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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Fee required)
For Fiscal year ended June 30, 2003
OR
[ ] 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 (IRS Employer
incorporation or organization) 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 Title of Each Class on Which Registered
- -------------------------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
- -------------------
Share 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]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in exchange act Rule 12b-2).
YES NO X
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The aggregate market value of voting stock (Class A Common Stock, no par value)
held by non-affiliates of the Registrant as of September 30, 2003 was
approximately $186,887.
Indicate the number of shares outstanding of each of the Registrants's classes
of common stock, as of the latest practicable date: At September 23, 2003, there
was outstanding 2,747,000 share 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 12 - 13.
(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 for
renovation work. The Company opened the banquet and training division during its
second quarter of fiscal year 1998. The remaining division of the project was
available for operations in the third quarter of fiscal 2000.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note N on page F-19 of the Consolidated Financial Statements.
DESCRIPTION OF SERVICES
The Company provides contract food service to continuing care facilities,
hospitals, and retirement communities. The Company provides complete management
and supervision of the dietary operations in its customers' facilities through
the use of on-site management staff, quality and cost-control programs, and
training and education of dietary staff. The Company's operational districts are
supported by Regional Managers, District Managers, Registered Dietitians and
Quality Assurance staff.
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.
1
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, for 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, 2003, the
Company provided services under various service agreements at 63 facilities. At
certain of these facilities, the Company has contracts to provide vending
services and housekeeping 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.
In consideration for providing its services, the Company expects to be paid by
its clients in accordance with the credit terms agreed upon which range from 30
days to 90 days.
MAJOR CUSTOMER
The Company had sales to one customer, Hebrew Hospital Home, representing
approximately 26% and 15% of total revenues for the fiscal years ended June 30,
2003 and 2002, respectively. The loss of this customer could have a material
adverse effect on the Company's future results of operations. The Company had
sales to a different customer, Harborside, representing approximately 25% of
2
total revenues for the fiscal year ended June 30, 2001. The Company is currently
involved in a legal proceeding with this client. See "Item 3 - Legal
Proceedings".
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.
EMPLOYEES
At June 30, 2003, the Company employed a total of approximately 378 employees.
Approximately 187 of those employees serve in various executive, management,
administrative, quality assurance and sales capacities. The remaining 191
employees are primarily dietary and housekeeping workers. A small percentage of
the Company's dietary and housekeeping 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 expired
on June 30, 2003 and will continue on a month to month lease based on terms
generally similar to those prevailing to unrelated parties. 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.
3
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 conference center.
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
On February 7, 2001, the Company filed a suit against a major client in the
Court of Common Pleas in Chester County, PA. This suit has subsequently been
removed to the United States District Court for the Eastern District of
Pennsylvania. In the lawsuit, the Company has made various claims, including
among others a claim that the client failed to pay approximately $2.1 million in
invoiced amounts, a claim that the client failed to pay approximately $1 million
in other amounts owing, a claim for reimbursement for start up costs in an
amount in excess of $400,000, a claim for over $2 million in lost profits (or,
alternatively, a claim for reimbursement for over $300,000 in credits issued in
exchange for the promise to extend the arrangement), a claim in the nature of
treble damages and counsel fees, and other claims. The client has filed a
counterclaim which the Company is contesting as part of the overall proceedings.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 OTC Bulletin Board (Ticker Symbol - NMSCA.OB) and is a penny
stock. Securities and Exchange Commission regulations generally define a penny
stock to be an equity security that is not listed on NASDAQ or a national
4
securities exchange and that has a market price of less than $5.00 per share,
subject to certain exceptions. The regulations of the Securities and Exchange
Commission require broker-dealers to deliver to a purchaser of the Company's
Class A Common Stock a disclosure schedule explaining the penny stock market and
the risks associated with it. Various sales practice requirements are also
imposed on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). In
addition, broker-dealers must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account.
