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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 27, 2004
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-1744
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Ambassador Food Services Corporation
- ------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 44-0656199
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5-30 54th Avenue Long Island City, New York 11101
- -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 718-361-2512
---------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Common Stock (Par Value $1)
---------------------------
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the
Exchange Act during the past 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
------ -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year are $5,336,442
At May 27, 2004, there were 734,636 shares of the Registrant's common stock
outstanding. Based on the average of the highest bid and lowest asked prices
reported on the national over-the-counter market (NASDAQ Symbol AMBF), the
aggregate market value of the shares held by non-affiliates of the Registrant
was $198,351.
Transitional Small Business Disclosure Format: YES NO X
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1
Table of Contents
Part I
Item 1. Description of Business
Item 2. Description of Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 8A. Controls and Procedures
Item 8B. Other Information
Part III
Item 9. Directors and Executive Officers of the Registrant and Compliance with
Section 16(a) of the Securities Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits
Item 14. Principal Accountant Fees and Services
2
PART I
Item 1. Description of Business
(a) Business Development
The Registrant (hereinafter "Company" or "Ambassador") is a Delaware
corporation, incorporated in 1963. It is engaged through divisions in
providing contract food service and janitorial services in New York.
On August 1, 1989, the name of the Company was changed from
Automatique, Incorporated to Ambassador Food Services Corporation.
The principal business activity of the Company is the servicing of its
customer accounts, which are primarily governmental social service
agencies, and not-for profit organizations, through the use of
cafeterias and prepared meals delivered from the Company commissary.
The Company also operates a janitorial business in New York and
provides routine janitorial services for its current food service
customers. The Company does not solicit janitorial services outside
its food service customer base.
Going Private Transaction
-------------------------
The Board of Directors is proposing a 1 for 30 reverse stock split
followed by a 30 for 1 forward stock split as a means to decrease the
number of outstanding shareholders to below 500 so that the Company
may suspend its obligation to file reports under the SEC Act of 1934.
Management believes that substantial savings would accrue. Subsequent
thereto, management has received comments to this proxy from the
Securities and Exchange Commission (SEC) to which it has responded and
is awaiting their final approval before scheduling the meeting of the
stockholders to vote on the proposal. The Company has approximated its
total cost for this transaction to by $25,000.
(b) Business of Issuer
(1) Description of Business Done by the Registrant in its Food Segment
(i and ii) The Company's food service operation is confined to the New
York City area and consists of providing contract food
services for local government social service agencies and
not-for-profit agencies. Business is obtained through
competitive bidding and is serviced by producing meals in a
central commissary and delivering them to various designated
points for consumption.
(iii) This segment has developed no new products. The Company, in
general, markets products developed by its suppliers.
(iv) The practice in the industry is to operate under written
agreements with the locations served. In the market area
where the Company is located, it has national, (iv)
regional, and local competition, some of which have
substantially greater total sales and assets. Competition in
the food service industry normally comes in the form of
pricing and in quality of service and product.
(v) Raw materials, consisting of packaged products and
commodities, are purchased from manufacturers and purveyors
and are warehoused or processed by the
3
Company in the local market. There is an adequate supply of
raw materials from normal sources.
(vi) During the year ended May 27, 2004, the Company had one
customer whose sales were equal to 10 percent or more of the
Company's consolidated revenues. This segment is not subject
to material fluctuations in sales volume resulting from
seasonality.
(vii) The distinctive logo associated with the Company has been
registered under the laws of the (vii) United States
relating to trade names and trademarks. The Company regards
such logo as valuable and will maintain the registration in
effect for continuing use in connection with the Company's
business. In addition, the segment is a party to a labor
agreement with the United Service Employees Union #377 in
New York that expires December 31, 2004. As of May 27, 2004,
eight employees were members of the union.
(viii) The Company does not have a material portion of its business
subject to renegotiation or termination at the election of
the Government.
(ix) The Company does not believe that existing or probable
government regulations have a material effect on its
operation.
(b) (2) Description of Business Done by the Registrant in its Janitorial
Segment
(i and ii) The janitorial and maintenance service division of the
Company's business is confined to the New York City area and
consists primarily of providing various types of routine
cleaning services as an added service for existing food
service customers.
(iii) This segment has introduced no new products.
(iv) The janitorial segment is limited to New York metropolitan
areas. Competition for janitorial contracts comes in the
form of pricing and quality of service. Competition in
general is from regional and local companies.
(v) The sources and availability of raw materials for this
segment are adequate
(vi) During fiscal year 2004, this segment had no single customer
whose sales were equal to 10 percent or more of the
Company's consolidated revenues. This segment is not subject
to material fluctuations in sales volume resulting from
seasonality.
(vii) This segment is operating without registered trademarks or
patents. The segment is a party to a labor agreement with
the United Service Employees Union #377 in New York that
(vii) expires December 31, 2004. As of May 27, 2004, three
employees were members of the union.
(viii) The Company does not have a material portion of its business
subject to renegotiation or termination at the election of
the Government.
(xi) The Company does not believe that existing or probable
government regulations have a material effect on its
operations.
4
(b) (1 and 2)
(x) Through (xii) with Respect to the Registrant's Business in General
(iv) The Company has not incurred any expense for research and
development activities during any of its last two (2) fiscal
years.
(v) Compliance with Federal, state, and local laws and
regulations involving the protection of the environment will
not have a material effect.
(vi) As of May 27, 2004, the Company employed approximately 74
persons.
Code of Business Conduct and Ethics
The Company has not adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting office
(controller) and persons performing similar functions.
In light of the fact that the Company's Chief Executive Officer acts as the
Company's principal executive, accounting and financial officer and the
relatively small number of persons employed by the Company, the Company did not
previously adopt a formal written Code of Business Conduct and Ethics. As
previously stated in Item I, the Company has filed with the SEC, a proxy to
complete a going private transaction. As such, the Company does not foresee that
it will adopt a formal written Code of Business Conduct and Ethics.
Item 2. Description of Properties
The Company leases all real estate for office, warehouse, and
commissary facilities. Annual rentals are approximately $239,000. The
suitability of the leased properties is adequate; such properties are
described below:
Size Expiration
Location Type of Property (Sq. Ft.) Date
5-30 54th Ave., Long Island City, NY Office/Whse 8,000 3/06
41-43 24th St., Long Island City, NY Commissary/Whse 2,500 6/05
24-1 Bridge Plaza, Long Island City, NY Whse 2,000 11/06
730 Kelly St., Bronx, NY Shelter 2,300 6/05
175-15 Rockaway Blvd., Jamaica, NY Shelter 4,000 6/05
The above physical properties are used for office, food preparation
and warehousing of food product items and equipment. The Company owns
all of the equipment used. The Company operates approximately 11
vehicles in the conduct of its business.
Item 3. Legal Proceedings
None.
5
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year of the Company.
The Board of Directors is proposing a 1 for 30 reverse stock split
followed by a 30 for 1 forward stock split as a means to decrease the
number of outstanding shareholders to below 500 so that the Company
may suspend its obligation to file reports under the SEC Act of 1934.
