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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, 1999
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, 1999 was
approximately $ 521,356.
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,
1999, there was outstanding 2,747,000 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
13-15.
(Cover page 2 of 2 pages)
PART I
ITEM 1 - BUSINESS
General
Nutrition Management Services Company (the "Company" or the
"Registrant") provides food management services to continuing care facilities,
hospitals and retirement communities.
The Company was incorporated under the laws of the
Commonwealth of Pennsylvania on March 28, 1979, and focuses on the continuing
care and health-care segments of the food service market. Its customers include
continuing care facilities, hospitals, and retirement communities.
On May 31, 1994, the Company purchased twenty-two (22) acres
of land containing a 40,000 square foot building formerly used as a restaurant
and banquet facility. The Company has recently renovated the property to serve
as a comprehensive training facility for Company employees. In addition, the
facility will serve as a showroom for prospective customers who will be able to
observe the Company's programs for nursing and retirement home dining and
hospital cafeteria operations. In September 1997, the Company opened the retail
restaurant portion of the Collegeville Inn Conference & Training Center. In
connection therewith, the Company expended approximately $6,000,000 in
renovation work. The Company opened the banquet and training division during its
second quarter of fiscal year 1999. The remaining division of the project is
expected to open by the third quarter of fiscal 2000. 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 20 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
districts are supported by Regional Managers, District Managers, registered
dietitians and quality assurance staff.
1
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, 1999 the Company provided services under various service agreements at
110 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:
1999 1998 1997
---- ---- ----
Agreements in effect at
beginning of fiscal year 103 102 92
New agreements during
the fiscal year 17 23 24
Contracts canceled during
the fiscal year 10 22 14
--- --- ---
Agreements in effect at the
end of the fiscal year 110 103 102
--- --- ---
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 1999, 17% 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 2000.
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, 1999, the Company employed a total of
approximately 805 employees. Approximately 323 of those employees serve in
various executive, management, administrative, quality assurance and sales
capacities. The remaining 482 employees are primarily dietary workers. A small
percentage of the Company's dietary workers were covered by collective
bargaining agreements. The Company considers relationships with its employees to
be satisfactory.
Financial Information About Foreign and Domestic Operations and
Export Sales
Not applicable.
ITEM 2 - PROPERTIES
The Company leases its corporate offices, located at 725
Kimberton Road, Kimberton, PA 19442, which consists of approximately 8,500
square feet from a corporation controlled by a related party. The initial term
of the lease expires on June 30, 2002.
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
On June 23, 1999, The NASDAQ Stock market notified the Company that
it's shares of Class A common stock, traded under the symbol NMSCA, were
delisted from the NASDAQ Small Cap market. This action was taken as a result of
the Company's failure to meet the market value of public float requirement in
Marketplace Rule 4310(c)(07) and 4310(c)(4).
Upon delisting, the securities of the Company immediately became
eligible to trade on the OTC Bulletin Board. Prior to the notification the
Company's Class A Common Stock No Par Value, (the "Class A Common Stock") was
traded on the NASDAQ Small Cap Market ("NASDAQ"). Now that the Class A Common
Stock is delisted from Nasdaq, it is a penny stock. Securities and Exchange
Commission regulations generally define a penny stock to be an equity security
that is not listed on Nasdaq or a national securities exchange and that has a
market price of less than $5.00 per share, subject to certain exceptions. The
regulations of the Securities and Exchange Commission require broker-dealers to
deliver to a purchaser of the Company's Class A Common Stock a disclosure
schedule explaining the penny stock market and the risks associated with it.
Various sales practice requirements are also imposed on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors (generally institutions). In addition, broker-dealers must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account.
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 1999 High Low
-----------------------------------------------
First Quarter 1 9/32 1 3/16
Second Quarter 1 5/16 21/32
Third Quarter 7/8 13/16
Fourth Quarter 1 1/4 11/16
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
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 21, 1999, there were approximately fifty-two
holders of record of the Class A Common Stock. It is estimated that there are in
excess of 500 beneficial holders of record.
5
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.
