10-K/A 1 form10ka01523_11102008.htm form10ka01523_11102008.htm
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A

(Mark One)
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee required)
    For Fiscal year ended June 30, 2008
             
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934 (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 incorporation or organization)
(IRS Employer Identification No.)
 
725 Kimberton Road, Kimberton, Pennsylvania 19442
(Address of principal executive office)       (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 on Which Registered
Title of Each Class
   
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES o     NO x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (2) of the Act

YES o     NO x

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 o

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

LARGE ACCELERATED FILER   o    ACCELERATED FILER   o 
NON-ACCELERATED FILER   o    SMALLER REPORTING COMPANY   x 
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o     NO x

The aggregate market value of voting stock (Class A Common Stock, no par value) held by non-affiliates of the Registrant as of December 31, 2007 was approximately $214,266.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At October 13, 2008, 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.

(Cover page 2 of 2 pages)
 
 
EXPLANATORY NOTE

This form 10-K is being filed to correct an immaterial mathematical error in the Consolidated Statements of Operations.  The initial filing of the Form 10-K stated that Income tax (benefit)/expense was $19,963.  In fact Income tax (benefit)/expense should have been $0.
 
 
 
 
 
 
PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) 1. Consolidated Financial Statements

 
Reports of Independent Registered Public Accounting Firm
F-2
   
 
 
Consolidated Balance Sheets as of June 30, 2008 and 2007
F-3
     
 
Consolidated Statements of Operations for the Years Ended June 30, 2008, 2007 and 2006
 F-4
   
 
 
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2008, 2007 and 2006
F-5
     
 
Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and 2006
F-6
     
 
Notes to Consolidated Financial Statements
F-7 to F-20
     
 
Schedule of Valuation Accounts
F-21
 
(B)  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 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).

10.4
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 Form10-K filed September 27, 1992).

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).

10.19
Fourth Amendment to Revolving Credit Note between the Company and Wilmington Trust of Pennsylvania (Incorporated by reference to exhibit 10.19, annual report on Form 10-K filed on September 28, 2005).

10.20
Ninth Amendment to Loan Agreement between the Company and Wilmington Trust of Pennsylvania (Incorporated by reference to exhibit 10.20, annual report on Form 10-K filed on September 28, 2005).

10.21
Guaranty and Suretyship of Joseph V. Roberts (Incorporated by reference to exhibit 10.21, annual report on Form 10-K filed on September 28, 2005).

31.1
Section 302 Certification of Principal Executive Officer

31.2
Section 302 Certification of Principal Financial Manager

32.1
Section 906 Certification of Chief Executive Officer

32.2
Section 906 Certification of Principal Financial Manager (the Company does not have a Chief Financial Officer).
 
 
 
Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annual 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:  November 11, 2008
 
 
Financial Statements and Reports of Registered Public Accounting Firms
Nutrition Management Services Company and Subsidiaries
June 30, 2008, 2007 and 2006

TABLE OF CONTENTS
   
 
Page
   
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 F – 2
   
CONSOLIDATED BALANCE SHEETS
F - 3
   
CONSOLIDATED STATEMENTS OF OPERATIONS
F - 4
   
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
F - 5
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
F - 6
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F – 7 to F -20
   
SUPPLEMENTAL INFORMATION
  
   
SCHEDULE OF VALUATION ACCOUNTS
 F - 21
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Nutrition Management Services Company and Subsidiary


We have audited the consolidated balance sheets of Nutrition Management Services Company and Subsidiary as of June 30, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2008.  These financial statements are the responsibility of the Nutrition Management Services 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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion.  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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nutrition Management Services Company and Subsidiary as of June 30, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with U.S. generally accepted accounting principles.
 
/s/ MSPC
 
MSPC
Certified Public Accountants and Advisors,
A Professional Corporation

 
Cranford, New Jersey
October 14, 2008
 
F-2

Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
 
   
2008
    
2007
  
Current assets
            
Cash and cash equivalents
   $ 307,902     $ 701,858  
 Accounts receivable (net of allowance for doubtful accounts of $808,887 and $755,778 in 2008 and 2007, respectively)
     2,648,181       2,774,016  
Inventory
     142,073       142,921  
Prepaid and other current assets
     342,655       244,676  
Assets held for sale
     6,295,450       -  
Total current assets
     9,736,261       3,863,471  
                 
Property and equipment - net
     104,939       115,126  
                 
Assets held for sale
     -       6,295,450  
                 
Other assets
                
Note receivable
     -       86,746  
Advances to officers
     238,381       427,510  
Deferred income taxes
     2,265,908       2,265,908  
Bond issue costs (net of accumulated amortization of $168,724 and $154,158 in 2008 and 2007, respectively)
     123,800       138,359  
Other assets
     248,566       82,281  
Total other assets
     2,876,655       3,000,804  
Total assets
   $ 12,717,855     $ 13,274,851  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Current liabilities
                
Current portion of long-term debt
   $ 180,000     $ 170,000  
Current portion of line of credit
     3,499,114       3,499,114  
Current portion of note payable
     7,551       -  
Accounts payable
     3,196,032       3,001,543  
Accrued expenses
     266,727       282,703  
Accrued payroll
     208,366       260,185  
Other
     105,718       202,555  
Total current liabilities
     7,463,508       7,416,100  
                 