Management understands that substantial savings would accrue. As a
result, this transaction will be put to a vote of the common
stockholders of the Company once approval of the proxy statement is
obtained by the SEC. This transaction will be put to vote once
approval of the proxy is obtained from the SEC.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
(a) Price Range of Common Stock
The principal market in which the common stock of the Company is
traded is the national over-the-counter market (NASDAQ symbol
AMBF.PK). The bid quotations for the Company's common stock for each
quarter during fiscal years ended May 27, 2004 and May 29, 2003, is
shown below:
2004 2003
Bid Quotation Bid Quotation
High Low High Low
---- ---- ---- ----
First Quarter $.27 $.27 $.25 $.25
Second Quarter $.27 $.27 $.27 $.27
Third Quarter $.27 $.27 $.30 $.30
Fourth Quarter $.29 $.27 $.27 $.27
The quotations above reflect inter-dealer prices without retail
mark-up, mark-down, or commission and may not represent actual
transactions.
(b) Number of Equity Security Holders
As of May 27, 2004, there were 524 record holders of the Company's
common stock.
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment
of dividends will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, debt
agreements, capital requirements, and the operating and financial
condition of the Company.
6
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the Company's
historical consolidated financial statements and the accompanying
notes included elsewhere in this Form 10-KSB.
Disclosure Regarding Forward-Looking Statements
-----------------------------------------------
This Form 10-KSB, including, but not limited to the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections, contains "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which can be identified by the use of
forward-looking terminology, such as "may," "intend," "will,"
"expect," "anticipate," "should," "plans to," "estimate" or "continue"
or the negative thereof or other variations thereon or comparable
terminology. In particular, any statement, express or implied,
concerning future operating results or the ability to generate
revenues, income or cash flow to service the Company's debt are
forward-looking statements. Although the Company believes that the
expectations will prove to have been correct, all forward-looking
statements are expressly qualified by such cautionary statements, and
the Company undertakes no obligation to update such forward-looking
statements.
Critical Accounting Policies
----------------------------
The Company's consolidated financial statements and related public
financial information are based on the application of accounting
principles generally accepted in the United States of America
("GAAP"). GAAP requires the use of estimates; assumptions, judgments
and subjective interpretations of accounting principles that have an
impact on the assets, liabilities, revenue and expense amounts
reported. These estimates can also affect supplemental information
contained in the external disclosures of the Company including
information regarding contingencies, risk and financial condition. The
Company believes its use of estimates and underlying accounting
assumptions adhere to GAAP and are consistently and conservatively
applied. Valuations based on estimates are reviewed for reasonableness
and conservatism on a consistent basis throughout the Company. Primary
areas where financial information of the Company is subject to the use
of estimates, assumptions and the application of judgment include
receivables, inventories, accruals and valuation of long-lived assets.
We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances.
Actual results may differ materially from these estimates under
different assumptions or conditions.
The Company's critical accounting policies are as follows:
Revenue Recognition
-------------------
Revenue from food and janitorial customer contracts is recognized at
the time services are provided to the customer in accordance with
those contracts.
Inventory
---------
Inventory consists of food and supplies and are stated at the lower of
cost (first-in, first-out) or market. The Company reviews its
inventory valuation and writes down the inventory for unusable
inventory. There were no such charges taken for the fiscal year 2004.
Receivable Valuation
--------------------
All of the Company's accounts receivable are with customers located in
the New York City area. Accounts receivable are uncollateralized
customer obligations due under trade terms generally requiring payment
within 30 and 60 days from the invoice date. Interest is not charged
for delinquent accounts. The Company has not experienced a significant
uncollected amount in several years. All customer accounts receivable
collateralize the Company's outstanding borrowings under its line of
credit. Accounts receivable are stated at the amount billed to the
customer. Customer account balances with invoices dated over 90 days
old are considered delinquent.
7
Payments on accounts receivable are allocated to the specific invoices
identified on the customer's remittance advice or, if unspecified, are
applied to the earliest unpaid invoices.
The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management's best estimate of the amounts that
will not be collected. Management individually reviews all accounts
receivable balances that exceed 30 days from invoice date and based on
an assessment of current creditworthiness, estimates the portion, if
any, of the balance that will not be collected.
Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2003, the FASB revised FIN No. 46 (FIN 46R),
"Consolidation of Variable Interest Entities." FIN No. 46R clarifies
the application of Accounting Research Bulletin No. 51 for certain
entities for which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company would
currently be required to adopt FIN No. 46 for any variable interest
entities it had and would be required to meet the disclosure
requirements of this pronouncement. However, the Company has
determined that it does not have a significant interest in such
entities based on its analysis and assessment.
Overview
--------
Ambassador Food Services Corporation provides contract food services
for government social-service agencies and not-for-profit
organizations in the New York City area. This service is provided in
the form of managing on-site cafeterias and delivery of meals prepared
in the Company's central commissary. The Company also provides basic
janitorial services for several of its food service customers. The
Company does not provide janitorial services outside its food service
customer base. Although the majority of the business is obtained
through public bids, the Company has provided food service to most of
its clients in excess of five years.
Results of Operation
--------------------
Total sales for fiscal year 2004 of $5,336,442 were $526,402 (9.0%)
less than fiscal year 2003.
For discussion and comparison purposes, the operating results for 2004
and 2003, by line of business and in total, are presented in the table
below:
2004 Food Janitorial Total
Sales $4,858,856 100.0% $477,586 100.0% $5,336,442 100.0%
Cost of Product Sold 2,103,889 43.3% - 0.0% $2,103,889 39.4%
Operating Expense 1,676,037 34.5% 460,307 96.4% $2,136,344 40.0%
Depreciation Expense 51,347 1.1% - 0.0% $ 51,347 0.9%
Administrative Expense 1,204,247 24.8% - 0.0% $1,204,247 22.6%
Operating Income (Loss) (176,664) -3.5% 17,279 3.6% $ (159,385) -2.9%
8
2003 Food Janitorial Total
Sales $5,319,260 100.0% $543,584 100.0% $5,862,844 100.0%
Cost of Product Sold 2,292,769 43.1% - 0.0% $2,292,769 39.1%
Operating Expense 1,838,272 34.5% 525,146 96.6% $2,363,418 40.3%
Depreciation Expense 80,414 1.5% - 0.0% $ 80,414 1.4%
Administrative Expense 1,253,625 23.6% - 0.0% $1,253,625 21.4%
Operating Income (Loss) (145,820) -2.7% 18,438 3.4% $ (127,382) -2.2%
Sales for the food service segment of $4,858,856 were $460,404 (8.7%)
less than fiscal year 2003. Sales for the janitorial segment of
$477,586 were $65,998 (12.1%) less than fiscal year 2003. The decrease
in sales was a result of a decrease in customer base and a decrease in
business with customers whose programs are funded by the City of New
York.
Cost of food products sold for fiscal year 2004 was 43.3% of sales
compared to 43.1% for fiscal year 2003. The overall cost as a
percentage of sales has been consistent throughout the reporting
periods.