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
-------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue $38,826,161 $36,156,074 $35,293,962 $35,138,432 $33,352,992
Gross profit 7,616,254 6,719,333 6,782,040 6,801,924 6,337,036
Income from
Operations 216,241 39,120 1,020,689 418,991 553,050
Other income
(Expense) (342,314) 79,608 242,383 128,563 (41,187)
Net Income(Loss) $ (163,227) $ 8,822 $ 752,276 $ 301,954 $ 265,461
============================================================================
Per share of common stock (basic and diluted):
Net Income $( 0.06) $ 0.00 $ 0.26 $ 0.10 $ 0.09
============================================================================
Weighted average
common shares
outstanding 2,859,959 2,845,845 2,921,549 2,956,504 2,975,000
===========================================================================
As of June, 30
--------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital $ 3,004,382 $ 262,102 $ 2,519,348 $ 3,921,140 $ 6,131,681
Total Assets 20,944,395 19,210,840 20,381,557 16,962,352 16,366,159
Long-term debt 7,185,000 5,616,552 6,083,851 3,267,808 4,039,474
Shareholders'
equity 6,739,216 6,924,443 6,972,153 6,309,595 6,037,329
============================================================================
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to year Ended June 30, 1998
Revenues ended for the June 30, 1999 ("Fiscal 1999") increased by 7.4%
to $38,826,161 compared to revenues of $36,156,074 for the year ended June 30,
1998 ("Fiscal 1998"). The increase results from revenues generated by the
Collegeville Inn Conference & Training Center, Inc., growth within existing
contracts, offset by contracts canceled during the period.
Direct cost of operations for fiscal 1999 was $31,209,907 compared to
$29,436,741 for similar expenses in fiscal 1998, an increase of $1,773,166 or
6.0%. This increase in direct costs is due to cost of living adjustments during
the year and higher revenues described above.
Gross Profit for fiscal 1999 was $7,616,254, compared to $6,719,333, an
increase of $896,921 or 13.4%. This increase is due to revenues increasing at a
greater percentage than direct expenses.
General and Administrative expenses for fiscal 1999 were $6,188,531 or
15.9% of revenue, compared to $5,191,218 or 14.4% of revenue for fiscal 1998.
The increases are due to additional costs incurred to support the field
operations and a full year of operations at the Collegeville Inn Training &
Conference Center.
Depreciation and amortization for fiscal 1999 was $831,482, compared to
$959,356 for fiscal 1998. The decrease of $127,874 or 13.3% was due to a
decrease in amortization expenses for purchased contracts, offset by a full year
of depreciation expense for the Collegeville Inn Conference & Training Center.
Provision for doubtful accounts for fiscal 1999 was $380,000 compared
to $529,639 for fiscal 1998. The decrease of $149,639 is attributable to the
Company's providing for past due accounts in prior years.
Income from operations for fiscal 1999 was $216,241 or .5% of revenue
compared to $39,120 or .1% of revenue for fiscal 1998, an increase of $177,121.
The increase in operating income is the result of efficiencies at the operating
levels.
Interest expense for fiscal year 1999 was $505,324 or 1.3% of revenue,
compared to $391,861 or 1.1% of revenue for fiscal 1998. This increase is due to
an increase in borrowings from the Company's line of credit, which were
necessary to cover slowdowns in collections from the Company's customers. These
temporary customer shortfalls were primarily caused by a slowdown in
reimbursement from government agencies to the customers.
7
For the reasons stated above, the net loss before income taxes for the
fiscal year 1999 was ($126,073) or (0.3)% of revenue compared to the net income
before income taxes $118,728 or .3% of revenue for fiscal 1998, a decrease of
$244,801 or 206.2% from fiscal 1998.
The Net Loss for fiscal 1999 was ($163,227) or $(0.06) per share as
compared to net income of $8,822 or $0.00 per share for fiscal 1998.
Year Ended June 30, 1998 Compared to year Ended June 30, 1997
Revenues for 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 $29,436,741, compared to
$28,511,922 for similar expenses in fiscal 1997, an increase of $924,819 or
3.2%. 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 $6,719,333, compared to $6,782,040, a
decrease of $62,707 or 0.9%. 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 $959,356, compared to
$651,539 for fiscal 1997. The increase of $307,817 or 47.2%, 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
8
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 due from the issuance of two bonds for the Collegeville Inn Conference
& Training Center in 1997.
For the reasons stated above, 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.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of
$3,004,382 as compared to $262,102 at June 30, 1998. This increase in working
capital is primarily attributable to the fact that investing activities provided
$490,481 in cash during fiscal 1999 compared to $2,272,540 consumed in cash in
fiscal 1998 and an increase in the Company's accounts. The Company's holdings in
cash, cash equivalents and marketable securities decreased by $88,235 to
$43,282. 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 used in operations for fiscal 1999 was $1,827,853,
compared to $997,268 provided by operations for fiscal 1998. This increase of
cash used is primarily attributable to an increase in accounts receivable of
$2,928,490 in fiscal 1999.
Investing Activities
Investing activities provided $490,481 in cash during 1999
compared to $2,272,540 consumed in cash in fiscal 1998. Investing activities for
fiscal 1999 include capital expenditures in the amount of $292,037. During
9
fiscal 1999, $906,838 in restricted cash related to reimbursement for equipment
purchased under the terms of an Industrial Development Bond was transferred to
the Company's operating accounts. For fiscal 1998, investing activities included
capital expenditures in the amount of $2,852,748, of which $2,146,453 related to
the completion of renovation work at the Collegeville Inn Conference & Training
Center.
