-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A7n+CNZc00xm/nAk0XXsJnedPBq35J1FWJXA9s0xsB2WNbbMgWpEWLkDs0WLFbfn G3fyLabylsDouWufVZ8x8A== 0000921895-98-000784.txt : 19980930 0000921895-98-000784.hdr.sgml : 19980930 ACCESSION NUMBER: 0000921895-98-000784 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980929 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NUTRITION MANAGEMENT SERVICES CO/PA CENTRAL INDEX KEY: 0000879303 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 232095332 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19824 FILM NUMBER: 98716837 BUSINESS ADDRESS: STREET 1: 725 KIMBERTON RD CITY: KIMBERTON STATE: PA ZIP: 19442 BUSINESS PHONE: 6109352050 MAIL ADDRESS: STREET 1: 725 KIMBERTON ROAD CITY: KIMBERTON STATE: PA ZIP: 19442 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee required) For the fiscal year ended June 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required) (NO FEE REQUIRED) For the transition period from _____ to _____ Commission file Number 0-19824 NUTRITION MANAGEMENT SERVICES COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-2095332 ------------ ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 725 Kimberton Road, Kimberton, Pennsylvania 19442 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 610-935-2050 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class Shares of Class A Common Stock (no par value) (Cover page 1 of 2 pages) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchanges Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES / X / NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /x/ The aggregate market value of voting stock (Class A Common Stock, no par value) held by non-affiliates of the Registrant as of September 21, 1998 was approximately $3,521,887. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: At September 21, 1998, there was outstanding 2,859,569 shares of the Registrant's Class A Common Stock, no par value, and 100,000 shares of the Registrant's Class B Common Stock, no par value. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III for Form 10-K will be incorporated by reference to certain portions of a definitive proxy statement which is expected to be filed by the Registrant pursuant to Regulation 14A within 120 days after the close of its fiscal year. This report consists of consecutively numbered pages (inclusive of all exhibits and including this cover page). The Exhibit Index appears on pages 17-19. (Cover page 2 of 2 pages) PART I ITEM 1 - BUSINESS General Nutrition Management Services Company (the "Company" or the "Registrant") provides food management services to continuing care facilities, hospitals and retirement communities. The Company was incorporated under the laws of the Commonwealth of Pennsylvania on March 28, 1979, and focuses on the continuing care and health-care segments of the food service market. Its customers include continuing care facilities, hospitals, and retirement communities. On May 31, 1994, the Company purchased twenty-two (22) acres of land containing a 40,000 square foot building formerly used as a restaurant and banquet facility. The Company has recently renovated the property to serve as a comprehensive training facility for Company employees. In addition, the facility will serve as a showroom for prospective customers who will be able to observe the Company's programs for nursing and retirement home dining and hospital cafeteria operations. In September 1997, the Company opened the retail restaurant portion of the Collegeville Inn Conference & Training Center. In connection therewith, the Company expended approximately $6,000,000 in renovation work. The revenue from the restaurant operation will be used to defray the costs and expenses of the training facility. The restaurant is managed by experienced professionals employed by and recruited by the Company. The remaining three divisions of the project are expected to open by the second quarter of fiscal 1999. See "Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Investing Activities" for a description of the costs relating to the renovation work. Financial Information About Industry Segments See Note N on page 23 of the Financial Statements. Description of Services The Company provides contract food service to continuing care facilities, hospitals, and retirement communities. The Company provides complete management and supervision of the dietary operations in its customers' facilities through the use of on-site management staff, quality and cost-control programs, and training and education of dietary staff. The Company's operational 1 districts are supported by Regional Managers, District Managers, registered dietitians and quality assurance staff. The Company seeks to provide food service at a lower cost than self-managed facilities, while maintaining or improving existing service, nutritional care standards and regulatory compliance. Marketing and Sales The Company's customers include continuing care facilities, hospitals and retirement communities, which range in size from small individual facilities to large multi-facility operations. Although many facilities perform their own food service functions without relying upon outside management firms such as the Company, the Company expects the market for its services to grow as facilities increasingly seek to contain costs and are required to comply with increased governmental regulations. The Company's services are marketed at the corporate level by its Chief Executive Officer, its President, and its Marketing Representatives. The Company's services are marketed primarily through in-person solicitation of facilities. The Company also utilizes direct mail and participates in industry trade shows. Market for Services The market for the Company's services consists of a large number of facilities involved in various aspects of the continuing care and health care fields, including nursing homes, retirement communities, hospitals and rehabilitation centers. Such facilities may be specialized or general, privately owned or public, profit or not-for-profit and may serve residents and patients on a continuing or short-term basis. Service Agreements The Company provides its services under several different financial arrangements including a fee basis and profit and loss basis. As of June 30, 1998 the Company provided services under various service agreements at 103 facilities. At certain of these facilities, the Company has contracts to provide vending services in addition to the contract to provide food services. Most of these contracts have one year terms and are automatically renewable at the end of each service year. The agreements generally provide that either party may cancel the agreement upon ninety (90) days written notice. 2 The following table shows the number of customer accounts maintained by the Company during each of the last three fiscal years:
1998 1997 1996 ---- ---- ---- Agreements in effect at beginning of fiscal year 102 92 95 New agreements during the fiscal year 23 24 10 Contracts canceled during the fiscal year 22 14 13 -- -- -- Agreements in effect at the end of the fiscal year 103 102 92 --- --- --
In consideration for providing its services, the Company expects to be paid by its clients in accordance with the credit terms agreed upon. Historically, the Company has not incurred any significant losses related to amounts not collected for services rendered. Major Customer In fiscal 1998, 15% of the Company's revenues were derived from sales to one customer. The loss of such customer could have a material adverse affect on the Company's results of operations in fiscal 1999. Competition The Company competes mainly with regional and national food service management companies operating in the continuing care and health care industries, as well as with the self managed departments of its potential clients. Although the competition to service these facilities is intense, the Company believes that it competes effectively for new agreements as well as for renewals of existing agreements based upon the quality and dependability of its services. The Company's ability to compete successfully depends upon its ability to maintain and improve quality, service and reliability, to attract and retain qualified employees and to continue to expand its marketing and service activities. 3 Employees At June 30, 1998, the Company employed a total of approximately 657 employees. Approximately 268 of those employees serve in various executive, management, administrative, quality assurance and sales capacities. The remaining 389 employees are primarily dietary workers. A small percentage of the Company's dietary workers were covered by collective bargaining agreements. The Company considers relationships with its employees to be satisfactory. Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. ITEM 2 - PROPERTIES The Company leases its corporate offices, located at 725 Kimberton Road, Kimberton, PA 19442, which consists of approximately 8,500 square feet from a corporation controlled by a related party. The initial term of the lease expires on June 30, 2002. The Company leases an apartment from a corporation controlled by a related party to accommodate visiting clients and employees. In addition, the Company is provided with office space at each of its client facilities. The Company owns approximately twenty-two acres of land in Collegeville, Pennsylvania, upon which construction was completed in 1997. The Company renovated an existing 40,000 square foot building to serve as a training facility and restaurant. The Company presently owns food service equipment, computers, office furniture, and equipment, automobiles and trucks. Management believes that all properties and equipment are sufficient for the conduct of the Company's current operations. ITEM 3 - LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 4 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock No Par Value, (the "Class A Common Stock") is traded on the NASDAQ Small Cap Market ("NASDAQ"). The following table shows the range of high and low bid quotations as reported by NASDAQ for the quarters ending during the last two fiscal years for the Class A Common Stock: Fiscal 1998 High Low ----------- ---- --- First Quarter 1 11/16 1 11/16 Second Quarter 1 5/8 1 17/32 Third Quarter 1 3/4 1 3/4 Fourth Quarter 1 9/16 1 9/16 Fiscal 1997 High Low ----------- ---- --- First Quarter 2 1 7/16 Second Quarter 1 9/16 1 1/4 Third Quarter 1 7/8 1 3/8 Fourth Quarter 2 1/8 1 7/16 The prices presented are bid prices, which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commission to the broker-dealer. The above prices do not reflect prices in actual transactions. Holders As of September 11, 1998, there were approximately fifty-six holders of record of the Class A Common Stock. It is estimated that there are in excess of 500 beneficial holders of record. Dividends The Company has not paid any dividends on its Class A or Class B Common Stock. It is not expected that the Company will pay any dividends in the foreseeable future. 5 ITEM 6 - SELECTED FINANCIAL DATA The selected historical financial data presented below should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and the notes thereto.