Operating expenses for the food service segment for fiscal year 2004
were 34.5% of sales compared to 34.5% of sales for fiscal year 2003.
Operating expenses for the janitorial segment were 96.4% of sales
compared to 96.6% of sales for fiscal year 2003. The overall cost as a
percentage of sales has been consistent throughout the reporting
periods for both segments.
Administrative expense for fiscal year 2004 decreased $49,378 compared
to fiscal year 2003. The decrease is attributed to cost cutting
measures enforced by management, a reduction in officers' annual
entitlement, partially offset by an increase in business insurance
costs.
Depreciation expense for fiscal year 2004 decreased $29,067 compared
to fiscal year 2003. The decrease is attributed to older equipment,
still in use, becoming fully depreciated during fiscal year 2004.
Other income (expense), net for fiscal year 2004 decreased $888,648
compared to fiscal year 2003. Fiscal year 2003 included a final
payment of $100,000 related to the sale of assets of the Iowa and
Oklahoma vending and food service operations. Also, during fiscal year
2003, the holder of an 8% note agreed to accept $125,000 as full and
complete settlement and satisfaction of all debts and amounts due on
the note payable. This transaction resulted in a gain on
extinguishment of debt of $790,992.
2003 Results
------------
Sales for the food service segment of $5,319,260 were $413,427 less
than fiscal year 2002 (7.2%). Sales for the janitorial segment of
$543,584 were $99,416 less than fiscal year 2002 (15.5%). The decrease
in sales for both segments was a result of a decrease in customer base
and a decrease in business with customers whose programs are funded by
the city of New York.
Cost of food products sold for fiscal year 2003 was 43.1% of sales
compared to 45.2% for fiscal year 2002. This slight increase in gross
profit resulted from competitive pricing on purchases and changes in
the menu mix sold to customers.
Operating expenses for the food service segment for fiscal year 2003
were 34.5% of sales compared to 34.3% of sales for fiscal year 2002.
Operating expenses for the janitorial segment increased to 96.6% of
sales compared to 91.6% for fiscal year 2002. Janitorial sales for
fiscal years 2003 and 2002 consist primarily of auxiliary janitorial
services for current food service customers and carry a smaller
margin.
9
Administrative expense for fiscal year 2003 increased $13,038 compared
to fiscal year 2002. This slight increase resulted from costs incurred
in moving accounting and administrative functions from Kansas City to
the Long Island City corporate office.
Gain on Sale of Assets: In connection with the sale of the Iowa and
Oklahoma vending machine and cafeteria operations in 2001, $200,000
was held from the purchase price by the buyer contingent upon the
buyer retaining certain customers. This $200,000 was not recorded by
the Company in the year the transaction occurred as it was deemed a
gain contingency. The Asset Purchase Agreement called for the Company
to receive the $200,000 in various intervals through 2004. $100,000
was collected and recorded during 2002. On February 15, 2003, the
Company reached an agreement to receive the final $100,000 payment
relating to the sale. This $100,000 was not due until January 2004.
The entire amount of $100,000 was collected on April 1, 2003.
On April 1, 2003, the holder of an 8% note agreed to accept $125,000
as full and complete settlement and satisfaction of all debts and
amounts due on the note payable. This transaction resulted in a gain
on extinguishment of debt of $790,992.
Liquidity and Capital Resources
-------------------------------
2004 Results
------------
The Company's working capital on May 27, 2004, decreased to a deficit
of $172,887 compared to a surplus of $30,765 on May 29, 2003. Cash
decreased from $68,551 on May 29, 2003, to $9,881 on May 27, 2004.
Net cash used in operating activities for the year ended May 27, 2004,
was $16,929 compared to $98,261 for the prior year. Accounts payable
and accrued expenses increased a net of $171,334. This increase was
mainly attributed to favorable renegotiated payment terms with various
vendors.
Net cash used in investing activities for the year ended May 27, 2004,
was $23,211 compared to $107,402 for the prior year. The prior year
included a deposit of $100,000 into a restricted savings account
required by the lender of the credit line.
Net cash used in financing activities for the year ended May 27, 2004,
was $18,530 compared to net cash provided by financing activities of
$39,691 for the prior year. Proceeds from the line of credit payable
increased $13,394 for the year ended May 27, 2004, compared to an
increase of $71,008 for the prior year.
The following table summarizes the Company's obligations at May 27,
2004.
Less Than In Excess of
Contractual Obligations Total 1 Year 1 Year
Long Term Debt
(Including Related
Parties) $ 156,651 $ 61,892 $ 94,759
Net Operating Leases $ 403,242 $ 240,781 $ 162,461
------------------------------------------
Total $ 559,893 $ 302,673 $ 257,220
Based on the Company's results for the year ended May 27, 2004, the
Company was not in compliance with its tangible net worth covenant, as
defined by the lender.
10
On August 19, 2004, the lender agreed to waive the covenant violation
and extend the line of credit payable through February 28, 2005. In
addition, certain terms of the agreement have been modified,
including:
o increasing the interest rate charged to prime plus 7%
o requiring the Chief Executive Officer to guarantee up to $100,000,
and further limiting the maximum borrowing.
o reducing the minimum tangible net worth from $200,000 to $60,000
o further limiting the maximum borrowings to the lesser of 85 percent
of eligible accounts receivable or 60 percent of eligible accounts
receivable less restricted cash
The Company continues to have operating losses. Management continues
its cost reduction efforts and its plan to attract new business.
However, at present, there is no assurance that its efforts will
return the Company to profitability. Therefore, if the Company is
unsuccessful in its efforts to achieve profitability, or attract new
finance, no assurance can be given that the Company will continue as a
going concern. As a result of these conditions, the Company's
independent auditors have issued a going concern opinion on the
Company's consolidated financial statements as of May 27, 2004.
2003 Results
------------
The Company's working capital on May 29, 2003, decreased to a surplus
of $30,765 compared to a surplus of $107,811 on May 30, 2002. Cash
decreased from $234,523 on May 30, 2002, to $68,551 on May 29, 2003.
The Company used $100,000 for a collateral deposit required by the
credit line lender.
Net cash used in operating activities for the year ended May 29, 2003,
was $98,261 compared to $227,107 for the prior year. Receivables
decreased $69,729 because of decreased sales in both the food service
and janitorial services. Accounts payable decreased $149,688,
inventories decreased $20,553, and prepaid expenses increased $19,481.
Net cash used in investing activities for the year ended May 29, 2003,
was $107,402 compared to net cash provided by investment activities of
$335,403 for the prior year. The fiscal year ended May 30, 2002,
included the proceeds from the sale of the assets of the vending
machine and cafeteria operations in Iowa, Missouri and Oklahoma of
$507,899.
Net cash provided by financing activities for the year ended May 29,
2003, was $39,691 compared to $122,487 for the prior year. Proceeds
from the line of credit payable decreased $183,636, and payments on
long term debt decreased $100,843 net from fiscal year 2002.