Financing Activities
During fiscal 1999, financing activities provided $1,249,137
in cash , compared to a decrease in cash of $861,024 in fiscal 1998. Repayment
of long term debt consumed $199,310 in fiscal 1999 compared to $804,492 in
fiscal 1998. The Company also received from the term credit line, advances of
$1,470,447 in fiscal 1999.
Capital Resources
The Company has certain credit facilities with its bank
including a line of credit and two Industrial Revenue Bond issues. The Company
issued two series of Industrial Bonds totaling $3,560,548 in December 1996. The
Company is current with all its obligations to its Bank and on its bonds and has
met all financial covenants in its loan documents except those that were
specifically waived by the bank.
A substantial portion of the Company's revenue is dependent upon the
payment of its fees by customer health care facilities, which, in turn, are
dependent upon third-party payers such as state governments, Medicare and
Medicaid. Delays in payment by third party payers, particularly state and local
governments , may lead to delays in collection of accounts receivable.
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.
10
Year 2000 Compliance
The Company is aware of the issues related to the Year 2000 that are
associated with the programming code in existing computer systems. The "Year
2000 problem" may affect every other computer operation to varying degrees.
Systems that do not properly recognize the Year 2000 could generate erroneous
data or cause a system to fail. Management is in the process of working with
technical support staff and software vendors to affirm that the Company is
prepared for the Year 2000. Management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in
computer systems improvements to be Year 2000 compliant. However, significant
uncertainty exists concerning the potential costs and effects associated with
any Year 2000 compliance. Any Year 2000 compliance problem of either the Company
or its customers could materially adversely affect the Company's business,
operating results, financial condition and prospects.
NASDAQ Notification
On June 23, 1999, The NASDAQ Stock market notified the Company that
it's shares of Class A common stock, traded under the symbol NMSCA, were
delisted from the NASDAQ Small Cap market. This action was taken as a result of
the Company's failure to meet the market value of public float requirement in
Marketplace Rule 4310(c)(07) and 4310(c)(4).
Upon delisting, the securities of the Company immediately became
eligible to trade on the OTC Bulletin Board. See "Market for Registrant's Common
Equity and Related Stockholder Matters."
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
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
On July 9, 1998, 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 independent accountants to the Registrant. Moore Stephens' accountant's
report on the financial statements of the Registrant for the year ended June 30,
1997, 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.
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 1999 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 1999 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 1999 Annual Meeting of Shareholders under the caption
"Security Ownership" and "Election of Directors" and is incorporated herein by
reference.
12
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
This information will be contained in the Proxy Statements of
the Company for the 1999 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
Reports of Independent Certified Public
Accountants F-3
Consolidated Balance Sheets as of
June 30, 1999 and 1998 F-5
Consolidated Statements of Operations for
the Years Ended June 30, 1999, 1998 and
1997 F-6
Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1999
1998 and 1997 F-7
Consolidated Statements of Cash Flows for
the Years Ended June 30, 1999, 1998 and
1997 F-8
Notes to Consolidated Financial Statements F-9 to F-21
Schedule of Valuation Accounts F-23
(B) Reports on Form 8-K
None
13
(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-K filed September 27,
1994).
14
10.14 Loan Agreement between the Montgomery County Industrial
Development Authority and Collegeville Inn Conference &
Training Center, Inc. (a wholly-owned subsidiary of the
Company). (Incorporated by reference to exhibit 10.14, annual
report on Form 10-K Filed on September 27, 1997.)
10.15 Trust Indenture between Montgomery County Industrial
Development Authority and Dauphin Deposit Bank and Trust
Company, as Trustee. (Incorporated by reference to exhibit
10.15, annual report on Form 10-K filed September 27, 1997.)
10.16 Loan Agreement between Montgomery County Industrial
Development Authority and Apple Fresh Foods Limited (a wholly-
owned subsidiary of the Company). (Incorporated by reference
to exhibit 10.16, annual report on Form 10-K Filed on
September 27, 1997.)
10.17 Trust Indenture between the Montgomery County Development
Authority and Dauphin Deposit Bank and Trust Company, as
Trustee. (Incorporated by reference to exhibit 10.17, annual
report on Form 10-K Filed on September 27, 1997.)
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.)
