to reconcile net income to net cash provided by
(used for) operating activities
Depreciation and amortization 869,422 651,539 621,285
Amortization of bond costs 13,566 - -
Provision for bad debts 529,639 180,000 153,283
Amortization of deferred gain (26,372) (26,372) (26,372)
Provision for deferred taxes (254,967) (333,000) (156,000)
Amortization of lease receivable - (28,438) (44,460)
Gain on sale of fixed assets - - (43,472)
Changes in assets and liabilities
Accounts receivable (294,806) (217,467) (618,087)
Notes receivable 15,261 637,057 199,129
Unbilled revenue 42,157 29,025 64,544
Accounts payable 662,142 (719,363) 1,084,369
Accrued professional and expenses (547,772) 752,244 42,820
Accrued payroll (20,542) (10,908) 57,844
Accrued income taxes (63,468) 187,458 (34,863)
Other 112,534 (77,904) 27,026
----------- ------------- -----------
Net cash provided by operating activities 1,045,616 1,776,147 1,629,000
---------- ---------- ----------
Investing activities
Payment of mortgage receivable from related party - - 55,577
Proceeds from sale of marketable securities - - 2,970,099
Purchase of property and equipment (706,295) (154,503) (188,780)
Construction in progress expenditures (2,146,453) (3,848,361) (2,484,021)
Proceeds from sale of fixed assets - - 71,645
Transfers from (to) restricted cash 189,238 (949,249) -
Other 18,353 (296,079) 53,517
Payment of lease receivable 287,023 144,790 157,953
Advances to employees and officers 8,597 (18,611) (133,305)
Deferred costs 76,997 12,910 251,719
---------- ------------ ------------
Net cash (used in) provided by investing activities (2,272,540) (5,109,103) 754,404
---------- ----------- -----------
Financing activities
Proceeds from long-term borrowings - 3,560,547 125,000
Repayment of long-term borrowings (804,492) (896,667) (896,667)
Purchase of treasury stock (104,880) (89,718) (54,688)
Sale of treasury stock - - 25,000
---------- ----------- -----------
Net cash (used in) provided by financing activities (909,372) 2,574,162 (801,355)
---------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (2,136,296) (758,794) 1,582,049
Cash and cash equivalents - beginning of years 2,267,813 3,026,607 1,444,558
---------- ----------- -----------
Cash and cash equivalents - end of years $ 131,517 $ 2,267,813 $ 3,026,607
========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for
Interest (net of amounts capitalized) $ 391,860 $ 100,987 $ 234,280
Income taxes $ - $ 674,903 $ 250,000
Supplemental disclosure of non-cash investing and financing activities
During the year ended June 30, 1998 and 1997, the company exchanged accounts
receivable and property and equipment of approximately $-0- and $500,873,
respectively, for a note receivable.
The accompanying notes are an integral part of these statements.
8
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
NOTE A - ORGANIZATION AND BUSINESS
Nutrition Management Services Company (the Company) was organized on March
28, 1979, to provide professional management expertise and food services to
continuing care and health care facilities in the domestic United States.
The Company competes mainly with regional and national food service
management companies as well as self-managed departments. Apple Management
Services (Apple Management), a wholly-owned subsidiary, was organized on
November 25, 1991, to provide management service expertise. The Collegeville
Inn Conference and Training Center, Inc. (Collegeville Inn located in Lower
Providence Township, Pennsylvania), a wholly-owned subsidiary, was organized
on April 29, 1994. This facility opened in September 1997 and is used as a
showroom for prospective customers, comprehensive training facility, and
retail restaurants. Apple Fresh Foods, Ltd. (Apple Fresh Foods), was
organized on November 14, 1997, to develop a cook-chill food preparation
technology for use in the Company's food service business. Apple Fresh
Food's operation is located in the Collegeville Inn. Apple Management and
Apple Fresh Foods were not operational as of June 30, 1998.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
The preparation of financial statements in conformity with 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. The
Company's primary estimate is its allowance for doubtful accounts.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information, which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate, and
their major customers. The adoption of SFAS No. 131 will not have a material
effect on the presentation of the Company's financial position or results of
operations.
2. Cash and Cash Equivalents
Cash equivalents are comprised of certain highly liquid investments with a
maturity of three months or less when purchased.
3. Unbilled Revenue
Unbilled revenue represents amounts for services provided, but not billed as
of the balance sheet date.