Off Balance Sheet Arrangements
------------------------------
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the
Company's financial condition, changes in financial condition, revenue
or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Item 7. Financial Statements
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets May 27, 2004 and May 29, 2003 F-2
Consolidated Statements of Operations 52 Weeks Ended
May 27, 2004 and May 29, 2003 F-3
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) 52 Weeks Ended May 27, 2004 and May 29, 2003 F-4
Consolidated Statements of Cash Flows 52 Weeks Ended
May 27, 2004 and May 29, 2003 F-5
Notes to Consolidated Financial Statements F-6 - F-14
11
Item 8. Changes in and disagreements with accountants on accounting and
financial disclosure.
None
Item 8A. Controls and Procedures
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the
Company's management, including the chief executive officer and the
principal financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. There
are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their
control objectives. Based upon and as of the date of the evaluation,
the chief executive officer and the principal financial officer
concluded that the design and operation of these disclosure controls
and procedures were effective in all material respects to provide
reasonable assurance that information required to be disclosed in the
reports of the Company files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There were no changes in the Company's internal control over financial
reporting that occurred during the twelve months ended May 27, 2004,
that materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Item 8B. Other Information
None
PART III
Item 9. Directors and Executive Officers of the Registrant; Compliance with 16
(a) of the Exchange Act and Compliance with Section 16(a) of the
Securities Exchange Act.
(a), (b) The Executive Officers and Directors of the Company are as follows:
Director
Name Age Principal Occupation Since
Robert A. Laudicina (1) 63 President, Treasurer, Director (2) 1986
Arthur D. Stevens (1) 79 Chairman of the Board (3) 1963
Ann W. Stevens 62 Real Estate Broker, Director 1996
John A. Makula 55 Vice President, Secretary, Director (4) 2000
(1) Member of Executive Committee of Board of Directors
(2) Mr. Laudicina was elected President in March 1998 and Treasurer in May
1998. He served as Executive Vice President beginning in February 1989
and Vice President prior to that time beginning in January 1982.
(3) Mr. Stevens has been Chairman of the Board of Directors of Ambassador
since February 15, 1963. He was also the first President and Treasurer
of Ambassador beginning on April 19, 1963, relinquishing those
positions in April 1978 and October 1969, respectively. He again
assumed the position of President on January 1, 1987, serving in that
capacity through March 1998. He was Chief Executive Officer from April
11, 1963 through May 1998 and Treasurer from January 26, 1972 through
May 1998.
(4) Mr. Makula was elected Assistant Secretary on April 12, 2000, and
elected Vice President, Secretary, Director in May 2000.
12
(c) Arthur D. Stevens, Chairman, and Ann W. Stevens, Director, are husband
and wife. No other family relationship exists between any of the
executive officers and directors listed above.
Each Officer holds his office at the pleasure of the Board of
Directors until the next annual meeting of the Directors and until his
successor is duly elected and qualified.
The Executive Officers and Directors listed above were not involved in
or part of any legal proceedings, as is described in Item 401(d).
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10
percent of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities
and Exchange Commission (SEC). Officers, directors, and greater than
10 percent stockholders are required by SEC regulation to furnish the
Company with copies of all Section16 (a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company, all reports under Section 16(a)
required to be filed by its officers, directors and greater than
ten-percent beneficial owners were timely filed.
Item 10. Executive Compensation
(a), (b) The following table sets forth information as to the remuneration
accrued by Ambassador Food Services Corporation and its subsidiary
during the fiscal year ended May 29, 2003, for each Director and
Officer whose aggregate remuneration for the year exceeded $100,000.
Names of Individuals,
Number of Persons in Group
and Capacities in which Served
Robert A. Laudicina, Fiscal Base
President, CEO, Treasurer and Director Year Salary
2004 $103,366
2003 $127,302
2002 $148,936
2001 $176,706
(d) Stock Options
None
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth, as of May 27, 2004, the information
with respect to common stock ownership of each person known by the
Company to own beneficially more than 5% of the shares of the
Company's common stock, and of all Officers and Directors as a group.
13
Amount Percent of
Beneficially Outstanding
Name and Address of Beneficial Owner(s) Owned Shares
Arthur D. Stevens
1901 W. 69th Street
Mission Hills, KS 66205 131,444 (1) 17.9%
Thomas G. Berlin
800 Superior Avenue, Suite 2100
Cleveland, Ohio 44114 236,119 (3) 32.2%
George T. Terris
104 S. Warbler
Sarasota, FL 34236 54,000 (2) 7.4%
George F. Crawford
10110 Fontana Lane
Overland Park, KS 66207 51,761 7.0%
(1) Does not include 91,400 shares beneficially owned by Mr. Stevens' adult
children, in which shares he disclaims any beneficial interest.
(2) Does not include 4,000 shares owned by Mr. Terris' immediate family, in
which shares he disclaims any beneficial interest.
(3) Includes 12,800 shares owned by Mr. Berlin's wife.
(b) Security Ownership of Management
Shares of Stock
Beneficially Owned
May 27, 2004
------------------
Number Percent
Name of Shares of Stock
Arthur D. Stevens
1901 W. 69th Street
Mission Hills, KS 66205 131,444 (1) 17.9%
Robert A. Laudicina
310 Prospect Avenue
Hackensack, NJ 07061 26,265 3.6%
John Makula
5 Pittsford Way
Nanuet, NY 10954 9,750 1.3%
Ann W. Stevens
1901 W. 69th Street
Mission Hills, KS 66205 1,000 0.1%
All Directors and Officers 168,459 22.9%
as a Group (4 persons)
(1) Does not include 91,400 shares beneficially owned by Mr. Stevens' adult
children, in which shares he disclaims any beneficial interest.
14
(c) Changes in Control
The Company knows of no contractual arrangements, which may, at a
subsequent date, result in a change in control of the Company.
Item 12. Certain Relationships and Related Transactions
The Company entered into a consulting agreement with the chairman of
the Board of Directors, who is also a stockholder and former officer.
The agreement, originally requiring payments of $100,482 per annum,
was informally amended to a total per annum consulting fee of $81,000.
The consulting agreement terminates in May 2009. The expense relating
to that agreement for the years ended May 27, 2004, and May 29, 2003,
was approximately $80,000 and $91,000, respectively. In addition, the
Company had advances due to this individual in the amount of $3,154 as
of May 27, 2004 and May 29, 2003, respectively. These advances are
non-interest bearing and are due on demand.
The Company had advances due to certain officers in the amount of
$12,301 and $10,204 as of May 27, 2004 and May 29, 2003, respectively.
The advances are non-interest bearing and are due on demand.
In 2003, in connection with the settlement of debt, the Company signed
notes with stockholders and management of the Company in the aggregate
amount of $95,000. A portion of these notes are payable upon demand
with the balances due after April 2007. Interest at 10 percent is
payable in semiannual installments. These notes are all subordinated
to the lender of the credit line. Aggregate maturities of these notes
due within the next three years are as follows:
Year Amount
---- ------
2004 30,000
2005 --
2006 65,000
-------
Total $95,000
Item 13. Exhibits
3.1 Articles of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
21 Subsidiary of the Registrant (2)
15
31.1 Certification Pursuant to 18 U.S.C. Section 1350
as adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (2)
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (2)
(1) This exhibit was filed with the Company's 10-K for the
fiscal year ended May 28, 1981. A copy of the Certificate of
Amendment of Certification of Incorporation changing the
Company's name was filed as supplement to said exhibit for
the fiscal year ended June 1, 1989.