27 Financial Data Schedule (Filed herewith)
15
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Nutrition Management Services Company
(Registrant)
/s/ Joseph V. Roberts
----------------------------------
Joseph V. Roberts, Chief Executive Officer
and Director
Date: September 28, 1999
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, 1999.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
- -------------------------- ----------------------------------
Joseph V. Roberts, Chief Kathleen A. Hill, President and
Executive Officer and Director Director
(Principal Financial Officer)
/s/ 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, Director
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NUTRITION MANAGEMENT SERVICES COMPANY
AND SUBSIDIARIES
June 30, 1999 and 1998
TABLE OF CONTENTS
Page
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED BALANCE SHEETS F-5
CONSOLIDATED STATEMENTS OF OPERATIONS F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
SUPPLEMENTAL INFORMATION
SCHEDULE OF VALUATION ACCOUNTS F-23
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, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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, 1999
and 1998, and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
We have also audited the schedule of valuation accounts for Nutrition
Management Services Corporation and its subsidiaries as of June 30, 1999. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 22, 1999
F-3
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Nutrition Management Services Company
We have audited the accompanying consolidated statements of
operations, stockholders' equity, and cash flows of Nutrition Management
Services Company and its subsidiaries for the year ended June 30, 1997. Our
audit also included the financial statement schedule of valuation accounts for
the year ended June 30, 1997. These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated results of
operations of Nutrition Management Services Company and its subsidiaries and
their cash flows for the year ended June 30, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
September 10, 1997
F-4
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS
1999 1998
---- ----
Current assets
Cash and cash equivalents $ 43,282 $ 131,517
Accounts receivable (net of allowance for doubtful accounts of $637,900 and
$702,406 in 1999 and 1998, respectively) 8,214,229 5,665,739
Unbilled revenue 435,663 201,950
Deferred income taxes 492,666 469,797
Inventory and other 785,943 336,380
------------ ------------
Total current assets 9,971,783 6,805,383
------------ ------------
Property and equipment - net 9,912,797 9,959,691
------------ ------------
Construction in progress 12,810 427,084
------------ ------------
Other assets
Restricted cash -- 906,838
Investment in contracts (net of accumulated amortization of $1,709,136 and
$1,630,859 in 1999 and 1998, respectively) 12,353 90,630
Advances to officers 346,871 289,623
Deferred income taxes 404,315 453,209
Bond issue costs 253,694 268,260
Deferred costs and other assets 29,772 10,122
------------ ------------
Total other assets 1,047,005 2,018,682
------------ ------------
$ 20,944,395 $ 19,210,840
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 110,000 $ 407,311
Accounts payable 5,476,019 4,984,804
Accrued expenses 414,205 375,238
Accrued payroll 458,370 392,008
Accrued professional 155,937 226,288
Accrued income taxes 13,992 5,092
Other 338,878 152,540
------------ ------------
Total current liabilities 6,967,401 6,543,281
------------ ------------
Long-term liabilities
Long-term debt - net of current portion 7,185,000 5,616,552
Other 52,778 126,564
------------ ------------
Total long-term liabilities 7,237,778 5,743,116
------------ ------------
Stockholders' equity
Undesignated preferred stock - no par, 2,000,000 shares authorized,
none outstanding -- --
Common stock
Class A - no par, 10,000,000 shares authorized; 3,000,000 issued,
2,747,000 and 2,770,000 outstanding in
1999 and 1998, 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 3,436,805 3,600,032
------------ ------------
7,238,779 7,402,006
Less treasury stock - (common - Class A: 253,000 and 230,000, shares in
1999 and 1998, respectively) - at cost (499,563) (477,563)
------------ ------------
Total stockholders' equity 6,739,216 6,924,443
------------ ------------
$ 20,944,395 $ 19,210,840
============ ============
The accompanying notes are an integral part of these statements.