(Continued)
9
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Inventory
Inventory, which consists primarily of food, is stated at the lower of cost
(first-in, first-out method) or market. Inventory of $226,002 and $304,579
has been included in inventory and other as of June 30, 1998 and 1997,
respectively.
5. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of
the related assets or the remaining lease term.
Certain long-term assets of the Company are reviewed at least annually as to
whether their carrying value has become impaired, pursuant to guidance
established in 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, 1998, management expects these assets to be
fully recoverable.
Construction in progress was stated at cost and represented costs incurred
in the construction of the Collegeville Inn's facilities. No depreciation
was provided on construction in progress, and costs incurred were
transferred to property and equipment in September 1997 and is being
depreciated accordingly. As of June 30, 1998, the balance remaining in the
construction in progress pertained solely to the construction of equipment
for Apple Fresh Foods.
6. 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. During the years ended June 30, 1998,
1997 and 1996, amortization expense was $352,298, $341,298 and $341,298,
respectively.
7. 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.
(Continued)
10
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Accounting for Stock-Based Compensation
Effective July 1, 1997, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees. Entities that continue to account for stock options using APB
Opinion 25 are required to make pro forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
in SFAS 123 had been applied. The Company's employee stock option plan is
accounted for under APB Opinion 25.
9. 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.
10. Earnings Per Share
During 1998, the Company adopted the provisions of SFAS No. 128, Earnings
Per Share, which eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average
common shares outstanding during the period. Diluted earnings per share
takes into account the potential dilution that could occur if securities or
other contracts to issue common stock were exercised and converted into
common stock.
Options to purchase 126,750, 316,250 and 336,250 shares of common stock at
$4.00 per share were outstanding during 1998, 1997 and 1996, respectively.
Also, 100,000 shares of underwriter options at $7.00 per share were
outstanding at June 30, 1996. They were not included in the computation of
diluted earnings per share because the option price is greater than the
average market price. For year ended June 30, 1996, disputed options of
112,500 shares were also excluded from the calculation of earnings per
share, (see note J).
11. Advertising Costs
It is the Company's policy to expense advertising costs in the period in
which they are incurred.
12. Reclassification
Certain 1997 and 1996 items have been reclassified to conform to the current
year presentation.
11
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE C - PROPERTY AND EQUIPMENT
The following details the composition of property and equipment.
Estimated
useful lives 1998 1997
------------ ------------- --------
Property and equipment
Land - $ 497,967 $ 497,967
Building 40 7,427,415 -
Machinery and equipment 2-8 2,357,354 1,481,032
Furnitures and fixtures 2-8 651,557 -
Other, principally autos and trucks 2-10 428,003 193,605
------------ ----------
11,362,296 2,172,604
Less accumulated depreciation 1,402,605 969,175
----------- ----------
$ 9,959,691 $ 1,203,429
=========== ==========
Depreciation expense amounted to $609,104, $310,241 and $299,978 for the
years ended June 30, 1998, 1997 and 1996, respectively.
The Company capitalized interest costs of $86,266, $366,492 and $164,702 for
the years ended 1998, 1997 and 1996, respectively, for qualifying
construction projects. Total interest costs incurred before recognition of
the capitalized amounts were $418,919, $461,649 and $398,982 for the years
ended June 30, 1998, 1997 and 1996, respectively.
NOTE D - RESTRICTED CASH
At June 30, 1998 and 1997, the Company had $906,838 and $1,096,076 of
restricted cash, respectively, of which $-0- and $154,782, respectively, is
held in escrow in connection with the acquisition of various service
facility contracts. 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.
12
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE E - LONG- TERM DEBT
Long-term debt consisted of the following:
1998 1997
-------------- ---------
Bankrevolving 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
Notepayable, 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
Notepayable, 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 93,750 218,750
Notepayable, 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
Industrial Revenue Bonds (Collegeville Inn Projects)
(see bonds payable) 2,430,560 2,560,548
Industrial Revenue Bonds (Apple Fresh Foods Projects)
(see bonds payable) 970,000 1,000,000
---------- ----------
6,023,863 6,828,355
Less current maturities 407,311 744,504
---------- -----------
$ 5,616,552 $ 6,083,851
========== ==========
(Continued)
13
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE E - LONG- TERM DEBT - Continued
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, 1998, 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.
The bank's prime rate at June 30, 1998, was 8.50%. All borrowing is from a
single lender.
Maturities of principal due in the following years are set forth below:
Year ending June 30,
1999 $ 407,311
2000 570,700
2001 621,400
2002 670,800
Thereafter 3,753,652
----------
$ 6,023,863
Bonds Payable - In December 1996, the Company, through its subsidiaries,
authorized two industrial revenue bond issues.