Long-term liabilities
                
Long-term debt - net of current portion
     1,865,000       2,045,000  
Total long-term liabilities
     1,865,000       2,045,000  
                 
Commitments and contingencies
                
                 
Stockholders’ equity
                
Preferred stock - no par, 2,000,000 shares authorized, none issued and outstanding Common stock
                
Class A - no par, 10,000,000 shares authorized; 3,000,000 issued, 2,747,000 outstanding
     3,801,926       3,801,926  
Class B - no par, 100,000 shares authorized; 100,000 shares issued and outstanding
     48       48  
Accumulated other comprehensive income (net of tax)
     -       -  
Retained earnings
     86,936       511,340  
      3,888,910       4,313,314  
Less treasury stock - (common - Class A: 253,000 shares - at cost )
     (499,563 )     (499,563 )
Total stockholders’ equity
     3,389,347       3,813,751  
Total liabilities and stockholders’ equity
   $ 12,717,855     $ 13,274,851  
 
The accompanying notes are an integral part of these statements

F-3
 
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,

   
2008
    
2007
    
2006
  
                   
Food service revenue
   $ 20,860,543     $ 20,911,939     $ 23,366,435  
                         
Cost of operations
                        
Payroll and related expenses
     9,913,066       8,816,497       9,540,157  
Other costs of operations
     6,954,041       8,218,410       9,552,811  
                         
Cost of operations
     16,867,107       17,034,907       19,092,968  
                         
Gross profit
     3,993,436       3,877,032       4,273,467  
                         
Expenses
                        
General and administrative expenses
     3,979,501       4,278,885       4,965,732  
Depreciation and amortization
     28,985       275,980       399,240  
Bad debt expense
     63,068       21,628       60,000  
                         
Total Expenses
     4,071,554       4,576,493       5,424,972  
                         
Loss from operations
     (78,118 )     (699,461 )     (1,151,505 )
                         
Other income/(expense)
                        
Interest expense
     (334,190 )     (472,454 )     (404,494 )
Interest income
     16,932       72,136       78,015  
Gain on Sale of Securities
     -       -       44,256  
Other
     (29,028 )     67,057       84,020  
                         
Other income/(expense) - net
     (346,286 )     (333,261 )     (198,203 )
                         
(Loss)/income before income taxes
     (424,404 )     (1,032,722 )     (1,349,708 )
                         
Income tax (benefit)/expense
     -       (261,575 )     (529,266 )
                         
Net (loss)/income
     (424,404 )     (771,147 )     (820,442 )
                         
                         
Comprehensive income/(loss)
   $ (424,404 )   $ (771,147 )   $ (820,442 )
                         
Net income/(loss) per share - basic and diluted
   $ (0.15 )   $ (.27 )   $ (.29 )
                         
Weighted average number of shares – basic and diluted
     2,847,000       2,847,000       2,847,000  
                         
 
The accompanying notes are an integral part of these statements
 
F-4
 
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the three years ended June 30, 2008
 
   
Class A Common Stock
    
Class B Common Stock
          
  Treasury Stock
  
   
Number of Shares
    
Amount
    
Number of Shares
    
Amount
    
Retained Earnings
    
Accumulated Other Comprehensive Income
    
Number of Shares
    
Amount
    
Total
Stockholders’
Equity
  
Balance June 30, 2005
     2,747,000     $ 3,801,926       100,000     $ 48     $ 2,102,929     $ 8,240       (253,000 )   $ (499,563 )   $ 5,413,580  
                                                                         
Other Comprehensive Income
     -       -       -       -       -       (8,240 )     -        -       (8,240 )
                                                                         
Net Income
     -       -       -       -       (820,442 )     -       -       -         (820,442 )
                                                                         
Balance-June 30, 2006
     2,747,000     $ 3,801,926       100,000     $ 48     $ 1,282,487       -       (253,000 )   $ (499,563 )   $ 4,584,898  
                                                                         
Net loss
     -       -       -       -       (771,147 )     -       -       -       (771,147 )
                                                                         
Balance-June 30, 2007     2,747,000     $ 3,801,926       100,000     $ 48     $ 511,340     $ -       (253,000 )    $ (499,563 )    $ 3,813,751  
                                                                         
Net loss      -       -       -       -       (424,404 )       -       -       -       (424,404 ) 
                                                                         
Balance-June 30, 2008     2,747,000     $ 3,801,926       100,000     $ 48     $ 86,936     $ -       (253,000 )     $ (499,563 )     $ 3,389,347  
 
The accompanying notes are an integral part of these statements

F-5
 
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
 
   
2008
    
2007
    
2006
  
Operating activities
                  
Net income/(loss)
   $ (424,404 )   $ (771,147 )   $ (820,442 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities
                        
Gain on sale of marketable securities
     -       -       (44,256 )
Depreciation and amortization
     28,985       275,980       399,240  
Amortization of bond costs
     14,559       14,564       14,564  
Provision for bad debts
     63,068       21,628       60,000  
(Benefit)/expense for deferred taxes
     -       (261,575 )     (548,219 )
                         