F-5
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,
1999 1998 1997
---- ---- ----
Food service revenue $38,826,161 $36,156,074 $35,293,962
Cost of operations
Payroll and related expenses 15,490,739 14,864,985 13,918,106
Other costs of operations 15,719,168 14,571,756 14,593,816
---------- ---------- ----------
Cost of operations 31,209,907 29,436,741 28,511,922
---------- ---------- ----------
Gross profit 7,616,254 6,719,333 6,782,040
----------- ----------- -----------
Expenses
General and administrative expenses 6,188,531 5,191,218 4,929,812
Depreciation and amortization 831,482 959,356 651,539
Provision for doubtful accounts 380,000 529,639 180,000
------------ ------------ ------------
Expenses 7,400,013 6,680,213 5,761,351
----------- ----------- -----------
Income from operations 216,241 39,120 1,020,689
------------ ------------- -----------
Other income (expenses)
Interest expense (505,324) (391,861) (95,157)
Interest income 92,939 194,727 309,158
Other 70,071 276,742 28,382
------------- ------------ -------------
Other income (expense) - net (342,314) 79,608 242,383
----------- ------------- ------------
(Loss) income before income taxes (126,073) 118,728 1,263,072
Income tax expense 37,154 109,906 510,796
------------- ------------ -------------
Net (loss) income $ (163,227) $ 8,822 $ 752,276
============ ============== ============
Net income per share - basic and diluted $ (0.06) $ 0.00 $ 0.26
============ ============= ============
Weighted average number of shares 2,859,959 2,845,845 2,921,549
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-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 - July 1,
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 (27,665) - - - - (27,665) (56,532) (56,532)
Net income - - - - 8,822 - - 8,822
------------------------------------------------------------------------------------------------------
Balance - June 30,
1998 2,770,000 3,801,926 100,000 48 3,600,032 (230,000) (477,563) 6,924,443
Repurchase of
company stock (23,000) - - - - (23,000) (22,000) (22,000)
Net loss - - - - (163,227) - - (163,227)
------------------------------------------------------------------------------------------------------
Balance - June 30,
1999 2,747,000 $ 3,801,926 100,000 $ 48 $ 3,436,805 (253,000) $ (499,563) $6,739,216
========== ========== ========== ======== =========== ======== ========== ==========
The accompanying notes are an integral part of this statement.
F-7
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
1999 1998 1997
---- ---- ----
Operating activities
Net (loss) income $ (163,227) $ 8,822 $ 752,276
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization 831,482 959,356 651,539
Amortization of bond costs 14,566 13,566 --
Provision for bad debts 380,000 529,639 180,000
Amortization of deferred gain (26,364) (26,372) (26,372)
Provision for deferred taxes 26,025 (254,967) (333,000)
Amortization of lease receivable -- -- (28,438)
Changes in assets and liabilities
Accounts receivable (2,928,490) (294,806) (217,467)
Notes receivable -- 15,261 637,057
Unbilled revenue (233,713) 42,157 29,025
Accounts payable 491,215 662,142 (719,363)
Accrued professional and expenses (70,351) (547,772) 752,244
Accrued payroll 66,362 (68,890) (10,908)
Accrued income taxes 8,900 (63,468) 187,458
Other (224,258) 22,600 (77,904)
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,827,853) 997,268 1,776,147
----------- ----------- -----------
Investing activities
Purchase of property and equipment (292,037) (706,295) (154,503)
Construction in progress expenditures -- (2,146,453) (3,848,361)
Transfers from (to) restricted cash 906,838 189,238 (949,249)
Other (47,422) 18,353 (296,079)
Payment of lease receivable -- 287,023 144,790
Advances to employees and officers (57,248) 8,597 (18,611)
Deferred costs (19,650) 76,997 12,910
----------- ----------- -----------
Net cash provided by (used in) investing activities 490,481 (2,272,540) (5,109,103)
----------- ----------- -----------
Financing activities
Proceeds from long-term borrowings 1,470,447 -- 3,560,547
Repayment of long-term borrowings (199,310) (804,492) (896,667)
Purchase of treasury stock (22,000) (56,532) (89,718)
----------- ----------- -----------
Net cash (used in) provided by financing activities 1,249,137 (861,024) 2,574,162
----------- ----------- -----------
Net decrease in cash and cash equivalents (88,235) (2,136,296) (758,794)
Cash and cash equivalents - beginning of years 131,517 2,267,813 3,026,607
----------- ----------- -----------
Cash and cash equivalents - end of years $ 43,282 $ 131,517 $ 2,267,813
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for
Interest (net of amounts capitalized) $ 480,614 $ 391,860 $ 100,987
Income taxes $ 240,813 $ -- $ 674,903
The accompanying notes are an integral part of these statements.
F-8
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
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, 1999.
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.
4. Inventory
---------
Inventory, which consists primarily of food, is stated at the lower of cost
(first-in, first-out method) or market. Inventory of $459,727 and $226,002
has been included in inventory and other as of June 30, 1999 and 1998,
respectively.
(Continued)
F-9
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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, 1999, 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.
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, 1999,
1998 and 1997, amortization expense was $78,278 $352,298 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.
8. Accounting for Stock-Based Compensation
---------------------------------------
The Company accounts for its stock options under the provisions of 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.
(Continued)
F-10
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 127,000, 156,750 and 316,250 shares of common stock at
$4.00 per share were outstanding during 1999, 1998 and 1997, respectively.
They were not included in the computation of diluted earnings per share
because the option price is greater than the average market price.
11. Advertising Costs
-----------------
It is the Company's policy to expense advertising costs in the period in
which they are incurred.
12. Reclassification
----------------
Certain 1998 and 1997 items have been reclassified to conform to the current
year presentation.
NOTE C - PROPERTY AND EQUIPMENT
The following details the composition of property and equipment.