Years ended June 30 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (as restated) Revenue $36,156,074 $35,293,962 $35,138,432 $33,352,992 $31,464,440 Gross profit 6,629,399 6,782,040 6,801,924 6,337,036 5,711,775 Income from Operations 39,120 1,020,689 418,991 553,050 1,160,541 Other income (Expense) 79,608 242,383 128,563 (41,187) (306,521) Income before effect of accounting change 8,822 752,276 301,954 265,461 401,151 ============================================================================ Net Income $ 8,822 $ 752,276 $ 301,954 $ 265,461 $ 656,838 ============================================================================ Per share of common stock: Income before effect of accounting change $0.00 $0.26 $0.10 $0.09 $0.13 Net Income $0.00 $0.26 $0.10 $0.09 $0.22 ============================================================================ Weighted average common shares outstanding 2,845,845 2,921,549 2,956,504 2,975,000 2,989,589 ============================================================================
As of June, 30 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (as restated) Working capital $ 213,754 $2,519,348 $3,921,140 $6,131,681 $ 6,518,916 Total Assets 19,210,840 20,381,557 16,962,352 16,366,159 15,556,388 Long-term debt 5,616,552 6,083,851 3,267,808 4,039,474 3,739,150 Shareholders' equity 6,876,095 6,972,153 6,309,595 6,037,329 5,771,868
6 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended June 30, 1998 Compared to year Ended June 30, 1997 Revenues for the year ended June 30, 1998 ("fiscal 1998") increased by 2.4% to $36,156,074 over revenues for the year ended June 30, 1997 ("fiscal 1997"). The increase results from revenues generated by the Collegeville Inn and Conference Center, growth within existing accounts as well as new accounts opened during the intervening period, offset by contracts canceled during the period. Direct cost of operations for fiscal 1998 was $29,526,675, compared to $28,511,922 for similar expenses in fiscal 1997, an increase of $1,014,753 or 3.6%. This increase in direct costs is due to cost of living adjustments during the year and higher revenues described above. Gross Profit for fiscal 1998 was 6,629,399, compared to $6,782,040, a decrease of $152,641 or 2.3%. This decrease is due to revenues increasing at a lesser percentage than direct expenses. General and administrative expenses for fiscal 1998 were $5,191,218 or 14.4% of revenue, compared to $4,929,812 or 14.0% of revenue for fiscal 1997. These increases are due to additional administrative personnel being employed during the current year to support field operations and the Collegeville Inn and Conference Center. Depreciation and amortization for fiscal 1998 was $869,422, compared to $651,539 for fiscal 1997. The increase of $217,883 or 33.4%, was largely attributable to the transfer of construction-in-progress to capital assets related to the Collegeville Inn and Conference Center. Provision for doubtful accounts for fiscal 1998 was $529,639 as compared to $180,000 for fiscal 1997. The increase of $349,639 or 194.2% was attributable to the Company providing for additional past due accounts, especially those facilities in bankruptcy and terminated status. Income from operations for fiscal 1998 was $39,120 or .1% of revenue compared to $1,020,689 or 2.9% of revenue for fiscal 1997, a decrease of $981,569. This decrease in operating income is primarily the result of the operating losses incurred by the Collegeville Inn Conference & Training Center. Interest expense for fiscal 1998 was $391,861 or 1.1% of revenue, compared to $95,157 or .3% of revenue for fiscal 1997. This increase is primarily 7 due from the issuance of two bonds for the Collegeville Inn Conference & Training Center in 1997. For the foregoing reasons, net income before taxes for fiscal 1998 was $118,728 or .3% of revenue compared to $1,263,072 or 3.6% of revenue for fiscal 1997, a decrease of $1,144,344, or 90.1% from fiscal 1997. Net income for fiscal 1998 was $8,822 or $0.00 per share as compared to $752,276 and $0.26 per share for fiscal 1997. Year Ended June 30, 1997 Compared to Year Ended June 30, 1996 Revenues for the year ended June 30, 1997 ("fiscal 1997") increased by 0.4% to $35,293,962 over revenues for the year ended June 30, 1996 ("fiscal 1996"). The increase results from growth within existing accounts as well as new accounts opened during the intervening period, offset by contracts canceled during the period. Direct cost of operations for fiscal 1997 was $28,511,922, compared to $28,336,508 for similar expenses in fiscal 1996, an increase of $175,414 or 0.6%. This increase in direct costs is consistent with revenue growth. Gross Profit for fiscal 1997 was $6,782,040, compared to $6,801,924, a decrease of $19,884 or 0.3%. This decrease is due to revenues decreasing at a greater percentage than direct expenses. General and administrative expenses for fiscal 1997 were $4,929,812 or 13.9% of revenue, compared to $5,608,365 or 15.9% of revenue for fiscal 1996. The expense reductions are the result of lower start-up costs, increased operating efficiencies and reduced travel expenses. Depreciation and amortization for fiscal 1997 was $651,539, compared to $621,285 for fiscal 1996. The increase of $30,254 or 4.8%, was attributable to additional depreciation related to capital expenditures. Provisions for doubtful accounts for fiscal 1997 was $180,000, compared to $153,283 for fiscal 1996. The increase of $26,717 or 17.4% was attributable to the increase in accounts receivable over 90 days for approximately six (6) accounts. 8 Income from operations for fiscal 1997 was $1,020,689 or 2.9% of revenue compared to $418,991 or 1.2% of revenue for fiscal 1996, an increase of $601,698 or 144%. This increase in operating income is primarily the result of the decrease in general and administrative expenses of approximately $600,000. Interest expense for fiscal 1997 was $95,157 compared to $234,280 for fiscal 1996. This decrease of approximately $140,000 is a result of the increase in the amount of interest expense capitalized due to an increase in the weighted average investment in Collegeville Inn Conference & Training Center. Interest expense will increase in fiscal year 1997 with the opening of the Collegeville Inn Conference and Training Center. Interest and other non-operating income for fiscal 1997 was $337,540 as compared to $362,843 for fiscal 1996. This decrease is due to a reduction of gains resulting from dispositions of fixed assets. For the foregoing reasons, net income before taxes for fiscal 1997 was $1,263,072 or 3.6% of revenue compared to $547,554 or 1.6% of revenue for fiscal 1996, an increase of $715,518, or 130.7% from fiscal 1995. Net income for fiscal 1997 was $752,276 or $0.26 per share as compared to $301,954 and $0.10 per share for fiscal 1996. This increase of approximately $450,000 is primarily from operations. Liquidity and Capital Resources At June 30, 1998, the Company had working capital of $213,754 as compared to $2,519,348 at June 30, 1997. This decrease in working capital is primarily attributable to expenses relating to $6,000,000 of renovation work at the Collegeville Inn Conference & Training Center. The Company's holdings in cash, cash equivalents and marketable securities decreased by $2,136,296 during fiscal 1998 to $131,517. The Company believes that its existing cash and cash equivalents, investments, accounts receivable, and anticipated revenues will be sufficient to meet its liquidity and cash requirements for the next twelve months. Operating Activities Cash provided by operations for fiscal 1998 and 1997 was $1,045,616 and $1,776,147 respectively. This is primarily attributable to the decrease in accounts payable and accrued expenses and the decrease in profitability due to the Collegeville Inn and Training Center's activities from 1997 to 1998. 