Changes in assets and liabilities
                        
Accounts receivable
     149,513       (417,924 )     668,750  
Inventory
     848       (701 )     (13,265 )
Prepaid and other
     (264,306 )     (47,399 )     144,566  
Income tax refund
     -       -       43,730  
Accounts payable
     194,489       3,494       (993,217 )
Accrued expenses
     (15,976 )     68,820       (484,477 )
Accrued payroll
     (51,818 )     33,574       (30,708 )
Other
     (96,837 )     118,061       (11,196 )
                         
Net cash provided by operating activities
     (401,879 )     (962,625 )     (1,614,930 )
                         
Investing activities
                        
Purchase of property and equipment
     (18,757 )     (49,482 )     (46,685 )
Net proceeds of marketable securities
     -       -       249,577  
Repayments/(advances) by employees and officers
     189,129       (4,216 )     10,989  
                         
Net cash provided by/(used in) investing activities
     170,372       (53,698 )     213,881  
                         
Financing activities
                        
Restricted cash
     -       250,000       -  
Proceeds from financing
     327,413       297,659       238,869  
Proceeds from long-term borrowings
     -       -       275,000  
Repayment of long-term borrowings
     (170,000 )     (165,808 )     (150,000 )
Repayment of financing
     (319,862 )     (277,237 )     (238,869 )
                         
Net cash provided by/(used in) financing activities
     (162,449 )     104,614       125,000  
                         
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
     (393,956 )     (911,709 )     (1,276,049 )
Cash and cash equivalents - beginning of year
     701,858       1,613,567       2,889,616  
Cash and cash equivalents - end of year
   $ 307,902     $ 701,858     $ 1,613,567  
Supplemental disclosures of cash flow information
                        
Cash paid during the years for
                        
Interest
   $ 348,705     $ 445,220     $ 419,416  
Income taxes
   $ 19,432     $ 38,459     $ 5,362  
 
The accompanying notes are an integral part of these statements

F-6
 
  Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
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 Company (“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 and a comprehensive training facility.  Effective June 27, 2005, the Company closed the buffet restaurant at the Collegeville Inn to make the entire facility available for catered events.   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 Foods operations are located at the Collegeville Inn.
 
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.
 
2.  Cash and Cash Equivalents
 
Cash equivalents are comprised of certain highly liquid investments with an original maturity of three months or less when purchased.

3. Marketable Securities

The Company classifies its investments in marketable securities as available for sale, which are carried at the lower of cost or market based upon the quoted market prices of those investments at period end.  The Company sold the marketable securities during the third quarter of Fiscal 2006 and realized a gain of $44,256.

As of June 30, 2008 there were no marketable securities.

During the years ended June 30, 2008, 2007 and 2006, sales proceeds were $0, $0, and $249,577 respectively.  The gross realized gains during the years ended June 30, 2008, 2007, and 2006 were $0, $0 and $44,256 respectively.

4. Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable are primarily related to food service management fees.  Credit is extended based on prior experience with the customer and evaluation of a customer’s financial condition.  Accounts receivable are generally due within thirty to sixty days.  The allowance for doubtful accounts represents an estimate of amounts considered uncollectible and is determined based on specifically identified amounts that we believe to be based on historical collection experience, adverse situations that may affect the customer’s ability to repay and prevailing economic conditions.  If our actual collections experience changes, revisions to our allowance may be required.  The Company believes it will be successful in its collection efforts related to its outstanding balances.

5. Inventory
 
Inventory, which consists primarily of food, is stated at the lower of cost (first-in, first-out method) or market.  The Company records inventory for contracts which require goods to be owned by the Company.  For the remaining customers, the Company purchases inventory on their behalf and a payable or receivable is recorded for the change in the value of these goods, which is then collected from or paid to customers.  As of June 30, 2008 and 2007, inventory was $142,073 and $142,921, respectively.  As of June 30, 2008 and 2007, inventory receivable from customers was $19,558 and $9,737 respectively, while inventory payable to customers was $18,225 and $4,204 respectively.
 
F-7
 
  Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

6. Revenue Recognition
 
The Company recognizes revenue when services have been rendered and the contract price is determinable, and collectibility is reasonably assured.  Revenue is generated primarily from fees for food service management and facilities management at continuing care and health care facilities, schools and the Collegeville Inn Conference and Training Center.  The Company provides its services under several different financial arrangements including a fee basis and guaranteed rate basis.  For Fee Contracts, certain expenses are paid directly by the Customer and certain expenses are paid by the Company and billed to the Customer.  The Company recognizes Revenue in the amount of the expenses billed and the fees for providing services.  For a Guaranteed Rate Contract, the Company charges Customers an established amount for services provided (for example, per Patient Day) and is responsible for all the expenses related to the delivery of those services.  The amount of the billing is recorded as Revenue and the delivery costs are recorded as Cost of Sales. Regardless of the different financial arrangements, the Company recognizes revenue when services have been rendered and the contract price is determinable, and collectibility is reasonably assured.  Ongoing assessments of the credit worthiness of customers provide the Company reasonable assurance of collectibility upon performance of services.  The Company has no other obligation with respect to its services once services are performed.