Estimated
useful lives 1999 1998
------------ ---- ----
Property and equipment
Land - $ 497,967 $ 497,967
Building 40 7,465,377 7,427,415
Machinery and equipment 2-8 2,916,560 2,357,354
Furnitures and fixtures 2-8 693,247 651,557
Other, principally autos and trucks 2-10 532,284 428,003
------------ ------------
12,105,435 11,362,296
Less accumulated depreciation 2,192,638 1,402,605
----------- -----------
$ 9,912,797 $ 9,959,691
=========== ===========
Depreciation expense amounted to $753,204, $699,038 and $310,241 for the
years ended June 30, 1999, 1998 and 1997, respectively.
The Company capitalized interest costs of $-0-, $86,266 and $366,492 for the
years ended 1999, 1998 and 1997, respectively, for qualifying construction
projects. Total interest costs incurred before recognition of the
capitalized amounts were $505,324, $478,127 and $461,649 for the years ended
June 30, 1999, 1998 and 1997, respectively.
F-11
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE D - RESTRICTED CASH
At June 30, 1999 and 1998, the Company had $-0- and $906,838 of restricted
cash, respectively. This balance was 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.
NOTE E - LONG- TERM DEBT
Long-term debt consisted of the following:
1999 1998
---- ----
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; matures on July 1, 2000 $ 4,000,000 $ 2,529,553
Note payable, term loan incurred in connection with purchased equipment,
payable in equal monthly installments of $10,417 bearing interest at
9.5%, matured in fiscal 1999; the acquired equipment was
pledged as collateral - 93,750
Industrial Revenue Bonds (Collegeville Inn Projects)
(see bonds payable) 2,360,000 2,430,560
Industrial Revenue Bonds (Apple Fresh Foods Projects)
(see bonds payable) 935,000 970,000
----------- ----------
7,295,000 6,023,863
Less current maturities 110,000 407,311
----------- ----------
$ 7,185,000 $ 5,616,552
========== ==========
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 through December
2000 and the letters of credit are available for four years with annual
renewals. At June 30, 1999, the Company used $4,000,000. 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.
Collegeville Inn and Apple Fresh Foods were not in compliance with the debt
service coverage ratio as of June 30, 1999. Subsequently, the Bank has
provided a waiver of compliance for this covenant extending through July 1,
2000.
(Continued)
F-12
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE E - LONG- TERM DEBT - Continued
The bank's prime rate at June 30, 1999, was 7.25%. All borrowing is from a
single lender.
Maturities of principal due in the following years are set forth below:
Year ending June 30,
--------------------
2000 $ 110,000
2001 4,120,000
2002 125,000
2003 130,000
2004 135,000
Thereafter 2,675,000
------------
$ 7,295,000
============
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.
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.
(Continued)
F-13
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE E- LONG- TERM DEBT - Continued
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
------------ ----------- -----
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
2004 95,000 40,000 135,000
NOTE F - INCOME TAXES
The components of income tax expense are:
1999 1998 1997
---- ---- ----
Current
Federal $ (51,732) $ 128,064 $ 618,839
State 62,886 72,842 224,957
----------- ----------- ----------
11,154 200,906 843,796
----------- ---------- ----------
Deferred
Federal 13,000 (69,000) (266,000)
State 13,000 (22,000) (67,000)
----------- ----------- -----------
Total deferred (benefit) expense 26,000 (91,000) (333,000)
----------- ----------- ----------
$ 37,154 $ 109,906 $ 510,796
=========== ========== ===========
F-14
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE F - INCOME TAXES - Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
approximately:
1999 1998
---- ----
Deferred tax assets
Provision for doubtful accounts $ 287,000 $ 316,000
Excess of tax over financial statement
basis of investments in contracts 342,000 342,000
Deferred gains 35,000 47,000
Vacation accrual 182,000 198,000
Other compensation accrual 24,000 31,000
Federal capital loss carryforwards 28,000 40,980
Charitable contribution carryforward 39,000 22,000
Federal net operating loss 53,000 --
Other 92,000 64,000
----------- -----------
Gross deferred tax assets 1,082,000 1,060,980
Deferred tax asset valuation allowance (28,000) (40,980)
----------- -----------
Total deferred tax assets 1,054,000 1,020,000
Deferred tax liabilities
Deferred costs capitalized for financial statement purposes 1,000 $ 10,000
Depreciation 156,000 87,000
----------- -----------
Total deferred tax liabilities 157,000 97,000
----------- -----------
Net deferred tax assets $ 897,000 $ 923,000
=========== ===========
These amounts are classified in the balance sheet as follows:
1999 1998
Current asset $493,000 $470,000
Non-current asset 404,000 453,000
-------- --------
$897,000 $923,000
======== ========
The following reconciles the tax provision with the U.S. statutory tax
rates:
1999 1998 1997
---- ---- ----
Income taxes at U.S. statutory rates 34.0% 34.0% 34.0%
States taxes, net of federal tax benefit (32.9) 28.1 7.3
Nondeductible expenses (45.4) 44.5 0.6
Decrease in valuation allowance 32.5 (9.0) --
Other (17.7) (5.2) --
------ ------ ------
(29.5)% 92.4% 41.9%
====== ====== ======
The Company has available federal capital loss carryforwards in the amount
of $82,652, which expire in the year 2000. The Company has charitable
contribution carryforwards in the amount of $86,000, which begin to expire
in the year 2004. The Company has available federal net operating
carryforwards of $155,712, which may be carry backed or forward, and will
expire in 2019.