9 Investing Activities Investing activities consumed $2,272,540 in cash during fiscal 1998 compared to $5,109,103 provided by investing activities for fiscal 1997. Investing activities for fiscal 1998 include capital expenditures in the amount of $2,852,748, of which $2,146,453 related to the renovation work at the Collegeville Inn Conference & Training Center. (See "Business - General Description of Business" for more discussion on the Collegeville Inn project). For fiscal 1997, investing activities included capital expenditure in the amount of $4,002,864, of which $3,848,361 related to the renovation work at the Collegeville Inn Conference & Training Center. Financing Activities During fiscal 1998, financing activities provided a decrease of $909,372 in cash compared to an increase of $2,574,162 in cash from financing activities in fiscal 1997. The fiscal 1998 and 1997 financing activities primarily consisted of two bond issuances by the Montgomery County Industrial Development Authority. The total amount raised was $3,500,000, of which $2,600,000 has been used by the Company for the rehabilitation, reconstruction, installation, furnishing and equipping of a building to be used as a conference center, training center, a food manufacturing/processing and distribution center and a retail restaurant. The remaining approximately $900,000 is restricted as to use for the acquisition, construction, installation and renovation of certain equipment to be used in connection with a cook-chill system of batch food processing. In addition, during fiscal 1997, the Company restructured its debt with its primary lender to increase its revolving credit facility to $4,000,000. Borrowings under the Revolving Credit facility were $2,529,553 at June 30, 1998. The Company intends to convert this debt to a five year term loan in December 1998. Capital Resources The Company has certain credit facilities with its bank including a line of credit and three term loans. As of June 30, 1998, the Company had $1,470,447 of unused credit available on its line of credit. The Company is current with all its obligations to its bank and has met all financial covenants in its loan documents. A substantial portion of the Company's revenue are dependent upon the payment of its fees by customer health care facilities, which, in turn, are dependent upon third-party payers such as state governments, Medicare and Medicaid. Delays in payment by third-party payers, particularly state and local governments, may lead to delays in collection of accounts receivable. 10 The Company has no other material commitments for capital expenditures and believes that its cash from operations, existing balances and available credit line will be sufficient to satisfy the needs of its operations and its capital commitments for the foreseeable future. However, if the need arose, the Company would seek to obtain capital from such sources as continuing debt financing or equity financing. Effects of Inflation All of the Company's agreements with its customers allow the Company to pass through to its customers its increases in the cost of labor. The Company believes that it will be able to recover increased costs attributable to inflation by continuing to pass through cost increases to its customers. Forward-Looking Statements This Form 10-K contains certain forward looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, which are intended to be covered by the safe harbors created thereby. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will provide to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to, expenditures relating to the renovation work at the Collegeville Inn Conference & Training Center. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. 11 New Authoritative Pronouncements The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 changes how operating segments are reported in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for periods beginning after December 15, 1997, and comparative information for earlier years is to be restated. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application. SFAS No. 131 is not expected to have a material impact on the disclosures of the Company. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data to be provided pursuant to this Item 8 are included under Part IV, Item 14, of this Form 10-K. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Audit Committee of the Board of Directors of the Registrant has dismissed Moore Stephens, P.C. ("Moore Stephens") as independent accountants to the Registrant and appointed Grant Thornton LLP as the new independent accountants to the Registrant. Moore Stephens' accountant's report on the financial statements of the Registrant for the past two years and any subsequent interim period through the date of dismissal did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. There were no other reportable events or disagreements with Moore Stephens to report in response to item 304(a) of Regulation S-K. 12 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information will be contained in the Proxy Statement of the Company for the 1998 Annual Meeting of Shareholders under the caption "Directors and Executive Officers of the Registrant", and is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION This information will be contained in the Proxy Statement of the Company for the 1998 Annual Meeting of Shareholders under the caption "Executive Compensation and Compensation of Directors" and is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information will be contained in the Proxy Statement of the Company for the 1998 Annual Meeting of Shareholders under the caption "Security Ownership" and "Election of Directors" and is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information will be contained in the Proxy Statements of the Company for the 1998 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. 13 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (A) 1. Consolidated Financial Statements Reports of Independent Certified Public Accountants F-3, 4 Consolidated Balance Sheets as of June 30, 1998 and 1997 F-5 Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997 and 1996 F-6 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1998 1997 and 1996 F-7 Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 F-8 Notes to Consolidated Financial Statements F-9 to F-23 Schedule of Valuation Accounts F-25 (B) Reports on Form 8-K None 14 (C) Exhibits The following Exhibits are filed as part of this report (references are to Reg. S-K Exhibit Numbers): 3.1 Amended and Restated Certificate of Incorporation of Company (Incorporated by reference to Exhibit 3-1 of the Company's Registration Statement on Form S-1 (File No. 33-4281). 3.2 By-laws of the Company (Incorporated by reference to Exhibit 3.2 of the S-1). 4.1 Specimen Stock Certificate of the Company (Incorporated by reference to Exhibit 4.1 of the S-1). 4.5 Registration Rights Agreement between the Company andKathleen Hill (Incorporated by reference to Exhibit 4.5 of the S-1). 10.1 Employment Agreement between the Company andJoseph Roberts (Incorporated by reference to Exhibit 10.1 of the S-1). 10.3 Employment Agreement between the Company and Kathleen Hill (Incorporated by reference 10.3 of the S-1). 10.4 Company's 1991 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of the S-1). 10.8 Guaranty Agreement between the Company and Joseph Roberts (Incorporated by reference to Exhibit 10.9 Annual Report on Form 10-K filed September 27, 1992). 10.9 Lease Agreement Between the Company and Ocean 7, Inc. (Incorporated by reference to Exhibit 10.11 Annual Report of Form 10-K filed September 27, 1992). 10.11 Escrow Agreement among the Company, Service America Corporation and Meridian Bank (Incorporated by reference to Exhibit 2, Current Report on Form 8-K filed July 29, 1993). 10.13 Agreement of Purchase and Sale between the Company and REVEST II Corporation, with Amendments. (Incorporated by reference to Exhibit 10.13, Annual Report on Form 10-K filed September 27, 1994). 10.14 Loan Agreement between the Montgomery County Industrial Development Authority and Collegeville Inn Conference & Training Center, Inc. (a wholly-owned subsidiary of the Company). (Incorporated by reference to exhibit 10.14, annual report on Form 10-K Filed on September 27, 1997.) 15 10.15 Trust Indenture between Montgomery County Industrial Development Authority and Dauphin Deposit Bank and Trust Company, as Trustee. (Incorporated by reference to exhibit 10.15, annual report on Form 10-K filed September 27, 1997.) 10.16 Loan Agreement between Montgomery County Industrial Development Authority and Apple Fresh Foods Limited (a wholly- owned subsidiary of the Company). (Incorporated by reference to exhibit 10.16, annual report on Form 10-K Filed on September 27, 1997.) 10.17 Trust Indenture between the Montgomery County Development Authority and Dauphin Deposit Bank and Trust Company, as Trustee. (Incorporated by reference to exhibit 10.17, annual report on Form 10-K Filed on September 27, 1997.) 10.18 Loan Agreement between the Company and Corestates Bank, N.A. (Incorporated by reference to exhibit 10.18, annual report on Form 10-K Filed on September 27, 1997.) 