Issue #I
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.
(Continued)
14
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE E- LONG- TERM DEBT - Continued
Issue #2
Title - Montgomery County Industrial Development Authority, $1,000,000
aggregate principal amount, federally taxable variable rate demand/fixed
rate revenue bonds (Apple Fresh Foods Ltd. Project) Series of 1996.
Rate - Variable, to a maximum of 15%
Term - 20 years (2016)
Purpose - Develop a cook-chill food preparation technology.
Note: This issue is tax-exempt.
Each series of bonds is guaranteed by the parent company and the other
subsidiaries. The assets of Collegeville Inn and Apple Fresh Foods are
pledged as collateral for both series of bonds.
The Company's bank has issued irrevocable letters of credit in favor of the
bond trustee for the full amount of both bond issues. The letters of credit
have a term of four years and can be renewed on an annual basis by the bank.
The bank holds the mortgage on the Collegeville Inn building and property.
The letters of credit are guaranteed by the parent company.
The sinking fund requirements are as follows:
Collegeville Apple Fresh
Inn Foods Total
--- ----- -----
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
2003 90,000 40,000 130,000
15
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE F - INCOME TAXES
The components of income tax expense are:
1998 1997 1996
------------ ------------- ---------
Current
Federal $ 128,064 $ 618,839 $ 267,900
State 72,842 224,957 133,700
----------- ---------- ----------
200,906 843,796 401,600
---------- ---------- ----------
Deferred
Federal (69,000) (266,000) (121,000)
State (22,000) (67,000) (35,000)
----------- ----------- ------------
Total deferred (benefit) expense (91,000) (333,000) (156,000)
----------- ---------- ----------
$ 109,906 $ 510,796 $ 245,600
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
approximately:
1998 1997
------------ ---------
Deferred tax assets
Provision for doubtful accounts $ 316,000 $ 265,000
Excess of tax over financial statement
basis of investments in contracts 342,000 228,000
Deferred gains 47,000 47,000
Vacation accrual 198,000 205,000
Other compensation accrual 31,000 80,000
Federal capital loss carryforwards 40,980 51,680
Charitable cost` 22,000 -
Other 64,000 109,000
----------- ----------
Gross deferred tax assets 1,060,980 985,680
Deferred tax asset valuation allowance (40,980) (51,680)
----------- -----------
Total deferred tax assets 1,020,000 934,000
Deferred tax liabilities
Deferred costs capitalized for financial statement purposes $ 10,000 $ 17,000
Depreciation 87,000 85,000
----------- -----------
Total deferred tax liabilities 97,000 102,000
----------- ----------
Net deferred tax assets $ 923,000 $ 832,000
========== ==========
(Continued)
16
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE F - INCOME TAXES - Continued
These amounts are classified in the balance sheet as follows:
1998 1997
------------ ---------
Current asset $ 470,000 $ 599,000
Non-current asset 453,000 233,000
---------- ----------
$ 923,000 $ 832,000
========== ==========
The following reconciles the tax provision with the U.S. statutory tax
rates:
1998 1997 1996
------- ------- ---------
Income taxes at U.S. statutory rates 34.0% 34.0% 34.0%
States taxes, net of federal tax benefit 28.1 7.3 9.5
Nondeductible expenses 44.5 0.6 1.4
Decrease in valuation allowance (9.0) - -
Other (5.2) - -
------ ------- ------
92.4% 41.9% 44.9%
====== ====== ======
The Company has available federal capital loss carryforwards in the amount
of $120,526, which expire in the year 2000. The Company has charitable
contribution carryforwards in the amount of $47,000.
NOTE G - RELATED PARTY
During 1992, the Company sold its building for a purchase price of $610,000
to a related party (a corporation wholly-owned by the principal stockholder
of the Company). At the time of the sale a lease was entered into for ten
years, whereby the Company will lease back the building from the purchaser.
The sale resulted in a gain of $263,717, which has been deferred and will be
amortized over the life of the lease. During each of the three years in the
period ended June 30, 1998, the Company recognized a gain of $26,372. As of
June 30, 1998 and 1997, the balance of the unamortized gain on the sale was
$105,510 and $131,882, respectively.
The Company leases its corporate office building from the above-mentioned
related party. During the years ended June 30, 1998, 1997 and 1996, rent
expense was $229,705, $195,178 and $178,651, respectively.
17
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE H - COMMITMENTS AND CONTINGENCIES
1. 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 G).