F-15
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
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, 1999, the Company recognized a gain of $26,364. As of
June 30, 1999 and 1998, the balance of the unamortized gain on the sale was
$79,154 and $105,510, respectively.
The Company leases its corporate office building from the above-mentioned
related party. During the years ended June 30, 1999, 1998 and 1997, rent
expense was $228,862, $229,705 and $195,178, respectively.
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,
1999, 1998 and 1997, rent expense was $300,300, $259,546 and $216,778,
respectively.
Minimum annual rentals under non-cancellable operating leases subsequent to
June 30, 1999, are as follows:
Operating Real estate
Year ending June 30, equipment Facilities
-------------------- --------- ----------
2000 $ 16,238 $ 199,862
2001 - 199,862
2002 - 199,862
------------ ----------
$ 16,238 $ 599,586
=========== ==========
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.
F-16
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
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, 1999 and 1998, the Company
repurchased 23,000 and 27,665 shares of common stock, respectively, for an
aggregate price of $22,000 and $56,532, respectively. The repurchase price
is recorded as a reduction of stockholders' equity.
2. Class B Common Stock
--------------------
The Company has authorized 100,000 shares of Class B Common Stock, all of
which were issued to the Chief Executive Officer and majority shareholder of
the Company, in exchange for 100,000 shares of Class A Common Stock. Each
share of Class B Common Stock is entitled to seven votes on all matters on
which shareholders may vote, including the election of directors. The Class
A Common Stock and Class B Common Stock vote together as a single class on
all matters on which shareholders may vote, except when class voting is
required by applicable law.
Each share of Class B Common Stock also is convertible at any time upon the
option of the holder into one share of Class A Common Stock. There are no
preemptive, redemption, conversion or cumulative voting rights applicable to
the Class B Common Stock.
3. Preferred Stock
---------------
The Company is authorized to issue 2,000,000 shares of Preferred Stock, no
par value, of which no shares have been issued. The Preferred Stock may be
issued by the Company's Board of Directors from time to time in one or more
series.
F-17
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
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, 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 30,000 63,000 4.00
Forfeited/exercised - (207,500) (15,000) (222,500) 4.00
--------------- ---------- ----------- ----------
Outstanding at June 30, 1998 - 96,750 60,000 156,750 4.00
Exercisable at June 30, 1998 - 81,350 60,000 141,350 4.00
Granted - - - - -
Forfeited/exercised - (29,750) - (29,750) 4.00
--------------- ----------- --------------- -----------
Outstanding at June 30, 1999 - 67,000 60,000 127,000 4.00
Exercisable at June 30, 1999 - 55,800 60,000 115,800 4.00
All options were granted at exercise prices above market price. The exercise
price was $4.00 per share for grants in 1998 and 1997, for the incentive
stock options.
The remaining contractual life of outstanding and exercisable options is
approximately six years and five years, respectively.
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.
(Continued)
F-18
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued
Net (loss) income and net (loss) 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:
1999 1998 1997
---- ---- ----
Net (loss) income
As reported $ (163,227) $ 8,822 $ 752,276
Pro forma (163,227) (6,170) 709,488
Per Share- basic and diluted
As reported $ (0.06) $ 0.00 $ 0.26
Pro forma $ (0.06) $ 0.00 0.24
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 $-0-, $.96 and
$.89 during the years ended June 30, 1999, 1998 and 1997, using the
Black-Scholes option-pricing model with the following assumptions used for
grants in the fiscal year 1999, 1998 and 1997: dividend yields of 0%,
expected volatility of 84%, expected useful life of 5 years for all three
years and risk-free interest rate of $-0-%, 5.6% and 6.7%, respectively.
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, 1999,
all employees were eligible to participate in the plan. A summary of stock
purchased under the plan is shown below.