16 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Nutrition Management Services Company (Registrant) /s/ Joseph V. Roberts ---------------------------------- Joseph V. Roberts, Chief Executive Officer and Director Date: September 28, 1998 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated as of September 28, 1998. /s/ Joseph V. Roberts /s/ Kathleen A. Hill - -------------------------- ------------------------------ Joseph V. Roberts, Chief Kathleen A. Hill, President and Executive Officer and Director Director /s/ Janet Paroo /s/ Samuel R. Shipley - -------------------------- ------------------------------ Janet Paroo, Director Samuel R. Shipley, Director /s/ Michael M. Gosman /s/ Michelle L. Roberts - -------------------------- ------------------------------ Michael M. Gosman, Director Michelle L. Roberts 17 FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES June 30, 1998 and 1997 TABLE OF CONTENTS Page REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 CONSOLIDATED BALANCE SHEETS 5 CONSOLIDATED STATEMENTS OF OPERATIONS 6 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 7 CONSOLIDATED STATEMENTS OF CASH FLOWS 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 SUPPLEMENTAL INFORMATION SCHEDULE OF VALUATION ACCOUNTS 25 Report of Independent Certified Public Accountants Board of Directors and Stockholders Nutrition Management Services Company We have audited the accompanying consolidated balance sheets of Nutrition Management Services Company and its subsidiaries as of June 30, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nutrition Management Services Company and its subsidiaries as of June 30, 1998, and the consolidated results of their operations and their cash flows for the year ended June 30, 1998, in conformity with generally accepted accounting principles. We have also audited the schedule of valuation accounts for Nutrition Management Services Company and its subsidiaries as of June 30, 1998. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Philadelphia, Pennsylvania September 18, 1998 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Nutrition Management Services Company Kimberton, Pennsylvania We have audited the accompanying consolidated balance sheets of Nutrition Management Services Company and its subsidiaries as of June 30, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nutrition Management Services Company and its subsidiaries as of June 30, 1997, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. We have also audiated the schedule of valuation accounts for Nutrition Management Services Company and its subsidiaries as of June 30, 1997 and 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/ MOORE STEPHENS, P.C. ------------------------ MOORE STEPHENS, P.C. Cranford, New Jersey September 10, 1997 Nutrition Management Services Company and Subsidiaries CONSOLIDATED BALANCE SHEETS June 30,
ASSETS 1998 1997 ---- ---- Current assets Cash and cash equivalents $ 131,517 $ 2,267,813 Accounts receivable (net of allowance for doubtful accounts of $702,406 and $531,428 in 1998 and 1997, respectively) 5,665,739 5,900,572 Unbilled revenue 201,950 244,107 Notes and leases receivable - 202,124 Deferred income taxes 469,797 599,000 Inventory and other 336,380 409,068 ------------ ------------ Total current assets 6,805,383 9,622,684 ----------- ----------- Property and equipment - net 9,959,691 1,203,429 ----------- ----------- Construction in progress 427,084 6,939,702 ------------ ----------- Other assets Restricted cash 906,838 1,096,076 Long-term accounts receivable (net of allowance for doubtful accounts of $-0- and $57,509 in 1998 and 1997, respectively) - 50,815 Investment in contracts (net of accumulated amortization of $1,630,859 and $1,278,561 in 1998 and 1997, respectively) 90,630 427,928 Lease receivable - 157,952 Advances to officers 289,623 281,026 Deferred income taxes 453,209 233,000 Bond issue costs 268,260 281,826 Deferred costs and other assets 10,122 87,119 ------------- ------------- Total other assets 2,018,682 2,615,742 ----------- ----------- $19,210,840 $20,381,557 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 407,311 $ 744,504 Accounts payable 4,984,804 4,322,662 Accrued expenses 375,238 757,286 Accrued payroll 440,356 460,898 Accrued professional 226,288 392,012 Accrued income taxes 5,092 232,521 Other 152,540 193,453 ----------- ------------ Total current liabilities 6,591,629 7,103,336 ----------- ----------- Long-term liabilities Long-term debt - net of current portion 5,616,552 6,083,851 Other 126,564 222,217 ------------ ------------ Total long-term liabilities 5,743,116 6,306,068 ------------ ----------- Commitments and contingencies - - ------------ ---------- Stockholders' equity Undesignated preferred stock - no par, 2,000,000 shares authorized, none outstanding - - Common stock Class A - no par, 10,000,000 shares authorized; 3,000,000 issued, 2,742,734 and 2,797,665 outstanding in 1998 and 1997, respectively 3,801,926 3,801,926 Class B - no par, 100,000 shares authorized; 100,000 shares issued and outstanding 48 48 Retained earnings 3,600,032 3,591,210 ----------- ----------- 7,402,006 7,393,184 Less treasury stock - (common - Class A: 257,266 and 202,335, shares in 1998 and 1997, respectively) - at cost (525,911) (421,031) ------------ ------------ Total stockholders' equity 6,876,095 6,972,153 ----------- ----------- $19,210,840 $ 20,381,557 ========== ===========
The accompanying notes are an integral part of these statements. 5 Nutrition Management Services Company and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30,
1998 1997 1996 -------------- -------------- --------- Food service revenue $36,156,074 $ 35,293,962 $35,138,432 Cost of operations Payroll and related expenses 14,864,985 13,918,106 13,128,099 Other costs of operations 14,661,690 14,593,816 15,208,409 ---------- ---------- ---------- Cost of operations 29,526,675 28,511,922 28,336,508 ---------- ---------- ---------- Gross profit 6,629,399 6,782,040 6,801,924 ----------- ----------- ----------- Expenses General and administrative expenses 5,191,218 4,929,812 5,608,365 Depreciation and amortization 869,422 651,539 621,285 Provision for doubtful accounts 529,639 180,000 153,283 ------------ ------------ ------------ Expenses 6,590,279 5,761,351 6,382,933 ----------- ----------- ----------- Income from operations 39,120 1,020,689 418,991 ---------- ---------- ---------- Other income (expenses) Interest expense (391,861) (95,157) (234,280) Interest income 194,727 309,158 292,819 Other 276,742 28,382 70,024 ---------- ------------- ------------- Other income - net 79,608 242,383 128,563 ---------- ------------ ------------ Income before income taxes 118,728 1,263,072 547,554 Income tax expense 109,906 510,796 245,600 ---------- ------------- ------------ Net income $ 8,822 $ 752,276 $ 301,954 ========== ============ ============ Net income per share - basic and diluted $ .00 $ 0.26 $ 0.10 ========== =========== ============ Weighted average number of shares 2,845,845 2,921,549 2,956,504 ========== =========== ==========
The accompanying notes are an integral part of these statements. 6 Nutrition Management Services Company and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years ended June 30,
Class A Class B Common stock Common stock Treasury stock ------------------------- ---------------------------------- -------------------- Total Number Number Retained Number stockholders' of shares Amount of shares Amount earnings of shares Amount equity --------- ---------- ---------- ------- --------- ---------------------- ------------- Balance - June 30, 1995 2,875,000 $3,801,926 100,000 $ 48 $ 2,536,980 (125,000) $(301,625) $ 6,037,329 Sale of 12,500 Treasury shares of Class A stock 12,500 - - - - 12,500 25,000 25,000 Repurchase of company stock (37,500) - - - - (37,500) (54,688) (54,688) Net income - - - - 301,954 - - 301,954 --------- ---------- ---------- -------------- ----------- ---------- --------- ------------ Balance - June 30, 1996 2,850,000 3,801,926 100,000 48 2,838,934 (150,000) (331,313) 6,309,595 Repurchase of company stock (52,335) - - - - (52,335) (89,718) (89,718) Net income - - - - 752,276 - - 752,276 --------- ---------- ---------- -------------- ----------- ---------- --------- ------------ Balance - June 30, 1997 2,797,665 3,801,926 100,000 48 3,591,210 (202,335) (421,031) 6,972,153 Repurchase of company stock (54,931) - - - - (54,931) (104,880) (104,880) Net income - - - - 8,822 - - 8,822 --------- ---------- ---------- -------------- ----------- ---------- --------- ------------ Balance - June 30, 1998 2,742,734 $3,801,926 100,000 $ 48 $ 3,600,032 (257,266) $(525,911) $ 6,876,095 ========= ========== ========== ============== ========== ========== ========= ============