The Company is also obligated under various operating leases for operating
equipment for periods expiring through 2000. During the years ended June 30,
1998, 1997 and 1996, rent expense was $259,546, $216,778 and $228,211,
respectively.
Minimum annual rentals under non-cancellable operating leases subsequent to
June 30, 1998, are as follows:
Operating Real estate
Year ending June 30, equipment Facilities
-------------------- --------- ----------
1998 $ 74,869 $ 199,862
1999 74,430 199,862
2000 16,238 199,862
2001 - 199,862
2002 - 199,862
Thereafter - -
----------- -------------
$ 165,537 $ 999,310
========== ==========
2. 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.
3. 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
consolidated financial position, results of operations or cash flows.
18
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE I - STOCKHOLDERS' EQUITY
1. Class A Common Stock
The Company is authorized to issue 10,000,000 shares of Class A Common
Stock, no par value, of which holders of Class A Common Stock have the right
to cast one vote for each share held of record in all matters submitted to a
vote of holders of Class A Common Stock. The Class A Common Stock and Class
B Common Stock vote together as a single class on all matters on which
shareholders may vote, except when class voting is required by applicable
law.
Holders of Class A Common Stock are entitled to dividends, together with the
holders of Class B Common Stock, pro rata based on the number of shares
held. In the event of the liquidation, dissolution or winding up of the
affairs of the Company, all assets and funds of the Company remaining after
the payment to creditors and to holders of Preferred Stock, if any, shall be
distributed, pro rata, among the holders of the Class A Common Stock and
Class B Common Stock.
During the fiscal years ended June 30, 1998 and 1997, the Company
repurchased 54,931 and 52,335 shares of common stock, respectively, for an
aggregate price of $104,880 and $89,718, respectively. The repurchase price
is recorded as a reduction of stockholders' equity.
During fiscal year 1996, the Company sold from treasury 12,500 shares of
Class A common stock for $25,000.
2. Class B Common Stock
The Company has authorized 100,000 shares of Class B Common Stock, all of
which were issued to the Chief Executive Officer and majority shareholder of
the Company, in exchange for 100,000 shares of Class A Common Stock. Each
share of Class B Common Stock is entitled to seven votes on all matters on
which shareholders may vote, including the election of directors. The Class
A Common Stock and Class B Common Stock vote together as a single class on
all matters on which shareholders may vote, except when class voting is
required by applicable law.
Each share of Class B Common Stock also is convertible at any time upon the
option of the holder into one share of Class A Common Stock. There are no
preemptive, redemption, conversion or cumulative voting rights applicable to
the Class B Common Stock.
3. Preferred Stock
The Company is authorized to issue 2,000,000 shares of Preferred Stock, no
par value, of which no shares have been issued. The Preferred Stock may be
issued by the Company's Board of Directors from time to time in one or more
series.
19
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
1. Stock Options
In September 1991, the Company adopted the 1991 Stock Option Plan for
officers, directors and key employees to receive incentive stock options.
The options are exercisable for a period up to 10 years from date of grant
at an exercise price not less than fair market value of the common stock at
date of grant. The Plan 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 Weighted
outstanding average
incentive Non-qualified exercise
Underwriters stock options stock options Total price
------------ ------------- ------------- ----- -----
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
Granted - 33,000 - 33,000 4.00
Forfeited/exercised - (207,500) (15,000) (222,500) 4.00
---------- --------------- --------------- ---------- -----
Outstanding at June 30, 1998 - 96,750 30,000 126,750 4.00
Exercisable at June 30, 1998 - 81,350 30,000 111,350 4.00
All options were granted at exercise prices above market price. The exercise
price was $4.00 per share for grants in 1998, 1997 and 1996, for the
incentive stock options.
The remaining contractual life of outstanding and exercisable options is
approximately six years and five years, respectively.
(Continued)
20
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued
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.
Net income (loss) and net income 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, are as follows:
1998 1997 1996
-------- --------- --------
Net Income
As reported $ 8,822 $ 752,276 $ 301,954
Pro forma (6,170) 709,488 278,024
Per Share- basic and diluted
As reported $ 0.00 $ 0.26 $ 0.10
Pro forma $ 0.00 0.24 0.09
These pro forma amounts, may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants before July 1, 1995.
The weighted average fair value of the stock options granted to employees
used in determining the pro forma amounts is estimated at $.96, $.89 ad
$3.42 during the years ended June 30, 1998, 1997 and 1996, using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the fiscal year 1998, 1997 and 1996: dividend yields of 0%,
expected volatility of 84%, expected useful life of 5 years for all three
years and risk-free interest rate of 5.6% 6.7% and 5.8%, respectively.