7. 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, if less.

8. Assets Held for Sale

The Company continues its efforts to sell or lease all or part of the Collegeville Inn Conference and Training Center and or certain excess land adjacent to the facility.  The Company has reclassified these assets as held for sale.

9. Bond Issue Costs

Bond issue 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.

10. Accounting for Stock-Based Compensation

Stock Options issued to Employees – On July 1, 2005 we adopted the fair value recognitions provisions of SFAS No. 123 R, “Share-Based Payments”, under the modified prospective transition method.  Prior to July 1, 2005, we applied the Accounting Principles Board (APB) Opinion No. 25 intrinsic value accounting method for its stock incentive plans.   Under the modified prospective transition method, the fair value recognition provisions apply only to new awards or awards modified after July 1, 2005.  Additionally, the fair value of existing unvested awards at the date of adoption is recorded in compensation expense over the remaining requisite service period.

11. Income Taxes

The Company determines its provision for income taxes using the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences of existing assets and liabilities and their respective tax bases.  Future tax benefits of tax loss and credit carryforwards also are recognized as deferred tax assets.  When necessary, deferred tax assets are reduced by a valuation allowance to the extent the Company concludes there is uncertainty as to their ultimate realization.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred taxes of a change in tax rates is recognized in income in the period that the change is enacted.
 
As of June 30, 2008 and 2007, the Company maintained a deferred tax asset of $2,265,908.  The Company has provided a valuation allowance of $125,461 against its deferred tax asset after consideration of a future gain on the disposal of certain land and assets relative to its Collegeville facility and anticipated future profitable operating results.  However, the amount realizable may be reduced if future taxable income is reduced or is insufficient to utilize the entire deferred tax asset.  See Note G for additional information.
 
F-8
 
  Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
12. Accumulated Other Comprehensive Income/(Loss)

 Based on the Company’s current activities, there is no accumulated other comprehensive income.

13. Earnings/(Loss) Per Share
 
The Company has adopted the provisions of SFAS No. 128.  Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period.  SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures.  Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as  common shares that could result from the potential exercise into common stock.

The computation of diluted earnings per share does not assume exercise of securities that would have an antidilutive effect on per share amounts (i.e., increasing earnings per share or reducing loss per share).  The dilutive effect of outstanding options are reflected in dilutive earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share.  It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options.   Options that may have a dilutive effect in the future are listed in Note J.
 
14. Advertising Costs
 
It is the Company’s policy to expense advertising costs in the period in which they are incurred.  Advertising expense for the years ended June 30, 2008, 2007 and 2006 was $8,845, $5,247 and $24,600 respectively.
 
15. Reclassification
 
Certain 2007 and 2006 items have been reclassified to conform to the current year presentation.
 
16. Use of Estimates
 
In preparing the Company’s financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.

17. Fair Value of Financial Instruments

The Company used the following methods and assumptions in estimating our fair value disclosures for financial instruments:
 
Cash and cash equivalents:  The carrying amounts the Company has reported in the accompanying balance sheet for cash and cash equivalents approximate their fair values.
 
Investments:  The Company estimates the fair values of investments based on quoted market prices.  The carrying amounts the Company has reported in the accompanying balance sheet for investments in contracts approximate their fair values.
 
Long- and short-term debt:  The Company bases the fair values of debt instruments on quoted market prices.  Where quoted prices are not available, the Company bases the fair values on the present value of future cash flows discounted as estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms.  The carrying amounts the Company has reported in the accompanying balance sheet for debt approximate their fair values.  See footnote F for further discussion.
 
F-9

Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
18. Impairment or Disposal of Long Lived Assets
 
The Company adopted SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).  Under the requirements of SFAS 144, the Company assesses the potential impairment of property, plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  An asset’s value is impaired if management’s estimate of the aggregate future cash flows, undiscounted and without interest charges, to be generated by the asset are less than the carrying value of the asset.  Such cash flows consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition.  To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the asset over the fair value of the asset.  Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the requirements for impairment charges.
 
19. New Accounting Pronouncements
 
In May 2008, the Financial Accounting Standards Board issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Statement No. 162 improves financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. Statement No. 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is evaluating the impact of Statement No. 162.
 
In April 2008, the Financial Accounting Standards Board issued FASB Staff Position FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is evaluating the impact of FSP No. FAS 142-3.
 
In March 2008, the Financial Accounting Standards Board issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related and cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. Statement No. 161 is effective for financial statements issued for fiscal years and interim periods after November 15, 2008, with early application encouraged. The Company is evaluating the impact of Statement No. 161 on its consolidated financial statements.
 
In December 2007, the Financial Accounting Standards Board issued Statement No. 141(R), “Business Combinations.” Statement No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Statement No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 141(R) on its consolidated financial statements.
 
In December 2007, the Financial Accounting Standards Board issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” Statement No. 160 requires that a reporting entity provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Statement No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 160 on its consolidated financial statements.
 
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 provides entities with the opportunity to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” The Company did not elect early adoption and is currently assessing the implications of this Statement on its consolidated financial statements.