The accompanying notes are an integral part of this statement. 7 Nutrition Management Services Company and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended June 30,
1998 1997 1996 -------------- --------- --------- Operating activities Net income $ 8,822 $ 752,276 $ 301,954 Adjustments to reconcile net income to net cash provided by (used for) operating activities Depreciation and amortization 869,422 651,539 621,285 Amortization of bond costs 13,566 - - Provision for bad debts 529,639 180,000 153,283 Amortization of deferred gain (26,372) (26,372) (26,372) Provision for deferred taxes (254,967) (333,000) (156,000) Amortization of lease receivable - (28,438) (44,460) Gain on sale of fixed assets - - (43,472) Changes in assets and liabilities Accounts receivable (294,806) (217,467) (618,087) Notes receivable 15,261 637,057 199,129 Unbilled revenue 42,157 29,025 64,544 Accounts payable 662,142 (719,363) 1,084,369 Accrued professional and expenses (547,772) 752,244 42,820 Accrued payroll (20,542) (10,908) 57,844 Accrued income taxes (63,468) 187,458 (34,863) Other 112,534 (77,904) 27,026 ----------- ------------- ----------- Net cash provided by operating activities 1,045,616 1,776,147 1,629,000 ---------- ---------- ---------- Investing activities Payment of mortgage receivable from related party - - 55,577 Proceeds from sale of marketable securities - - 2,970,099 Purchase of property and equipment (706,295) (154,503) (188,780) Construction in progress expenditures (2,146,453) (3,848,361) (2,484,021) Proceeds from sale of fixed assets - - 71,645 Transfers from (to) restricted cash 189,238 (949,249) - Other 18,353 (296,079) 53,517 Payment of lease receivable 287,023 144,790 157,953 Advances to employees and officers 8,597 (18,611) (133,305) Deferred costs 76,997 12,910 251,719 ---------- ------------ ------------ Net cash (used in) provided by investing activities (2,272,540) (5,109,103) 754,404 ---------- ----------- ----------- Financing activities Proceeds from long-term borrowings - 3,560,547 125,000 Repayment of long-term borrowings (804,492) (896,667) (896,667) Purchase of treasury stock (104,880) (89,718) (54,688) Sale of treasury stock - - 25,000 ---------- ----------- ----------- Net cash (used in) provided by financing activities (909,372) 2,574,162 (801,355) ---------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (2,136,296) (758,794) 1,582,049 Cash and cash equivalents - beginning of years 2,267,813 3,026,607 1,444,558 ---------- ----------- ----------- Cash and cash equivalents - end of years $ 131,517 $ 2,267,813 $ 3,026,607 ========== =========== =========== Supplemental disclosures of cash flow information Cash paid during the years for Interest (net of amounts capitalized) $ 391,860 $ 100,987 $ 234,280 Income taxes $ - $ 674,903 $ 250,000 Supplemental disclosure of non-cash investing and financing activities During the year ended June 30, 1998 and 1997, the company exchanged accounts receivable and property and equipment of approximately $-0- and $500,873, respectively, for a note receivable.
The accompanying notes are an integral part of these statements. 8 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 and 1997 NOTE A - ORGANIZATION AND BUSINESS Nutrition Management Services Company (the Company) was organized on March 28, 1979, to provide professional management expertise and food services to continuing care and health care facilities in the domestic United States. The Company competes mainly with regional and national food service management companies as well as self-managed departments. Apple Management Services (Apple Management), a wholly-owned subsidiary, was organized on November 25, 1991, to provide management service expertise. The Collegeville Inn Conference and Training Center, Inc. (Collegeville Inn located in Lower Providence Township, Pennsylvania), a wholly-owned subsidiary, was organized on April 29, 1994. This facility opened in September 1997 and is used as a showroom for prospective customers, comprehensive training facility, and retail restaurants. Apple Fresh Foods, Ltd. (Apple Fresh Foods), was organized on November 14, 1997, to develop a cook-chill food preparation technology for use in the Company's food service business. Apple Fresh Food's operation is located in the Collegeville Inn. Apple Management and Apple Fresh Foods were not operational as of June 30, 1998. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Financial Statement Presentation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's primary estimate is its allowance for doubtful accounts. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which is effective for all periods beginning after December 15, 1997. SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate, and their major customers. The adoption of SFAS No. 131 will not have a material effect on the presentation of the Company's financial position or results of operations. 2. Cash and Cash Equivalents Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. 3. Unbilled Revenue Unbilled revenue represents amounts for services provided, but not billed as of the balance sheet date. (Continued) 9 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 4. Inventory Inventory, which consists primarily of food, is stated at the lower of cost (first-in, first-out method) or market. Inventory of $226,002 and $304,579 has been included in inventory and other as of June 30, 1998 and 1997, respectively. 5. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or the remaining lease term. Certain long-term assets of the Company are reviewed at least annually as to whether their carrying value has become impaired, pursuant to guidance established in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment is deemed to exist, the assets will be written down to fair value or projected discounted cash flows from related operations. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of June 30, 1998, management expects these assets to be fully recoverable. Construction in progress was stated at cost and represented costs incurred in the construction of the Collegeville Inn's facilities. No depreciation was provided on construction in progress, and costs incurred were transferred to property and equipment in September 1997 and is being depreciated accordingly. As of June 30, 1998, the balance remaining in the construction in progress pertained solely to the construction of equipment for Apple Fresh Foods. 6. Investment in Contracts During 1993, the Company entered into an agreement for the acquisition of various service facility contracts. The costs associated with this acquisition were capitalized and are being amortized over a period of five years using the straight-line method. During the years ended June 30, 1998, 1997 and 1996, amortization expense was $352,298, $341,298 and $341,298, respectively. 7. Deferred Financing Costs Debt financing costs incurred in connection with the bonds payable are deferred and amortized, using the interest method, over the term of the related debt and are classified as other assets on the balance sheet. (Continued) 10 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 8. Accounting for Stock-Based Compensation Effective July 1, 1997, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Company's employee stock option plan is accounted for under APB Opinion 25. 9. Income Taxes Income taxes consist of taxes currently due plus deferred taxes related primarily to temporary differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. 10. Earnings Per Share During 1998, the Company adopted the provisions of SFAS No. 128, Earnings Per Share, which eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Options to purchase 126,750, 316,250 and 336,250 shares of common stock at $4.00 per share were outstanding during 1998, 1997 and 1996, respectively. Also, 100,000 shares of underwriter options at $7.00 per share were outstanding at June 30, 1996. They were not included in the computation of diluted earnings per share because the option price is greater than the average market price. For year ended June 30, 1996, disputed options of 112,500 shares were also excluded from the calculation of earnings per share, (see note J). 11. Advertising Costs It is the Company's policy to expense advertising costs in the period in which they are incurred. 12. Reclassification Certain 1997 and 1996 items have been reclassified to conform to the current year presentation. 11 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE C - PROPERTY AND EQUIPMENT The following details the composition of property and equipment.