(2) Exhibit attached as part of filing.
Item 14. Principal Accountant Fees and Services
Independent Auditor Fees
Fees for professional services provided by the Company's independent
auditors, WithumSmith+Brown, P.C., for the 52 weeks ended May 27, 2004
and May 29, 2003 are as follows:
2004 2003
------- -------
Audit Fees $45,000 $34,500
Audit-related fees -0- -0-
Tax fees 5,500 6,500
All other fees -0- -0-
------- -------
Totals $50,500 $41,000
Audit Fees
Audit fees consist of fees related to the audit of the Company's
year-end financial statements and review of the Company's quarterly
reports on Form 10-QSB.
Tax Fees
Tax fees consist of fees related to preparation of the Company's
consolidated United States federal and state tax returns in 2004 and
2003.
Board of Directors Pre-Approval Policy
It is the policy of the Company's Board of Directors to approve all
engagements of the Company's independent auditors to render audit or
non-audit services prior to the initiation of such services.
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.
AMBASSADOR FOOD SERVICES CORPORATION
------------------------------------
(Registrant)
By /s/ Robert A. Laudicina
---------------------------------------
Date: 8/25/04 Robert A. Laudicina
Chief Executive Officer and Principal
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Arthur D. Stevens Chairman of the Board 8/25/04
- --------------------------------------------------------------------------------
Arthur D. Stevens Title Date
President and Chief
Executive Officer and
/s/ Robert A. Laudicina Principal Financial Officer 8/25/04
- --------------------------------------------------------------------------------
Robert A. Laudicina Title Date
/s/ Ann W. Stevens Director 8/25/04
- --------------------------------------------------------------------------------
Ann W. Stevens Title Date
/s/ John Makula Director 8/25/04
- --------------------------------------------------------------------------------
John Makula Title Date
Note: The Company will provide, on the written request of any stockholder,
a copy of any exhibit to this Form 10-KSB at a rate of $.15 per page.
The minimum fee is $5.00. Requests should be directed to Robert A.
Laudicina, President, Ambassador Food Services Corporation, 5-30
54th Avenue, Long Island City, New York 11101.
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders,
Ambassador Food Services Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Ambassador Food
Services Corporation and Subsidiary as of May 27, 2004 and May 29, 2003, and the
related consolidated statements of operations, changes in stockholders'
(deficit) equity and cash flows for the 52 weeks then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ambassador Food
Services Corporation and Subsidiary as of May 27, 2004 and May 29, 2003, and the
consolidated results of their operations and their cash flows for the 52 weeks
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has limited cash available to fund operations,
has sustained operating losses, and its current liabilities exceeded its current
assets by $172,887 at May 27, 2004. Furthermore, the Company is operating under
a debt compliance waiver from it's principal lender which will expire in
February 2005. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
WithumSmith+Brown, P.C.
New Brunswick, New Jersey
August 13, 2004, except for the second paragraph of
Note 4, as to which the date is August 19, 2004
F-1
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 27, 2004 AND MAY 29, 2003
2004 2003
---- ----
ASSETS
Current Assets:
Cash $ 9,881 $ 68,551
Accounts receivable, net of allowance
for doubtful accounts of $7,189 in 2004 and 2003 769,067 764,688
Inventory 92,260 94,475
Prepaid expenses and other assets 75,237 64,748
Restricted cash 219,744 210,913
----------- -----------
Total Current Assets 1,166,189 1,203,375
Property and Equipment - Net 136,405 167,148
Deposits 20,860 20,860
----------- -----------
Total Assets $ 1,323,454 $ 1,391,383
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Line of credit payable $ 575,575 $ 562,181
Current maturities of long-term debt 31,892 52,251
Notes payable to related parties, current maturities 30,000 30,000
Advances due to related parties 15,455 13,358
Accounts payable 583,337 357,995
Accrued expenses 102,817 156,825
----------- -----------
Total Current Liabilities 1,339,076 1,172,610
Long-Term Debt, Net of Current Maturities 29,759 42,231
Other Liabilities -- 1,700
Notes Payable to Related Parties, Net of Current Maturities
Net of Current Portion 65,000 65,000
Stockholders' (Deficit) Equity:
Common stock, $1.00 par value (2,000,000
shares authorized, 1,009,230 shares issued) 1,009,230 1,009,230
Additional paid-in capital 718,291 718,291
Accumulated deficit (1,508,201) (1,287,985)
----------- -----------
219,320 439,536
Less Treasury Stock, at Cost (274,594 and 274,574 shares
in 2004 and 2003, respectively) (329,701) (329,694)
----------- -----------
Total Stockholders' (Deficit) Equity (110,381) 109,842
----------- -----------
Total Liabilities and Stockholders' (Deficit) Equity $ 1,323,454 $ 1,391,383
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements
F-2
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
52 WEEKS ENDED MAY 27, 2004 AND MAY 29, 2003
2004 2003
----------- -----------
Sales $ 5,336,442 $ 5,862,844
Cost and Expenses:
Cost of food products sold 2,103,889 2,292,769
Operating 2,136,344 2,363,418
Administrative 1,204,247 1,253,625
Depreciation and amortization 51,347 80,414
----------- -----------
Total Cost and Expenses 5,495,827 5,990,226
----------- -----------
Operating Loss (159,385) (127,382)
Other Income (Expense):
Loss on asset disposal of property and equipment (1,693) --
Interest income 8,832 8,539
Interest expense (64,030) (64,340)
Gain on sale of assets -- 100,000
Gain on settlement of debt -- 790,992
Other income (expense) -- (3,434)
----------- -----------
Total Other Income (Expense), Net (56,891) 831,757
----------- -----------
(Loss) Income Before Provision For Income Taxes (216,276) 704,375
Provision For Income Taxes 3,940 1,285
----------- -----------
Net (Loss) Income $ (220,216) $ 703,090
=========== ===========
Basic and Diluted (Loss) Income Per Common Share $ (0.30) $ 0.96
=========== ===========
Weighted Average of Common Shares Outstanding 734,650 734,684
=========== ===========
The Notes to Consolidated Financial Statements are an integral part of these
statements
F-3
AMBASSADOR FOOD SERVICE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED MAY 27, 2004 AND MAY 29, 2003
Common Stock
-----------------------------------------------------------
Issued Treasury Additional Total
Authorized ---------------------- -------------------- Paid-in Accumulated Stockholders'
Shares Shares Amount Shares Amount Capital Deficit Equity (Deficit)
--------- --------- --------- --------- --------- -------- ------------ ----------------
Balance, May 30, 2002 2,000,000 1,009,230 $1,009,230 (274,274) $(329,601) $718,291 $(1,991,075) $(593,155)
Net Income -- -- -- -- -- -- 703,090 703,090
Purchase of Treasury Stock -- -- -- (300) (93) -- -- (93)
--------- --------- --------- --------- --------- -------- ------------ ----------
Balance May 29, 2003 2,000,000 1,009,230 1,009,230 (274,574) (329,694) 718,291 (1,287,985) 109,842
Net Loss -- -- -- -- -- -- (220,216) (220,216)
Purchase of Treasury Stock -- -- -- (20) (7) -- -- (7)
--------- --------- ---------- --------- --------- -------- ------------ ----------
Balance May 27, 2004 2,000,000 1,009,230 $1,009,230 (274,594) $(329,701) $718,291 $(1,508,201) $(110,381)
========= ========= ========== ========= ========== ======== ============ ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements
F-4
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 27, 2004 AND MAY 29, 2003
2004 2003
---- ----
Cash Flows from Operating Activities:
Net (loss) income $(220,216) $ 703,090
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Gain on settlement of debt -- (790,992)
Depreciation and amortization 51,347 80,414
Loss on fixed asset disposal 1,693 --
Interest income on restricted cash (8,831) (7,382)
Changes in:
Accounts receivable (4,379) 69,729
Inventory 2,215 20,553
Prepaid expenses and other assets (10,489) (19,481)
Advances due to related parties 2,097 --
Accounts payable 225,342 (149,688)
Accrued expenses (54,008) 12,646
Other liabilities (1,700) (17,150)
---------- ----------
Net Cash Used In Operating Activities (16,929) (98,261)
Cash Flows from Investing Activities:
Purchase of property and equipment (23,211) (16,372)
Change in deposits -- 8,970
Change in restricted cash -- (100,000)
---------- ----------
Net Cash Used In Investing Activities (23,211) (107,402)
Cash Flows from Financing Activities:
Principal payments on long-term debt (31,917) (41,224)
Increase in borrowings of long term debt -- 135,000
Payment to settle debt -- (125,000)
Purchase of treasury stock (7) (93)
Net proceeds under line of credit payable 13,394 71,008
---------- ----------
Net Cash (Used in) Provided by Financing Activities (18,530) 39,691
---------- ----------
Net Decrease in Cash (58,670) (165,972)
Cash at Beginning of Period 68,551 234,523
---------- ----------
Cash at End of Period $ 9,881 $ 68,551
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period:
Income taxes $ 3,940 $ 1,258
Interest $ 64,617 $ 62,089
Non cash investing and financing activities:
Purchase of vehicles through issuance of long term debt $ 15,493 $ 65,007
Debt settlement by insurance proceeds in connection
with stolen vehicle $ 16,407 $ --
The Notes to Consolidated Financial Statements are an integral part of these
statements
F-5
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
- ----------------------------------------------------
Significant accounting policies followed by Ambassador Food Services
Corporation and Subsidiary (hereinafter collectively known as the
Company) in the preparation of the accompanying consolidated financial
statements are summarized below:
Nature of Business and Recent Developments
The Company conducts operations in New York in two operating segments:
food (meal preparation and delivery, cafeteria and catering) and
janitorial services. These segments primarily service government
agencies and non-profit organizations.
In March 2004, the Company has filed a preliminary Proxy Statement
Pursuant to Section 14(a) of the Securities and Exchange Act of 1934
wherein the Board of Directors proposed a 1 for 30 reverse stock split
followed by a 30 for 1 forward stock split as a means to decrease the
number of outstanding shareholders to below 500 so that the Company
may terminate its registration under the Securities and Exchange Act
of 1934. Subsequent thereto, management has received comments to this
proxy from the Securities and Exchange Commission (SEC) to which it
has responded and is awaiting their final approval before scheduling
the meeting of the stockholders to vote on the proposal. The Company
has approximated its total cost for this transaction to by $25,000.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal
course of business.
The Company's current liabilities exceed its current assets by
$172,887, it has sustained operating losses, and has limited cash
available to fund operations. In addition, the Company is also having
difficulties in generating positive cash flows from operations.
Furthermore, the Company is operating under a debt compliance waiver
from it's primary lender which will expire in February 2005. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans include continuing its
cost reduction efforts and its plan to attract new business. However,
at present, there is no assurance that its efforts will return the
Company to profitability. However, there can be no assurances that the
Company will be successful in their efforts to cut costs and
renegotiate their line of credit beyond February 2005. The
accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of
Ambassador Food Services Corporation (AFSC) and its wholly-owned
subsidiary, Ambassador Fast Services, Inc. (AFS) All intercompany
balances and transactions have been eliminated in consolidation.
Reporting Periods
The Company has a fiscal year (52 or 53 weeks) ending on the Thursday
nearest May 31. Fiscal years 2004 and 2003 contained 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenue and expenses during the reported period.
Actual results could differ from those estimates.
F-6
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued):
---------------------------------------------------------------
Inventory
Inventory, consisting of food and supplies, is stated at the lower of
cost (first-in, first-out) or market.
Income Taxes
Deferred income tax assets and liabilities are recognized for the
differences between financial and income tax reporting basis of assets
and liabilities based on enacted tax rates and laws. The deferred
income tax provision or benefit generally reflects the net change in
deferred income tax assets and liabilities during the year. A
valuation allowance is recorded when the expected recognition of a
deferred tax asset is considered to be unlikely.
FINANCIAL INSTRUMENTS
Short-Term Financial Instruments
----------------------------------
The carrying amount of short-term financial instruments, including
cash and cash equivalents, trade accounts receivables and payables and
certain accrued liabilities, approximates their fair value in the
financial statements because of the short maturity of such
instruments.
Notes Payable and Long-Term Debt
--------------------------------
The carrying amount of the line of credit approximates its fair value
because the currently effective rates reflect market rates available
to the Company. The carrying amount of fixed rate notes payable and
fixed rate related party advances approximates its fair value based on
the Company's estimated current incremental borrowing rate for similar
obligations with similar terms.
CONCENTRATION OF RISK
Financial instruments which potentially expose the Company to
concentrations of risk, consist primarily of cash, accounts
receivable, and labor:
Cash
----
The Company places operating cash with high quality financial
institutions. At times, these amounts exceed the Federal Deposit
Insurance Corporation limits of $100,000. However, management monitors
the soundness of these institutions and considers the Company's risk
negligible.
Accounts Receivable and Credit Policies
---------------------------------------
Accounts receivable are unsecured, non-interest bearing, customer
obligations due under normal trade terms requiring payment within 30
to 60 days from the invoice date, depending on the terms the Company
has with the customer. If a customer fails to remit payment within 90
days of the invoice date, management calls the customer to determine
when collection can be expected. Customer account balances with
invoices dated over 90 days are considered delinquent. Payment of
accounts receivable are allocated to the specific invoices as
identified on the customer's remittance advice. The carrying amount of
accounts receivable is reduced by a valuation allowance that reflects
management's best estimate of the amounts that will not be collected.
All of the Company's accounts receivable balances are with customers
located in New York. The Company grants credit to customers such as
governmental social service agencies and other non-profit
organizations.