1999 1998 1997
---- ---- ----
Aggregate purchase price $ - $ 21,093 $ 30,871
Shares purchased - 12,691 21,388
Employee participants 23 23 40
The Employee Stock Purchase Plan currently holds 19,517 shares of stock in
excess of the amounts required by participating employees.
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, 1999, 1998 and 1997, company contributions to the plan, which were
charged to expense, amounted to $10,092, $22,526 and $25,976, respectively.
F-19
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE L - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and accounts receivable. A substantial portion of the Company's
revenues are dependent upon the payment by customers who are dependent upon
third-party payers, such as state governments, medicare and medicaid.
Generally, the Company does not require collateral or other security to
support customer receivables. The Company routinely assesses the financial
strength of its customers and, based upon factors surrounding the credit
risk of its customers, establishes an allowance for uncollectible accounts
and, as a consequence, believes that its accounts receivable credit risk
exposure beyond such allowances is limited.
As of June 30, 1999, 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 17%, 15%
and 13% of total revenues for the years ending June 30, 1999, 1998 and 1997,
respectively. The loss of such customer could have a material adverse effect
on the Company's future results of operations.
NOTE N - BUSINESS SEGMENTS
In 1999, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 supercedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach. The management
approach focuses on internal financial information that is used by
management to assess performance and to make operating decisions. SFAS No.
131 also requires disclosures about products, services, geographic areas,
and major customers. The adoption of SFAS No. 131 had no effect on the
Company's results of operations or financial position.
The financial information of the Company's reportable segments have been
compiled utilizing the accounting policies described in Note A Organization
and Business. The Company's reportable segments are (1) food service
management and (2) retail restaurants and banquet facilities. The Company
reports segment performance on an after tax basis. Deferred taxes are not
allocated to segments. The management accounting policies and processes
utilized in compiling segment financial information are highly subjective
and, unlike financial accounting, are not based on authoritative guidance
similar to generally accepted accounting principles. As a result, reported
segment results are not necessarily comparable with similar information
reported by other similar companies.
As of and for the year ended June 30, 1999:
Food Service Retail Restaurants
Management and Banquet Facilities Total
---------- ---------------------- -----
Food service revenue $37,439,489 $ 1,386,672 $38,826,161
Depreciation and amortization 298,946 532,536 831,482
Income from operations 1,840,664 (1,624,423) 216,241
Interest income 59,762 33,177 92,939
Interest expense (261,459) (243,865) (505,324)
Income (loss) before taxes (benefit) 178,971 (305,044) (126,073)
Net income (loss) 141,817 (305,044) (163,227)
Total assets 9,953,391 10,991,004 20,944,395
Capital expenditures 92,472 199,565 292,037
(Continued)
F-20
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 1999 and 1998
NOTE N - BUSINESS SEGMENTS - Continued
As of and for the year ended June 30, 1998:
Food Service Retail Restaurants
Management and Banquet Facilities Total
------------ ---------------------- -----
Food service revenue $37,439,489 $ 1,386,672 $38,826,161
Depreciation and amortization 299,356 532,536 831,892
Income from operations 1,485,887 (1,446,767) 39,120
Interest income 146,822 47,905 194,727
Interest expense (215,023) (176,838) (391,861)
Income (loss) before taxes 1,555,901 (1,437,193) 118,728
Net income (loss) 1,495,106 (1,803,201) (308,095)
Total assets 7,964,135 11,246,705 19,210,840
Capital expenditures 83,229 2,769,519 959,356
Total assets 9,678,223 9,953,391 19,631,614
The retail restaurants and banquet facilities were placed in service in
September, 1997 and December, 1998, respectively, therefore all information
included in the financial statements for the year ended June 30, 1997 was
attributable to the food service management segment.
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 1999
------------------------------------------------------------------
September 30, December 31, March 31, June 30,
------------- ------------ --------- --------
Revenues $ 9,115,066 $ 9,996,543 $ 9,711,904 $10,002,648
Gross profit 1,541,776 1,850,324 1,675,307 2,452,824
Net income (loss) (149,783) 69,927 8,542 (91,913)
Net income (loss) per share - basic
and diluted $ (0.05) $ 0.03 $ 0.00 $ (0.03)
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 (loss) income 85,272 18,770 35,963 (131,183)
Net (loss) income per share - basic
and diluted $ 0.03 $ 0.01 $ 0.01 $ (0.05)
F-21
SUPPLEMENTAL INFORMATION
F-22
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
June 30, 1999 and 1998
The following sets forth the activity in the Company's valuation accounts:
Long-term
Accounts accounts
receivable receivable
---------- ----------
Balance at July 1, 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 -
Provision for bad debts 380,000 -
Write-offs (444,506) -
---------- -----------
Balance at June 30, 1999 $ 637,900 $ -
========== ===========
F-23