The following table shows the range of high and low bid quotations as reported
by OTC Bulletin Board for the quarters ending during the last two fiscal years
for the Class A Common Stock:
Fiscal 2004 High Low
----------- ---- ---
First Quarter $ 0.39 $ 0.20
Fiscal 2003 High Low
----------- ---- ---
First Quarter $ 0.35 $ 0.21
Second Quarter 0.39 0.20
Third Quarter 0.20 0.20
Fourth Quarter 0.30 0.20
Fiscal 2002 High Low
----------- ---- ---
First Quarter $ 0.40 $ 0.26
Second Quarter 0.33 0.20
Third Quarter 0.30 0.21
Fourth Quarter 0.35 0.21
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 15, 2003, there were approximately 43 holders of record of the
Class A Common Stock.
5
DIVIDENDS
The Company has not paid any dividends on its Class A or Class B Common Stock.
It is not expected that the Company will pay any dividends in the foreseeable
future. The Company's credit facilities prohibit it from paying any cash
dividends.
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
-------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenue $ 27,306,030 $ 29,906,631 $ 40,870,720 $ 42,613,918 $ 38,773,935
Gross profit 4,621,590 6,223,884 7,621,056 8,588,173 7,616,254
(Loss) Income from
Operations (1,099,435) (86,087) 138,720 810,718 216,241
Other income
(expense) (217,393) (290,616) (462,885) (467,238) (342,314)
Net (loss) income (819,441) (286,724) (315,952) 163,018 (163,227)
Per share of common stock (basic and diluted):
Net (loss) income $ (0.29) $ (0.10) $ (0.11) $ 0.06 $ (0.06)
=============================================================================
Weighted average
common shares
outstanding 2,847,000 2,847,000 2,847,000 2,859,959 2,845,845
=============================================================================
As of June 30
-------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Working capital $ 1,726,474 $ 2,923,149 $ 2,875,949 $ 4,554,099 $ 3,004,382
Total Assets 15,142,714 17,352,016 18,504,547 20,166,854 20,770,376
Long-term debt 5,339,343 6,273,998 6,453,248 8,002,784 7,185,000
Stockholders' equity 5,480,117 6,299,558 6,586,282 6,902,234 6,739,216
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 prove 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 and the outcome of the Company's litigation
discussed under Item 3--Legal Proceedings. 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.
RESULT OF OPERATIONS YEAR ENDED JUNE 30, 2003 COMPARED TO YEAR ENDED JUNE 30,
2002
Revenues for the year ended June 30, 2003 ("fiscal 2003") decreased by 8.7% to
$27,306,030 compared to revenues of $29,906,631 for the year ended June 30, 2002
("fiscal 2002"). This decrease is primarily due to the net impact of revenues
from lost contracts versus revenues from new contracts.
Cost of operations for fiscal 2003 was $22,684,440 compared to $23,682,747 in
fiscal 2002, a decrease of $998,307 or 4.2%. This decrease in costs of
operations is due to lower revenues during the period partially offset by
inflationary price, wage and expense increases along with payroll and related
costs for new contracts.
Gross Profit for fiscal 2003 was $4,621,590 or 16.9% of revenue, compared to
$6,223,884 or 20.8% of revenue, a decrease of $1,602,294 or 25.7 %. The decrease
in gross profit as a percentage of revenue is mainly attributed to a change in
the terms of certain client contracts, which have resulted in lower gross
margins.
General and administrative expenses for fiscal 2003 were $4,556,706 or 16.7% of
revenue, compared to $4,562,244 or 15.2% of revenue for fiscal 2002, a decrease
of $5,538. The percentage increase is due to higher fixed costs within the
general and administrative expenses compared to lower sales. General and
administrative expenses for fiscal 2003 include $138,605 of development costs
7
related to the Company's cook-chill food preparation technology.
Depreciation and amortization for fiscal 2003 was $775,057, compared to $847,727
for fiscal 2002. This decrease was due primarily to the end of amortization
expense for investment in contracts.