Estimated useful lives 1998 1997 ------------ ------------- -------- Property and equipment Land - $ 497,967 $ 497,967 Building 40 7,427,415 - Machinery and equipment 2-8 2,357,354 1,481,032 Furnitures and fixtures 2-8 651,557 - Other, principally autos and trucks 2-10 428,003 193,605 ------------ ---------- 11,362,296 2,172,604 Less accumulated depreciation 1,402,605 969,175 ----------- ---------- $ 9,959,691 $ 1,203,429 =========== ==========
Depreciation expense amounted to $609,104, $310,241 and $299,978 for the years ended June 30, 1998, 1997 and 1996, respectively. The Company capitalized interest costs of $86,266, $366,492 and $164,702 for the years ended 1998, 1997 and 1996, respectively, for qualifying construction projects. Total interest costs incurred before recognition of the capitalized amounts were $418,919, $461,649 and $398,982 for the years ended June 30, 1998, 1997 and 1996, respectively. NOTE D - RESTRICTED CASH At June 30, 1998 and 1997, the Company had $906,838 and $1,096,076 of restricted cash, respectively, of which $-0- and $154,782, respectively, is held in escrow in connection with the acquisition of various service facility contracts. The remaining balance is attributable to the Industrial Revenue Bond proceeds of $1,000,000 to finance the acquisition, construction, installation and renovation of certain equipment to be used in connection with a cook-chill system of batch food processing; and the payment of a portion of the costs and expenses of issuing the Bonds. 12 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE E - LONG- TERM DEBT Long-term debt consisted of the following:
1998 1997 -------------- --------- Bankrevolving credit, interest due monthly at the bank's prime rate plus 0.5%, secured by all corporate assets as well as a negative pledge on all assets; converts to a 5-year term loan in December 1998 $ 2,529,553 $2,529,553 Notepayable, term loan incurred in connection with acquisition of various service facility contracts, payable in equal monthly installments of $53,334 plus interest of 7.5%, note is unsecured, matures on March 5, 1998 - 453,671 Notepayable, term loan incurred in connection with purchased equipment, payable in equal monthly installments of $10,417 bearing interest at 9.5%, matures in fiscal 1999; the acquired equipment is pledged as collateral 93,750 218,750 Notepayable, term loan incurred in connection with the purchase of equipment payable in monthly installments of $10,972 bearing interest at 8.5%, matures in fiscal 1998; the acquired equipment is pledged as collateral - 65,833 Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds payable) 2,430,560 2,560,548 Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds payable) 970,000 1,000,000 ---------- ---------- 6,023,863 6,828,355 Less current maturities 407,311 744,504 ---------- ----------- $ 5,616,552 $ 6,083,851 ========== ==========
(Continued) 13 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE E - LONG- TERM DEBT - Continued In December 1996, the Company executed a loan agreement with a bank for a revolving credit and two irrevocable letters of credit, totaling approximately $7,500,000. The revolving credit is available for two years, at which time it converts to a term loan, and the letters of credit are available for four years with annual renewals. At June 30, 1998, the Company has approximately $1,500,000 available under the revolving credit. Advances under the revolving credit are used for working capital purposes and the acquisition and renovation of the Collegeville Inn. These credit agreements contain covenants that include the submission of specified financial information and the maintenance of insurance coverage for the pledged assets during the term of the loans. The covenants also include the maintenance of a certain current ratio, minimum net worth, minimum cash and cash equivalents balance and other ratios. The bank's prime rate at June 30, 1998, was 8.50%. All borrowing is from a single lender. Maturities of principal due in the following years are set forth below: Year ending June 30, 1999 $ 407,311 2000 570,700 2001 621,400 2002 670,800 Thereafter 3,753,652 ---------- $ 6,023,863 Bonds Payable - In December 1996, the Company, through its subsidiaries, authorized two industrial revenue bond issues. Issue #I Title - Montgomery County Industrial Development Authority, $2,500,000 aggregate principal amount, federally taxable variable rate demand/fixed rate revenue bonds (Collegeville Inn Project) Series of 1996. Rate - Variable, to a maximum of 17% Term - 20 years (2016) Purpose - Rehabilitate, furnish and equip the Collegeville Inn facility. (Continued) 14 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE E- LONG- TERM DEBT - Continued Issue #2 Title - Montgomery County Industrial Development Authority, $1,000,000 aggregate principal amount, federally taxable variable rate demand/fixed rate revenue bonds (Apple Fresh Foods Ltd. Project) Series of 1996. Rate - Variable, to a maximum of 15% Term - 20 years (2016) Purpose - Develop a cook-chill food preparation technology. Note: This issue is tax-exempt. Each series of bonds is guaranteed by the parent company and the other subsidiaries. The assets of Collegeville Inn and Apple Fresh Foods are pledged as collateral for both series of bonds. The Company's bank has issued irrevocable letters of credit in favor of the bond trustee for the full amount of both bond issues. The letters of credit have a term of four years and can be renewed on an annual basis by the bank. The bank holds the mortgage on the Collegeville Inn building and property. The letters of credit are guaranteed by the parent company. The sinking fund requirements are as follows: Collegeville Apple Fresh Inn Foods Total --- ----- ----- 1999 $70,000 $ 35,000 $ 105,000 2000 75,000 35,000 110,000 2001 80,000 40,000 120,000 2002 85,000 40,000 125,000 2003 90,000 40,000 130,000 15 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE F - INCOME TAXES The components of income tax expense are:
1998 1997 1996 ------------ ------------- --------- Current Federal $ 128,064 $ 618,839 $ 267,900 State 72,842 224,957 133,700 ----------- ---------- ---------- 200,906 843,796 401,600 ---------- ---------- ---------- Deferred Federal (69,000) (266,000) (121,000) State (22,000) (67,000) (35,000) ----------- ----------- ------------ Total deferred (benefit) expense (91,000) (333,000) (156,000) ----------- ---------- ---------- $ 109,906 $ 510,796 $ 245,600 ========== ========== ==========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are approximately:
1998 1997 ------------ --------- Deferred tax assets Provision for doubtful accounts $ 316,000 $ 265,000 Excess of tax over financial statement basis of investments in contracts 342,000 228,000 Deferred gains 47,000 47,000 Vacation accrual 198,000 205,000 Other compensation accrual 31,000 80,000 Federal capital loss carryforwards 40,980 51,680 Charitable cost` 22,000 - Other 64,000 109,000 ----------- ---------- Gross deferred tax assets 1,060,980 985,680 Deferred tax asset valuation allowance (40,980) (51,680) ----------- ----------- Total deferred tax assets 1,020,000 934,000 Deferred tax liabilities Deferred costs capitalized for financial statement purposes $ 10,000 $ 17,000 Depreciation 87,000 85,000 ----------- ----------- Total deferred tax liabilities 97,000 102,000 ----------- ---------- Net deferred tax assets $ 923,000 $ 832,000 ========== ==========