F-7
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued):
---------------------------------------------------------------
As of May 27, 2004, 40 percent (e.g. 17, 12 and 11 percent) of total
accounts receivable was from three customers. As of May 29, 2003, four
customers represented approximately 51 percent (e.g. 16, 13, 11 and 11
percent) of total accounts receivable. One of these customers also
represented approximately 31 percent and 34 percent of total
consolidated net sales for the 52 weeks ended May 27, 2004, and May
29, 2003, respectively.
Labor
-----
Some of the Company's non-management employees are covered by
collective bargaining agreements. The agreement with the United
Service Employees Union # 377 is scheduled to expire within the next
year. If the Company and the United Service Employees Union # 377
representing such workers (aggregating approximately 11% of all
non-management employees) are unable to agree on a new contract prior
to expiration of the current contract, a work stoppage may occur that
could adversely affect results of operations.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised FIN No. 46 (FIN 46R),
"Consolidation of Variable Interest Entities." FIN No. 46R clarifies
the application of Accounting Research Bulletin No. 51 for certain
entities for which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company would
currently be required to adopt FIN No. 46 for any variable interest
entities it had and would be required to meet the disclosure
requirements of this pronouncement. However, the Company has
determined that it does not have a significant interest in such
entities based on its analysis and assessment.
RECLASSIFICATION
Certain amounts from the 2003 financial statements have been
reclassified to conform to the 2004 presentation.
REVENUE RECOGNITION
Revenue from food and janitorial customer contracts is recognized at
the time services are provided to the customer in accordance with
those contracts.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated useful lives on the straight-line
method. The estimated lives used in determining depreciation are as
follows:
Description Years
Cafeteria and Commissary Equipment 3-7
Leasehold Improvements *
Vehicles 3-5
Office Equipment 3-7
Warehouse Equipment 3-7
* Lesser of estimated life or term of lease
Expenditures for maintenance and repairs are charged to expense as
incurred.
F-8
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies (Continued):
---------------------------------------------------------------
VALUATION OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," long-lived assets used in operations
are reviewed for impairment when events and circumstances warrant such
a review. Based on these evaluations, there were no adjustments made
in the carrying value of the long-lived assets in 2004 and 2003.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed using the weighted average
of common shares outstanding during the period.
Note 2 - Restricted Cash:
- -------------------------
In connection with the Company's line of credit, the Company is
required to maintain a collateral deposit of $200,000. The deposit
earns interest at the prime rate (4.00 percent at May 27, 2004, and
4.25 percent at May 29, 2003). Interest earned for the year ended May
27, 2004, and May 29, 2003, amounted to $8,831 and $7,382,
respectively. The collateral is required to be maintained during the
term of the loan.
Note 3 - Property and Equipment:
- --------------------------------
Property and equipment consists of the following at May 27, 2004 and
May 29, 2003:
2004 2003
------------- ------------
Cafeteria and Commissary Equipment $ 467,343 $ 456,349
Leasehold Improvements 31,923 22,657
Vehicles 156,493 162,182
Office Equipment 60,213 60,213
Warehouse Equipment 22,189 22,189
------------- ------------
738,161 723,590
Less Accumulated Depreciation 601,756 556,442
------------- ------------
Property and Equipment, Net $ 136,405 $ 167,148
============= ============
Depreciation expense amounted to $51,347 and $80,414 for the fiscal
years ended May 27, 2004, and May 29, 2003, respectively.
Note 4 - Line of Credit Payable:
- --------------------------------
The Company has a line of credit agreement with a lender, which
provides for maximum borrowings of $1,000,000, limited to 85 percent
of eligible accounts receivable as defined by the lender. Interest is
payable monthly at prime (4.00 percent and 4.25 percent at May 27,
2004 and May 29, 2003, respectively) plus five percent. The loan,
which was originally due in December 2002, is collateralized by a
first priority perfected security interest in all the Company's
assets, excluding certain equipment, for which the lender has a second
priority perfected security interest. The agreement contains a
tangible net worth covenant, as defined by the lender, which is
measured on a semi-annual basis. As of May 27, 2004, the Company was
in default on the tangible net worth covenant.
F-9
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Line of Credit Payable (continued):
-------------------------------------------
On August 19, 2004, the lender agreed to waive the covenant violation
and extended the due date through February 28, 2005. In addition,
certain terms of the agreement have been modified, including:
o increasing the interest rate charged to prime plus 7%
o requiring the Chief Executive Officer to guarantee up to $100,000,
and further limiting the maximum borrowing.
o reducing the minimum tangible net worth from $200,000 to $60,000
o further limiting the maximum borrowings to the lesser of 85 percent
of eligible accounts receivable or 60 percent of eligible accounts
receivable less restricted cash
In connection with the line of credit payable, $95,000 of loans due to
certain related parties (see Note 6) are subordinated to the lender.
The balance of the credit line was $575,575 and $562,181 as of May 27,
2004, and May 29, 2003, respectively.
Note 5 - Long-Term Debt:
- -----------------------
Long-term debt consists of the following at May 27, 2004 and May 29,
2003:
2004 2003
--------- ---------
Notes payable - vehicles, payable
in monthly installments,
non-interest bearing, due August 2007 $ 14,803 $ 38,546
Note payable - vehicle, payable
in monthly installments, bearing interest
at 8.99 percent, due May 2007 12,754 15,936
Note payable - vehicle, payable
in monthly installments, bearing interest
at 7.99 percent, due November 2007 14,094 --
Notes payable to individuals, payable
upon demand after October 2003. Interest
at 10 percent is payable in
semi-annual installments 20,000 40,000
--------- ---------
Total Long-Term Debt 61,651 94,482
Less Current Maturities 31,892 52,251
--------- ---------
Long-Term Debt, Less Current Maturities $ 29,759 $ 42,231
========== =========
Aggregate maturities of long-term debt due within the four years
subsequent to May 27, 2004, are as follows:
Year Amount
2005 $ 31,892
2006 12,541
2007 13,248
2008 3,970
----------
Total $ 61,651
==========
F-10
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Related Party Transactions:
- -----------------------------------
The Company entered into a consulting agreement with the chairman of
the Board of Directors, who is also a stockholder and former officer.
The agreement originally requiring payments of $100,482 per annum, was
informally amended to a total per annum consulting fee of $81,000. The
consulting agreement terminates in May 2009. The expense relating to
that agreement for the 52 week period ended May 27, 2004, and May 29,
2003, was approximately $80,000 and $91,000, respectively. In
addition, the Company had advances due to this individual in the
amount of $3,154 as of May 27, 2004. These advances are non-interest
bearing and are due on demand.
The Company had advances due to certain officers in the amount of
$12,301 and $10,204 as of May 27, 2004 and May 29, 2003, respectively.
These advances are non-interest bearing and are due on demand.