F-10

Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
 
19. New Accounting Pronouncements - continued
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and enhances disclosures about fair value measurements. SFAS 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those years. The Company did not elect early adoption and is currently assessing the implications of this Statement on its consolidated financial statements.
 
In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.” FSP No. 157-2 delays the effective date of FASB Statement No. 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of this FSP. The Company is currently assessing the implications of this Statement on its consolidated financial statements.
 
Effective July 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides guidance on financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. According to FIN 48, a tax position is recognized if it is more-likely-than-not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize and should be measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of June 30, 2008, the Company had no material unrecognized tax benefits, accrued interest or penalties.  Penalties are recorded in non-interest expense in the year they are assessed and are treated as a non-deductible expense for tax purposes. Interest is recorded in non-interest expense in the year it is assessed and is treated as a deductible expense for tax purposes. As of June 30, 2008, tax years 2005 through 2007 remain subject to Federal examination as well as examination by state taxing jurisdictions.

NOTE C – BUSINESS CONDITIONS
 
The Company's primary sources of revenues are the management fees it receives from contracts to provide food and housekeeping services to continuing care facilities, hospitals, retirement communities and schools, as well as the Collegeville Inn, which includes the Conference and Training Center, Catering facilities and the Cook Chill operations. The Company has a business plan in place to improve the operating results from the Collegeville Inn while it continues its sale/lease efforts.  See Note O for segment reporting information.  Effective June 27, 2005, the Company closed the buffet restaurant at the Collegeville Inn to make the facility available for catered events.

On October 8, 2008 the Company entered into an agreement of sale for certain tracts or parcels of land together with the building, Collegeville Inn Conference & Training Center for the sum of $5,500,000.  The agreement provides for an initial deposit of $500,000 to be placed into escrow within three days after the effective date of the agreement.  At closing the Purchaser shall pay the remaining balance of the purchase price.  The Purchaser shall have a period of sixty (60) days after the Agreement Date for a due diligence period for the purpose of inspecting, investigating, examining, surveying, appraising, and any other testing as Purchaser may elect to perform.  The agreement of sale provides that settlement occur within forty five (45) days of purchaser’s receipt of all permits and approvals.  Upon closing of the transaction, the Company plans on using the proceeds to retire the outstanding debt associated with the property.   However, there can be no assurance that this transaction will be completed in accordance with the terms of the agreement of sale.
 
F-11

Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE C – BUSINESS CONDITIONS - continued

The Company's financial statements as of June 30, 2008 have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Although the Company had positive working capital at June 30, 2008 of approximately $2.1 million, the Company did have negative working capital of approximately $3.5 million as of June 30, 2007, which raised some doubt as to its ability to satisfy its obligations during that next fiscal year as they become due.  Such doubt was alleviated after careful review of Management's plans for the future relating to the Collegeville Inn Assets and operations, and the projections relating to the management fees from its contracts and future contracts.

Management believes that operating cash flow, the possible proceeds from the sale or lease of certain assets, available cash and available credit resources will be adequate to make repayments of indebtedness, meet the working capital needs, satisfy the needs of its operations, and to meet anticipated capital expenditures during the next twelve months ending June 30, 2009.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the Company's accompanying balance sheet is dependent upon continued operations of a continuing basis, to maintain present financing, and to succeed in its future operations. The Company's financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

NOTE D - PROPERTY AND EQUIPMENT
 
The following details the composition of property and equipment.
 
   
Estimated useful lives
    
2008
    
2007
  
Building
    
40
 
   $ 7,829       7,829  
Machinery and equipment
    
2 - 8
       2,352,735       2,422,005  
Furniture and fixtures
    
2 - 8
       26,374       26,374  
Other, principally autos and trucks
    
2 - 10
        211,335       211,335  
              2,598,273       2,667,543  
Less: accumulated depreciation
             2,493,334       2,552,416  
            $ 104,939     $ 115,126  
                         
NOTE E – ASSETS HELD FOR SALE
                        
                         
The following details the composition of assets held for sale.
                        
   
Estimated useful lives
    
2008
    
2007
  
Property and equipment
                        
Land
  
 
-
     $ 497,967     $ 497,967  
Building
    
40
       7,491,263       7,491,263  
Other, principally equipment, furniture and fixtures
    
2 - 8
        2,386,716       2,386,717  
              10,375,946       10,375,946  
Less: accumulated depreciation
             4,080,496       4,080,496  
            $ 6,295,450     $ 6,295,450  
 
The Company continues its efforts to sell or lease all or part of the Collegeville Inn Conference and Training Center and or certain excess land adjacent to the facility.  The Company has reclassified these assets as held for sale.
 