(Continued) 16 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE F - INCOME TAXES - Continued These amounts are classified in the balance sheet as follows: 1998 1997 ------------ --------- Current asset $ 470,000 $ 599,000 Non-current asset 453,000 233,000 ---------- ---------- $ 923,000 $ 832,000 ========== ========== The following reconciles the tax provision with the U.S. statutory tax rates:
1998 1997 1996 ------- ------- --------- Income taxes at U.S. statutory rates 34.0% 34.0% 34.0% States taxes, net of federal tax benefit 28.1 7.3 9.5 Nondeductible expenses 44.5 0.6 1.4 Decrease in valuation allowance (9.0) - - Other (5.2) - - ------ ------- ------ 92.4% 41.9% 44.9% ====== ====== ======
The Company has available federal capital loss carryforwards in the amount of $120,526, which expire in the year 2000. The Company has charitable contribution carryforwards in the amount of $47,000. NOTE G - RELATED PARTY During 1992, the Company sold its building for a purchase price of $610,000 to a related party (a corporation wholly-owned by the principal stockholder of the Company). At the time of the sale a lease was entered into for ten years, whereby the Company will lease back the building from the purchaser. The sale resulted in a gain of $263,717, which has been deferred and will be amortized over the life of the lease. During each of the three years in the period ended June 30, 1998, the Company recognized a gain of $26,372. As of June 30, 1998 and 1997, the balance of the unamortized gain on the sale was $105,510 and $131,882, respectively. The Company leases its corporate office building from the above-mentioned related party. During the years ended June 30, 1998, 1997 and 1996, rent expense was $229,705, $195,178 and $178,651, respectively. 17 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE H - COMMITMENTS AND CONTINGENCIES 1. Operating Leases The Company leases real estate facilities from a corporation owned by a principal stockholder under operating leases. In addition to the minimum annual rentals, the lease requires additional rentals based upon increases in the consumer price index. These leases range from one to five years (see note G). The Company is also obligated under various operating leases for operating equipment for periods expiring through 2000. During the years ended June 30, 1998, 1997 and 1996, rent expense was $259,546, $216,778 and $228,211, respectively. Minimum annual rentals under non-cancellable operating leases subsequent to June 30, 1998, are as follows: Operating Real estate Year ending June 30, equipment Facilities -------------------- --------- ---------- 1998 $ 74,869 $ 199,862 1999 74,430 199,862 2000 16,238 199,862 2001 - 199,862 2002 - 199,862 Thereafter - - ----------- ------------- $ 165,537 $ 999,310 ========== ========== 2. Purchase Commitment The Company has entered into a commitment to purchase a minimum of $5,000,000 in supplies between February 1995 and January 2000 from one of its vendors. If the Company does not meet this commitment during the term of the agreement, the agreement automatically extends until the minimum commitment is met. There is no penalty to the Company for its failure to meet the minimum purchase requirement during the agreement period. In exchange for this commitment, the vendor made a donation to the Company to be used to acquire equipment for the Collegeville Inn. The amount of the donation is being amortized over five years. In the event the agreement is terminated prior to January 2000, the Company is required to repay to the vendor a proportionate amount of the donation received. 3. Litigation In the normal course of its business, the Company is exposed to asserted and unasserted claims. In the opinion of management, the resolution of these matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. 18 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE I - STOCKHOLDERS' EQUITY 1. Class A Common Stock The Company is authorized to issue 10,000,000 shares of Class A Common Stock, no par value, of which holders of Class A Common Stock have the right to cast one vote for each share held of record in all matters submitted to a vote of holders of Class A Common Stock. The Class A Common Stock and Class B Common Stock vote together as a single class on all matters on which shareholders may vote, except when class voting is required by applicable law. Holders of Class A Common Stock are entitled to dividends, together with the holders of Class B Common Stock, pro rata based on the number of shares held. In the event of the liquidation, dissolution or winding up of the affairs of the Company, all assets and funds of the Company remaining after the payment to creditors and to holders of Preferred Stock, if any, shall be distributed, pro rata, among the holders of the Class A Common Stock and Class B Common Stock. During the fiscal years ended June 30, 1998 and 1997, the Company repurchased 54,931 and 52,335 shares of common stock, respectively, for an aggregate price of $104,880 and $89,718, respectively. The repurchase price is recorded as a reduction of stockholders' equity. During fiscal year 1996, the Company sold from treasury 12,500 shares of Class A common stock for $25,000. 2. Class B Common Stock The Company has authorized 100,000 shares of Class B Common Stock, all of which were issued to the Chief Executive Officer and majority shareholder of the Company, in exchange for 100,000 shares of Class A Common Stock. Each share of Class B Common Stock is entitled to seven votes on all matters on which shareholders may vote, including the election of directors. The Class A Common Stock and Class B Common Stock vote together as a single class on all matters on which shareholders may vote, except when class voting is required by applicable law. Each share of Class B Common Stock also is convertible at any time upon the option of the holder into one share of Class A Common Stock. There are no preemptive, redemption, conversion or cumulative voting rights applicable to the Class B Common Stock. 3. Preferred Stock The Company is authorized to issue 2,000,000 shares of Preferred Stock, no par value, of which no shares have been issued. The Preferred Stock may be issued by the Company's Board of Directors from time to time in one or more series. 19 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN 1. Stock Options In September 1991, the Company adopted the 1991 Stock Option Plan for officers, directors and key employees to receive incentive stock options. The options are exercisable for a period up to 10 years from date of grant at an exercise price not less than fair market value of the common stock at date of grant. The Plan expires in September 2001. There have been 500,000 shares of common stock reserved for the Plan. The following is a summary of transactions:
Number of options Weighted outstanding average incentive Non-qualified exercise Underwriters stock options stock options Total price ------------ ------------- ------------- ----- ----- Outstanding at June 30, 1995 100,000 324,000 60,000 484,000 $ 4.62 Exercisable at June 30, 1995 100,000 - - 100,000 7.00 Granted - 7,000 - 7,000 4.00 Forfeited/exercised - (139,750) (15,000) (154,750) 4.00 ---------- --------------- --------------- ---------- ----- Outstanding at June 30, 1996 100,000 191,250 45,000 336,250 4.89 Exercisable at June 30, 1996 100,000 184,250 45,000 329,250 4.91 Granted - 80,000 - 80,000 4.00 Forfeited/exercised (100,000) - - (100,000) 7.00 ---------- --------------- --------------- ---------- ----- Outstanding at June 30, 1997 - 271,250 45,000 316,250 4.00 Exercisable at June 30, 1997 - 185,650 45,000 230,650 4.00 Granted - 33,000 - 33,000 4.00 Forfeited/exercised - (207,500) (15,000) (222,500) 4.00 ---------- --------------- --------------- ---------- ----- Outstanding at June 30, 1998 - 96,750 30,000 126,750 4.00 Exercisable at June 30, 1998 - 81,350 30,000 111,350 4.00