Provision for doubtful accounts for fiscal 2003 was $389,262 compared to
$900,000 for fiscal 2002. The decrease is due to increased collection efforts
and an increased effort by management to attract a credit worthy customer base.
Additionally, bad debt expense was reduced as a result of a cash recovery of
approximately $142,000 relating to accounts receivable written off prior to
fiscal 2003.
Loss from operations for fiscal 2003 was ($ 1,099,435) or (4.0%) of revenue
compared to ($86,087) or (.3%) of revenue for fiscal 2002, an increase of
$1,013,348. This increase is due to lower revenues as well as increased general
and administrative expenses some of which are fixed.
Interest expense for fiscal 2003 was $211,953 or .8% of revenue, compared to
$261,037 or .9% of revenue for fiscal 2002. This decrease is primarily due to a
reduction of long term debt.
For the reasons stated above, loss before income taxes for fiscal year 2003 was
$(1,316,828) or (4.8)% of revenue compared to loss before income taxes of
$(376,703) or (1.3) % of revenue for fiscal 2002.
Net loss for fiscal 2003 was $(819,441) or $(0.29) per share compared to net
loss of $(286,724) or $(0.10) per share for fiscal 2002.
RESULT OF OPERATIONS YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30,
2001
Revenues for the year ended June 30, 2002 fiscal 2002 decreased by 26.8% to
$29,906,631 compared to revenues of $40,870,720 for the year ended June 30, 2001
fiscal 2001. The Company recorded revenue of $9,888,568 from a major client
during fiscal 2001. The Company recorded no revenue from this client during
fiscal 2002 due to the termination of the Company's relationship with this
client. See Item 3--Legal Proceedings.
Cost of operations for fiscal 2002 was $23,682,747 compared to $33,249,664 in
fiscal 2001, a decrease of $9,566,917 or 28.8%. This decrease in costs of
operations is due to lower revenues during the period, as a result of the
termination of a major client contract.
Gross Profit for fiscal 2002 was $6,223,884 or 20.8% of revenue, compared to
$7,621,056 or 18.6% of revenue, a decrease of $1,397,170 or 18.3 %. The Company
recorded revenue of $9,888,568 from a major client during fiscal 2001. The
8
Company recorded no revenue from this client during fiscal 2002 due to the
termination of the Company's relationship with this client. See Item 3--Legal
Proceedings. The increase in gross profit as a percentage of revenue is due to a
change in the terms of client contracts.
General and Administrative expenses for fiscal 2002 were $4,562,244 or 15.2% of
revenue, compared to $5,954,094 or 14.6% of revenue for fiscal 2001, a decrease
of $1,391,850. The percentage increase is due to revenues increasing at a lower
rate than the general and administrative expenses, some of which are fixed
expenses. The Company implemented certain cost cutting measures due to the
termination of the major customer. General and administrative expenses for
fiscal 2001 include $126,404 of development costs related to the Company's
cook-chill food preparation technology.
Depreciation and amortization for fiscal 2002 was $847,727, compared to $678,242
for fiscal 2001. The increase of $169,485 or 25.0% was primarily due to the
amortization expense for investment in contracts.
Provision for doubtful accounts for fiscal 2002 was $900,000 compared to
$850,000 for fiscal 2001. The net increase is attributable to a change in
contractual relationships.
(Loss) income from operations for fiscal 2002 was ($ 86,087) or (0.3%) of
revenue compared to $138,720 or .3% of revenue for fiscal 2001, a decrease of
$224,805. This decrease is due to an increase in amortization expense and
provision for doubtful accounts as well as a decrease in gross profit and offset
by a decrease in general and administrative expenses.
Interest expense for fiscal 2002 was $261,037 or .9% of revenue, compared to
$486,512 or 1.2% of revenue for fiscal 2001. This decrease is primarily due to a
reduction in interest rates (5.3% average rate in fiscal 2002, 7.7% average rate
in fiscal 2001), as well as a reduction of long term debt.