F-12
 
  Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
NOTE F - LONG- TERM DEBT
 
Long-term debt consisted of the following:
  
2008
    
 2007
  
Bank revolving credit, interest due monthly at the National Consumer rate minus .25% (effectively 5.00% as of June 30, 2008), secured by all corporate assets and ersonal guarantee of the Chief Executive Officer; matures on September 30, 2008
   $ 3,499,114     $ 3,499,114  
Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds payable)
     1,495,000       1,615,000  
Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds payable)
      550,000       600,000  
      5,544,114       5,714,114  
Less: current maturities (includes bank revolving credit)
     3,679,114       3,669,114  
    $ 1,865,000     $ 2,045,000  
 
In February 2001, the Company executed a loan agreement with a bank for a revolving credit and two irrevocable letters of credit issued in conjunction with the issuance of the Industrial Revenue Bonds, totaling $4,000,000 and $3,065,000, respectively.  In October 2003, the Company entered into an amended credit agreement whereby the $4,000,000 Revolving Credit Loan Facility was reduced to $3,500,000 and $500,000 was placed in a cash collateral account and pledged as additional collateral against the revolving credit line.  As of June 30, 2008 all of the cash collateral account has been released and is available for operations.
 
At June 30, 2008, the Company had approximately $3,500,000 outstanding under the revolving credit.  Advances under the revolving credit are used for working capital purposes.
 
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 Company and the bank reached an agreement in June 2008 which maintains the revolving credit line in place to September 30, 2008.  The Company is currently negotiating to replace or retire this debt with alternate financing.
 
Bonds Payable - In December 1996, the Company, through its subsidiaries, authorized two industrial revenue bond issues.
 
Issue #1
 
Title - Montgomery County Industrial Development Authority, $2,500,000 aggregate principal amount, federally taxable variable rate demand/fixed rate revenue bonds (“Collegeville Inn Project”) Series of 1996
 
Rate - Variable, to a maximum of 17% (Variable Rate at June 30, 2008 was 2.58%)
 
Term - 20 years (2016)
 
Purpose - Rehabilitate, furnish and equip the Collegeville Inn

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% (Variable Rate at June 30, 2008 was 1.85%)
 
Term - 20 years (2016)
 
Purpose - Develop a cook-chill food preparation technology

F-13
 
  Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE F - LONG- TERM DEBT - Continued
 
Each series of bonds is guaranteed by the Company and each of its subsidiaries.  The assets of Collegeville Inn and Apple Fresh Foods are pledged as collateral for both series of bonds.
 
The Company’s bank has issued irrevocable letters of credit in favor of the bond trustee for the full amount of both bond issues.  The letters of credit have a term of four years and can be renewed on an annual basis by the bank.  The bank holds the mortgage on the Collegeville Inn building and property.  The letters of credit are guaranteed by the parent company.

The sinking fund requirements of the bonds are as follows:
   
Collegeville  Inn 
    
Apple Fresh Foods
    
Total
  
                   
2009
     130,000       50,000       180,000  
2010
     135,000       55,000       190,000  
2011
     145,000       55,000       200,000  
2012
     155,000       60,000       215,000  
2013
     165,000       60,000       225,000  
Thereafter
     765,000       270,000       1,035,000  
Total
     1,495,000       550,000       2,045,000  

Maturities of principal due in the following years are set forth below:

Year ending June 30,
      
       
2009
   $ 3,679,114  
2010
     190,000  
2011
     200,000  
2012
     215,000  
2013
     225,000  
Thereafter
     1,035,000  
    $ 5,544,114  

NOTE G - INCOME TAXES

The components of income tax (benefit)/expense are:
  
  Year Ended June 30,
  
   
2008
    
2007
    
2006
  
Current
                  
Federal
   $ 0     $ (266,597 )   $ 0  
State
     0       (47,046 )     0  
      0       (313,643 )     0  
Deferred
                        
Federal
     0       44,258       (403,176 )
State
     0       7,810       (126,090 )
      0       52,068       (529,266 )
                         
    $ 0     $ (261,575 )   $ (529,266 )
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are approximately:
 
F-14
 
Nutrition Management Services Company and Subsidiaries
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
     
June 30
  
     
2008
    
 2007
  
Deferred tax assets
            
Provision for doubtful accounts
   $ 347,839     $ 421,051  
Excess of tax over financial statement basis of investments in contracts
     94,650       94,650  
                 
Vacation accrual
     99,008       136,558  
Bonus accrual
     -       -  
Charitable contribution carryforward
 
   48,919       48,919  
Federal net operating loss
     1,831,968       1,501,994  
Other
      74,181       74,181  
Total deferred tax assets
     2,496,565       2,277,353  
                   
Deferred tax liabilities
                
Depreciation
     105,196       11,443  
                   
Allowance
       125,461        -  
                   
Net deferred tax assets
   $ 2,265,908     $ 2,265,910  
                   
 
The deferred tax amounts are classified on the balance sheet as follows:
 
   
June 30
  
   
2008
    
2007
  
Current asset
   $ --     $    
Non-current asset
     2,265,908       2,265,910  
    $ 2,265,908     $ 2,265,910  
 
The Company also has a federal net operating loss carry forward of approximately $4,380,000 expiring on December 31, 2026.  The Company has charitable contribution carry forwards in the amount of $113,765, which began to expire in the fiscal year ended June 30, 2007.
 
The Company has provided a valuation allowance of $125,461 against its deferred tax assets after consideration that the  future gain on the disposal of certain land and assets relative to the Collegeville Inn and anticipated future profitable operating results.