All options were granted at exercise prices above market price. The exercise price was $4.00 per share for grants in 1998, 1997 and 1996, for the incentive stock options. The remaining contractual life of outstanding and exercisable options is approximately six years and five years, respectively. (Continued) 20 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued Had compensation cost for the Company's stock options issued to employees been determined based upon the fair value at the grant date for stock options issued under these plans pursuant to the fair value methodology prescribed under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Net income (loss) and net income per share as reported, and on a pro forma basis as if compensation cost had been determined on the basis of fair value pursuant to SFAS No. 123, are as follows:
1998 1997 1996 -------- --------- -------- Net Income As reported $ 8,822 $ 752,276 $ 301,954 Pro forma (6,170) 709,488 278,024 Per Share- basic and diluted As reported $ 0.00 $ 0.26 $ 0.10 Pro forma $ 0.00 0.24 0.09
These pro forma amounts, may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants before July 1, 1995. The weighted average fair value of the stock options granted to employees used in determining the pro forma amounts is estimated at $.96, $.89 ad $3.42 during the years ended June 30, 1998, 1997 and 1996, using the Black-Scholes option-pricing model with the following assumptions used for grants in the fiscal year 1998, 1997 and 1996: dividend yields of 0%, expected volatility of 84%, expected useful life of 5 years for all three years and risk-free interest rate of 5.6% 6.7% and 5.8%, respectively. In November 1995, the Company was advised that a consultant believes that he and an entity controlled by him were granted options to purchase an aggregate 112,500 shares of common stock of the Company at an exercise price of $2.125 per share. The Company is not aware of any documentation supporting the grant of these stock options and is currently in the process of determining whether in fact such stock options were granted. Under the guidelines of the SFAS 123, the Company estimated that on a pro forma basis the Company's net income would have been reduced by an additional $92,000 or $0.03 per share for the fiscal year ended June 30, 1996, if these options were granted. (Continued) 21 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued 2. Employee Stock Purchase Plan The Company has a stock purchase plan that allows participating employees to purchase, through payroll deductions, shares of the Company's common stock at 85 percent of the fair market value at specified dates. At June 30, 1997, all employees were eligible to participate in the plan. A summary of stock purchased under the plan is shown below.
1998 1997 1996 ------------ ------------- --------- Aggregate purchase price $ 21,093 $ 30,871 $ 55,611 Shares purchased 12,691 21,388 37,126 Employee participants 23 40 34
NOTE K - DEFINED CONTRIBUTION PENSION PLAN The Company sponsors a 401 (k) plan for all employees who have attained the age of twenty-one and have completed one year of service. Eligible employees may contribute up to 15% of their annual compensation to the plan. The Company can match 100% up to the first 6% of employee plan contributions. Participants are vested 20% for each year of service beginning after year 3 and are fully vested after seven service years. During the years ended June 30, 1998, 1997 and 1996, company contributions to the plan, which were charged to expense, amounted to $22,526, $25,976 and $25,398, respectively. NOTE L - CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable, and notes receivable. A substantial portion of the Company's revenues are dependent upon the payment by customers who are dependent upon third-party payers, such as state governments, medicare and medicaid. Generally, the Company does not require collateral or other security to support customer receivables. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. As of June 30, 1998, the Company has cash accounts with various financial institutions having high credit standings and periodically has cash balances subject to credit risk beyond insured amounts. As a consequence, it believes that its exposure to credit risk loss is limited. The Company does not require collateral and other security to support financial instruments subject to credit risk. NOTE M - MAJOR CUSTOMERS The Company had sales to one customer representing approximately 15%, 13% and 12% of total revenues for the years ending June 30, 1998, 1997 and 1996, respectively. The loss of such customer could have a material adverse effect on the Company's future results of operations. 22 Nutrition Management Services Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 1998 and 1997 NOTE N - BUSINESS SEGMENTS Information about the Company's operations in different businesses for the year ended June 30, 1998 excluding intercompany transactions, is as follows:
Nutrition Management Collegeville Services Company Inn Total ---------------- --- ----- Food service revenue $34,780,125 $ 1,375,949 $36,156,074 Net income (loss) 1,297,214 (1,288,392) 8,822 Total assets 7,964,135 11,246,705 19,210,840 Capital expenditures 83,229 2,769,519 2,852,748 Depreciation/amortization expense 587,158 282,264 869,422
Collegeville Inn was placed in service in September 1997; therefore, previous revenues, net income, and total assets were entirely attributable to Nutrition Management Services Company. NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial data is unaudited, but in the opinion of management includes all necessary adjustments for a fair presentation of the interim results.
Fiscal 1998 September 30, December 31, March 31, June 30, ------------- ------------ --------- -------- Revenues $ 9,128,381 $ 9,421,397 $ 8,850,579 $ 8,755,717 Gross profit 1,752,923 1,704,370 1,732,678 1,439,428 Net income (loss) 85,272 18,770 35,963 (131,183) Net income (loss) per share - basic and diluted $ 0.03 $ 0.01 $ 0.01 $ (0.05)
Fiscal 1997 September 30, December 31, March 31, June 30, ------------- ------------ --------- -------- Revenues $ 8,552,087 $ 8,428,595 $ 8,947,786 $ 9,365,494 Gross profit 1,488,330 1,681,297 1,778,730 1,833,683 Net income 124,493 174,425 170,574 282,784 Net income per share - basic and diluted $ 0.04 $ 0.06 $ 0.06 $ 0.10
23 SUPPLEMENTAL INFORMATION 24 Nutrition Management Services Company and Subsidiaries SCHEDULE OF VALUATION ACCOUNTS June 30, 1998 and 1997 The following sets forth the activity in the Company's valuation accounts:
Notes and Long-term Accounts lease accounts receivable receivable receivable ---------- ---------- ---------- Balance at June 30, 1995 $ 381,669 $ 121,448 $ 57,509 Provision for bad debts 153,283 - - Write-offs (172,887) (121,448) - ---------- ---------- ------------ Balance at June 30, 1996 362,065 - 57,509 Provision for bad debts 180,000 - - Write-offs (10,637) - - ---------- ---------- ------------ Balance at June 30, 1997 531,428 - 57,509 Provision for bad debts 529,639 - - Write-offs (358,661) - (57,509) ---------- ---------- ------------ Balance at June 30, 1998 $ 702,406 $ - $ - ========== ========== ============
25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S 10-K FOR THE PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 132 0 6,368 702 336 6,805 11,362 1,403 19,211 6,592 3,401 0 0 3,276 3,600 19,211 36,156 36,628 29,527 36,118 0 530 392 119 110 9 0 0 0 9 0.00 0.00
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