In November 1995, the Company was advised that a consultant believes that he
and an entity controlled by him were granted options 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. Under the
guidelines of the SFAS 123, the Company estimated that on a pro forma basis
the Company's net income would have been reduced by an additional $92,000 or
$0.03 per share for the fiscal year ended June 30, 1996, if these options
were granted.
(Continued)
21
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued
2. Employee Stock Purchase Plan
The Company has a stock purchase plan that allows participating employees to
purchase, through payroll deductions, shares of the Company's common stock
at 85 percent of the fair market value at specified dates. At June 30, 1997,
all employees were eligible to participate in the plan. A summary of stock
purchased under the plan is shown below.
1998 1997 1996
------------ ------------- ---------
Aggregate purchase price $ 21,093 $ 30,871 $ 55,611
Shares purchased 12,691 21,388 37,126
Employee participants 23 40 34
NOTE K - DEFINED CONTRIBUTION PENSION PLAN
The Company sponsors a 401 (k) plan for all employees who have attained the
age of twenty-one and have completed one year of service. Eligible employees
may contribute up to 15% of their annual compensation to the plan. The
Company can match 100% up to the first 6% of employee plan contributions.
Participants are vested 20% for each year of service beginning after year 3
and are fully vested after seven service years. During the years ended June
30, 1998, 1997 and 1996, company contributions to the plan, which were
charged to expense, amounted to $22,526, $25,976 and $25,398, respectively.
NOTE L - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, 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 payers, such as state
governments, medicare and medicaid. Generally, the Company does not require
collateral or other security to support customer receivables. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk of its customers, establishes an
allowance for uncollectible accounts and, as a consequence, believes that
its accounts receivable credit risk exposure beyond such allowances is
limited.
As of June 30, 1998, the Company has cash accounts with various financial
institutions having high credit standings and periodically has cash balances
subject to credit risk beyond insured amounts. As a consequence, it believes
that its exposure to credit risk loss is limited. The Company does not
require collateral and other security to support financial instruments
subject to credit risk.
NOTE M - MAJOR CUSTOMERS
The Company had sales to one customer representing approximately 15%, 13%
and 12% of total revenues for the years ending June 30, 1998, 1997 and 1996,
respectively. The loss of such customer could have a material adverse effect
on the Company's future results of operations.
22
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1998 and 1997
NOTE N - BUSINESS SEGMENTS
Information about the Company's operations in different businesses for the
year ended June 30, 1998 excluding intercompany transactions, is as follows:
Nutrition Management Collegeville
Services Company Inn Total
---------------- --- -----
Food service revenue $34,780,125 $ 1,375,949 $36,156,074
Net income (loss) 1,297,214 (1,288,392) 8,822
Total assets 7,964,135 11,246,705 19,210,840
Capital expenditures 83,229 2,769,519 2,852,748
Depreciation/amortization expense 587,158 282,264 869,422
Collegeville Inn was placed in service in September 1997; therefore,
previous revenues, net income, and total assets were entirely attributable
to Nutrition Management Services Company.
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following quarterly financial data is unaudited, but in the opinion of
management includes all necessary adjustments for a fair presentation of the
interim results.
Fiscal 1998
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
Revenues $ 9,128,381 $ 9,421,397 $ 8,850,579 $ 8,755,717
Gross profit 1,752,923 1,704,370 1,732,678 1,439,428
Net income (loss) 85,272 18,770 35,963 (131,183)
Net income (loss) per share - basic
and diluted $ 0.03 $ 0.01 $ 0.01 $ (0.05)
Fiscal 1997
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 - basic and diluted $ 0.04 $ 0.06 $ 0.06 $ 0.10
23
SUPPLEMENTAL INFORMATION
24
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
June 30, 1998 and 1997
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, 1995 $ 381,669 $ 121,448 $ 57,509
Provision for bad debts 153,283 - -
Write-offs (172,887) (121,448) -
---------- ---------- ------------
Balance at June 30, 1996 362,065 - 57,509
Provision for bad debts 180,000 - -
Write-offs (10,637) - -
---------- ---------- ------------
Balance at June 30, 1997 531,428 - 57,509
Provision for bad debts 529,639 - -
Write-offs (358,661) - (57,509)
---------- ---------- ------------
Balance at June 30, 1998 $ 702,406 $ - $ -
========== ========== ============
25