The following reconciles the tax provision with the U.S. statutory tax rates:
 
   
Year Ended June 30
  
   
2008
    
2007
    
2006
  
Income taxes, at U.S. statutory rates
     (34.0 )%     (34.0 )%     (34.0 )%
States taxes, net of federal tax benefit
     (5.0 )     (5.0 )     (5.0 )
Nondeductible expenses
     10.0       10.0       7.0  
Other
     3.7       3.7       (8.6 )
Tax expense/(benefit)
     (25.3 )%     (25.3 )%     (40.6 )%
                         
 
F-15
   
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
NOTE H - RELATED PARTY TRANSACTIONS
 
The Company leases its corporate offices, located at 725 Kimberton Road, Kimberton, Pennsylvania, which consists of approximately 8,500 square feet from Ocean 7, Inc., a corporation controlled by the Chief Executive Officer of the Company, The initial term of the lease expired on June 30, 2003 and continues on a month to month lease based on terms generally similar to those prevailing to unrelated parties. The Company leases an apartment from the same company to accommodate visiting clients and employees.
 
Joseph V. Roberts, Chief Executive Officer and Director of the Company, received long term advances of which $187,503 and $372,315 remains outstanding as of June 30, 2008 and 2007, respectively.  Kathleen A. Hill, President, Chief Operating Officer and Director of the Company, received long term advances of which $50,567 and $54,695 remains outstanding as of June 30, 2008 and 2007, respectively.  Interest for fiscal year ended June 30, 2008 of $11,920 has been included in the outstanding amounts.  These amounts are currently under agreement whereby monthly payments are being made to reduce the outstanding amounts.
 
NOTE I – COMMITMENTS AND CONTINGENCIES
 
1.  Operating Leases
 
The Company leases real estate facilities from a corporation owned by a principal stockholder under month-to-month operating leases, including its corporate office building under a month-to-month lease based on terms management believes to be generally similar to those prevailing to unrelated parties.  During the years ended June 30, 2008, 2007 and 2006, rent expense paid to the related party was $259,347, $265,283 and $261,165, respectively.
 
The Company is also obligated under various operating leases for operating equipment for periods expiring through 2009.  During the years ended June 30, 2008, 2007 and 2006, rent expense was $323,114, $334,845 and $317,486, respectively, for all operating leases.
 
Minimum annual rentals under non-cancelable operating leases subsequent to June 30, 2008, are as follows:
 
Year ending June 30,
  
Operating
equipment
  
2009
   $ 11,601  
2010
     0  
2011
     0  
 Total
     11,601  
 
2.  Litigation
 
On February 7, 2001, the Company filed a suit against a major client in the Court of Common Pleas of Chester County, Pennsylvania, which was subsequently removed to the United States District Court for the Eastern District of Pennsylvania.  On February 25, 2005, judgment was entered on a jury verdict in favor of the Company, in the amount of $2,500,000 in damages related to its claims.  The former client did not appeal the judgment and the Company received $2,500,000 on June 1, 2005.  The Company filed a post-trial motion to amend the judgment to add prejudgment interest.  On June 1, 2006, this motion was denied.  The Company has engaged independent legal counsel to pursue prejudgment interest.  A trial has been scheduled for January 2009.

The Company is involved in litigation with a construction contractor related to the renovations of Collegeville Inn.  The Company denies the claims and has asserted offsets against the amounts claimed.  The case is in discovery.

Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operations.

In addition to the litigation described above, 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 effect on the Company’s financial position, results of operations or cash flows.
 
 
F-16
 
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
NOTE I – COMMITMENTS AND CONTINGENCIES - continued

3.  Employment Contracts

For the fiscal years ended June 30, 2008,  2007 and 2006, the Company paid a base salary  of $298,758, $290,344 and $333,727 to Joseph Roberts, Chairman and Chief Executive Officer and $222,127, $213,544 and $237,846 to Kathleen Hill, President and Chief Operating Officer, respectively.  The Company currently has no employment contracts with either of such individuals, as all previous employment contracts with such individuals expired.  The Compensation Committee of the Board of Directors is currently engaged in discussions with Mr. Roberts and Ms. Hill with respect to their compensation for the fiscal year ending June 30, 2009.

NOTE J - 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.
 
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.

NOTE K - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
 
1. 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, 2008, all employees were eligible to participate in the plan.  During the years ended June 2008, 2007 and 2006 there were fourteen participants and no shares purchased.

As of July 1, 2005, the Company adopted the fair value recognitions provisions of SFAS No. 123 R, “Share-Based Payments”, under the modified prospective transition method.
 
F-17
 
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

NOTE L - 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 4% of employee plan contributions.  Participants are vested 20% for each year of service beginning after year three and are fully vested after seven service years.  During the years ended June 30, 2008, 2007 and 2006, Company contributions to the plan, which were charged to expense, amounted to $16,471, $20,081, and $13,378, respectively.