In 2003, in connection with the settlement of debt (See Note 8), the
Company signed notes with stockholders and management of the Company
in the aggregate amount of $95,000. A portion of these notes are
payable upon demand with the balances due after April 2007. Interest
at 10 percent is payable in semiannual installments. Interest expense
relating to this debt is approximately $10,000 and $-0- for the 52
weeks ended May 27, 2004 and May 29, 2003, respectively. These notes
are all subordinated to the lender of the credit line. Aggregate
maturities of these notes due within the next three years are as
follows:
Year Amount
---- -------
2005 $30,000
2006 --
2007 65,000
--------
Total $ 95,000
========
Note 7 - Gain on Sale of Assets:
- ---------------------------------
In connection with the sale of the Iowa and Oklahoma vending machine
and cafeteria operations in 2001, $200,000 was held from the purchase
price by the buyer contingent upon the buyer retaining certain
customers. This $200,000 was not recorded by the Company in the year
the transaction occurred as it was deemed a gain contingency. The
Asset Purchase Agreement called for the Company to receive the
$200,000 in various intervals through 2004. $100,000 was collected and
recorded during 2002. On February 15, 2003, the Company reached an
agreement to receive the final $100,000 payment relating to the sale.
This $100,000 was not due until January 2004. The entire amount of
$100,000 was paid early on April 1, 2003.
Note 8 - Gain on Settlement of Debt:
- ------------------------------------
On March 10, 2003, a note payable to an individual with an outstanding
balance of $915,992 and due June 2008, was settled for $125,000. The
settlement resulted in a gain of $790,992 for the year ended May 29,
2003.
F-11
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments:
- --------------------
The Company leases all real estate for office, warehouse, and
commissary facilities expiring through November 2006. All equipment
that is leased is for office use. The Company must pay utilities under
the terms of the leases. Future minimum lease payments under all
non-cancelable operating leases, as of May 27, 2004, are as follows:
Fiscal Year Real
Ending Estate Equipment Total
----------- -------------- ----------- ------------
2005 $ 239,421 $ 1,360 $ 240,781
2006 140,511 -- 140,511
2007 23,310 23,310
------------- ----------- ------------
$ 403,242 $ 1,360 $ 404,602
============= =========== ============
The preceding data reflects existing leases and does not include
anticipated future replacements upon expiration.
Rental expense charged to operations was $239,263 in 2004 and $236,833
in 2003.
Note 10 - Income Taxes:
- -----------------------
Deferred income taxes consisted of the following at May 27 and May 29:
2004 2003
---- ----
Deferred Tax Asset $ 681,377 $ 554,411
Less Valuation Allowance (681,377) (512,618)
---------- ----------
Net Deferred Tax Asset -- 41,793
Deferred Tax Liability -- (41,793)
---------- ----------
Net Deferred Income Taxes $ -- $ --
========== ==========
The approximate tax effect of each temporary difference giving rise to
the deferred tax asset and liability was as follows: 2004 2003
2004 2003
---- ----
Vacation Accrual $ 10,360 $ 11,398
Allowance for Bad Debts 2,876 2,876
Depreciation 11,918 --
Contribution Carryforward 476 14,772
Net Operating Loss Carryforwards 655,747 525,365
---------- ----------
Deferred Tax Asset $ 681,377 $ 554,411
========== ==========
Accelerated Depreciation $ -- $ (41,793)
Deferred Tax Liability $ -- $ (41,793)
========== ==========
The valuation allowance was established to reduce the deferred tax
asset to zero. The reduction is necessary because of prior operating
losses and uncertainty about the Company's ability to utilize net
operating loss carryforwards before they expire. The valuation
allowance increased by $168,759 and decreased by $264,180 in fiscal
years 2004 and 2003, respectively.
F-12
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Income Taxes(continued):
--------------------------------
The income tax benefit reflected in the consolidated statements of
operations differs from the amounts computed at Federal statutory
income tax rates. The principal differences are as follows at May 27
and 29: 2004 2003
2004 2003
---- ----
Federal Income Tax Expense (Benefit)
Computed at Statutory Rate $ (73,533) $ 239,487
State Income Tax Expense 3,940 1,285
Non-Utilization of Net Operating Loss
Carryforwards 73,533 --
Utilization of Net Operating Loss
Carryforwards -- (239,487)
---------- ----------
Income Tax Expense (Benefit) $ 3,940 $ 1,285
========== ==========
The Company has Federal net operating loss carryforwards available at
May 27, 2004 which amounted to $1,639,368 and expires at various
intervals from 2008 through 2024.
In addition, for state purposes, AFS and AFSC has State of New York
net operating loss carryforwards available at May 27, 2004, which
amounted to $2,125,604 and expire at various intervals from 2008
through 2024.
Note 11 - Segment Information:
- -----------------------------
The Company follows Financial Accounting Standards Board SFAS No. 131
Disclosures about Segments of an Enterprise and Related Information.
SFAS No. 131 requires companies to report financial and descriptive
information about its reportable operating segments, including segment
profit or loss, certain specific revenue and expense items and segment
assets, as well as information about the revenues derived from the
Company's products and services, the countries in which the Company
earns revenues and holds assets, and major customers. The Company's
businesses are organized and managed as two operating segments based
on the differences in products and services. These segments are Food
and Janitorial. Operating segments are defined as components of an
enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. The
Company's chief executive officer and vice president have been
identified as the chief operating decision-makers. The Company's chief
operating decision makers direct the allocation of resources to
operating segments based on the profitability and cash flows of each
respective segment.
The Company evaluates performance based on several factors, of which
the primary financial measure is business segment income before taxes.
The accounting policies of the business segments are the same as those
described in "Note 1 - Summary of Significant Accounting Policies."
The following tables show the operations of the Company's reportable
segments:
2004 Food Janitorial Total
----------------------------- ------------ ---------- -----------
Sales $ 4,858,856 $ 477,586 $ 5,336,442
Operating Income (Loss) $ (176,664) $ 17,279 $ (159,385)
Assets $ 1,323,454 $ -- $ 1,323,454
Depreciation and Amortization $ 51,347 $ -- $ 51,347
Capital Expenditures $ 54,197 $ -- $ 54,197
F-13
AMBASSADOR FOOD SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Segment Information (continued):
- -----------------------------------------
2004 Food Janitorial Total
----------------------------- ------------ ---------- -----------
Sales $ 5,319,260 $ 543,584 $ 5,862,844
Operating Income (Loss) $ (145,820) $ 18,438 $ (127,382)
Assets $ 1,386,974 $ 4,409 $ 1,391,383
Depreciation and Amortization $ 80,414 $ -- $ 80,414
Capital Expenditures $ 81,379 $ -- $ 81,379
A reconciliation of the totals reported for the operating segments to
income (loss) before the provision for income taxes are as follows for
the 52 weeks ended May 27, 2004 and May 29, 2003: 2004 2003
2004 2003
---- ----
Total Reportable Segment Operating Loss $ (159,385) $ (127,382)
Other Income (Expense):
Loss on Asset Disposal (1,693) --
Interest Income 8,832 8,539
Interest Expense (64,030) (64,340)
Gain on Sale of Assets -- 100,000
Gain on Settlement of Debt -- 790,992
Other Expense -- (3,434)
---------- ----------
Total Other Income (Expense), Net (56,891) 831,757
---------- ----------
(Loss) Income Before Provision for
Income Taxes $ (216,276) $ 704,375
========== ==========
F-14