NOTE M - 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, 2008, the Company had cash balances of approximately $92,610 subject to credit risk beyond insured amounts at various financial institutions having high credit standings.  The Company 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 N - MAJOR CUSTOMERS

The Company’s Food Service Management Segment had sales to three customers representing approximately the following percentage of total revenues, for the years ended June 30, 2008, 2007, and 2006, respectively:
 
   
Years ending June 30,
  
   
2008
    
2007
    
2006
  
Customer A:
     26 %     38 %     34 %
Customer B:
     0 %     4 %     14 %
Customer C:
     10 %     12 %     10 %

The loss of any such customer could have a material adverse effect on the Company’s future results of operations.

NOTE O – MAJOR SUPPLIERS

For the years ended June 30, 2008, 2007 and 2006, respectively, the Company purchased the following percentages of its food and non-food products from two vendors:

   
Years ending June 30,
  
   
2008
    
2007
    
2006
  
Vendor A:
     32 %     29 %     38 %
Vendor B:
     11 %     18 %     19 %


In the event of a disruption in the Company’s relationship with these vendors or any disruption in the vendor’s business, the Company has alternate sources of supply for its food and non-food products.


 
 
F-18
 
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 
NOTE P - BUSINESS SEGMENTS
 
The Company follows the disclosure provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.  This 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 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) training and conference center.  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 accounting principles generally accepted in the United States of America.  As a result, reported segment results are not necessarily comparable with similar information reported by other similar companies.
 
   
Food Service Management
    
Training and Conference Center
    
Total
  
                   
As of and for the year ended June 30, 2008:
                  
Food service revenue
   $ 20,463,614     $ 396,929     $ 20,860,543  
Depreciation and amortization
     24,202       4,783       28,985  
Income/(loss) from operations
     313,111       (391,229 )     (78,118 )
Interest expense
     (251,138 )     (83,052 )     (334,190 )
Interest income
     16,932       -       16,932  
Income/(loss) before tax expense/(benefit)
     (750,640 )     326,236       (424,404 )
Net income/(loss)
     (750,640 )     326,236       (424,404 )
Total assets
     5,832,385       6,885,470       12,717,855  
Capital expenditures
     18,757       -       18,757  
                         
                         
As of and for the year ended June 30, 2007:
                        
Food service revenue
   $ 20,246,350     $ 665,589     $ 20,911,939  
Depreciation and amortization
     37,417       238,563       275,980  
Income/(loss) from operations
     12,101       (711,561 )     (699,460 )
Interest expense
     (307,488 )     (164,966 )     (472,454 )
Interest income
     72,136       -       72,136  
Income/(loss) before tax expense/(benefit)
     (966,548 )     ( 66,173 )     (1,032,721 )
Net income/(loss)
     (704,973 )     (66,173 )     (771,146 )
Total assets
     5,934,042       7,340,809       13,274,851  
Capital expenditures
     35,627       13,855       49,482  
                         
As of and for the year ended June 30, 2006:
                        
Food service revenue
   $ 22,854,359     $ 512,076     $ 23,366,435  
Depreciation and amortization
     44,712       354,528       399,240  
Income/(loss) from operations
     (266,472 )     (885,033 )     (1,151,505 )
Interest expense
     (251,281 )     (153,213 )     (404,494 )
Interest income
     78,015       -       78,015  
Income/(loss) before tax expense/(benefit)
     (1,309,629 )     ( 40,079 )     (1,349,708 )
Net income/(loss)
     (780,363 )     (40,079 )     (820,442 )
Total assets
     6,727,731       7,239,707       13,967,438  
Capital expenditures
     46,685       -       46,685  
 
 
 
 
 
F-19
 
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 
NOTE Q - 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 2008  
   
September 30,
    
December 31,
 
   March 31,     June 30,  
                         
Revenues
   $ 5,040,863     $ 5,283,004     $ 5,118,571     $ 5,418,105  
Gross profit
     994,020       993,648       932,972       1,072,796  
Net income (loss)
     ( 214,771 )     ( 179,489 )     ( 181,298 )     151,153  
Net income (loss) per share
                                
- basic and diluted
   $ (.08 )   $ (.06 )   $ (.06 )   $ .05  
                                 
   
Fiscal 2007
  
   
September 30,
    
December 31,
    
March 31,
    
June 30,
  
                                 
Revenues
   $ 5,325,602     $ 5,159,275     $ 4,953,280     $ 5,473,782  
Gross profit
     1,042,739       933,472       895,892       1,004,929  
Net income (loss)
     ( 117,423 )     ( 241,568 )     ( 242,489 )     (169,667 )
Net income (loss) per share
                                
- basic and diluted
   $ (.04 )   $ (.08 )   $ (.09 )   $ (.06 )
 
                                
 
F-20
 
SUPPLEMENTAL INFORMATION
 
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
For the three years ended June 30, 2008
 
The following sets forth the activity in the Company’s valuation accounts:

   
Allowance for
  
   
Doubtful Accounts
  
       
Balance at June 30, 2005
     958,702  
         
       Provision for bad debts
     60,000  
         
       Write-offs
     (54,514 )
         
Balance at June 30, 2006
     964,188  
         
       Provision for bad debts
     21,628  
         
       Write-offs
     (230,038 )
         
Balance at June 30, 2007
     755,778  
         
Provision for bad debts
     63,068  
      (9,959 )
       Write-offs
        
         
Balance at June 30, 2008
   $ 808,887  
         
         


F-21