For the reasons stated above, loss before income taxes for fiscal year 2002 was
$(376,703) or (1.3)% of revenue compared to loss before income taxes of
$(324,165) or (0.8) % of revenue for fiscal 2001.
Net loss for fiscal 2002 was $(286,724) or $(0.10) per share compared to net
loss of $(315,952) or $(0.11) per share for fiscal 2001, an increase of 9%.
LIQUIDITY AND CAPITAL RESOURCES
Our requirement for capital is to fund (i) sales growth and (ii) financing for
acquisitions. Our primary source of financing during 2003 and 2002 was cash flow
from operations. At June 30, 2003, the Company had working capital of $1,726,474
9
as compared to $2,923,148 at June 30, 2002. This decrease in working capital is
primarily attributable to operating losses sustained in the current fiscal year.
The Company's cash and cash equivalents increased by $767,202 to $1,360,512 due
to an increase in emphasis on collection activities. Cash provided by operations
for fiscal 2003 was $1,444,749, compared to $753,892 provided by operations for
fiscal 2002 primarily due to an increase in cash collections of accounts
receivable.
Investing activities provided $13,407 in cash during fiscal 2003 compared to
$438,201 consumed during fiscal 2002. Investing activities for fiscal 2003
include capital expenditures in the amount of $74,800. During fiscal 2003,
financing activities consumed $690,954 in cash, compared to $174,256 consumed
during fiscal 2002. The increase is attributable to an overall increase in net
debt repayments for the fiscal year ended June 30, 2003 compared to fiscal 2002.
The Company has certain credit facilities with its bank including a revolving
credit of $4,000,000. At June 30, 2003, the Company had $1,494,108 available
under its revolving credit. In March 2003, the Loan Facility was extended from
March 31, 2004 to December 31, 2004. The Company issued two series of Industrial
Bonds totaling $3,560,548 in December of 1996. The outstanding balance on the
bonds was $2,810,000 as of June 30, 2003. The Loan Facility contains certain
covenants that include maintenance of certain financial ratios, maintenance of
minimum levels of working capital as well as affirmative and negative covenants.
At June 30, 2003, the Company was not in compliance with the covenants required
under the credit facility agreement. On October 20, 2003, the Company entered
into an amended credit agreement whereby the non-compliance at June 30, 2003 was
waived and new financial covenants were negotiated through June 30, 2004. As a
condition of obtaining said waivers and amendments, the Loan Facility
availability was reduced from $4,000,000 to $3,500,000 million and $500,000 was
placed in a cash collateral account and pledged as additional collateral against
the revolver note.
Payment Due By Period
=================================================================
Less
Contractual Total than 1 2-3 4-5 After 5
Obligations year years years years
========= ========= ========= ========= =========
Long-Term Debt* 5,381,704 196,813 2,804,891 335,000 2,045,000
========= ========= ========= ========= =========
Operating Leases 60,384 18,580 37,159 4,645 0
========= ========= ========= ========= =========
Total Contractual Cash Obligations
5,442,088 215,393 2,842,050 339,645 2,045,000
========= ========= ========= ========= =========
* Long-Term Debt includes $2,505,922 outstanding on the revolving line of
credit, leaving $1,494,078 available under the $4,000,000 revolving line of
credit.
10
Amount of Commitment Expiration
Per Period
==========================================================
Other Commercial Total Amounts Less than 1-3 4-5 Over 5
Commitments Committed 1 year years years years
=============================================================================================
Lines of Credit 4,000,000 0 4,000,000 0 0
=============================================================================================
Standby Letter of 3,065,000 0 3,065,000 0 0
Credit
=============================================================================================
Total Commercial
Commitments
7,065,000 0 7,065,000 0 0
=============================================================================================
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to make the
repayments of indebtedness described herein, to meet the working capital cash
needs of the Company and to meet anticipated capital expenditure needs during
the 12 months ending June 2004. In addition, the Company anticipates the sale of
certain land adjacent to its Collegeville facility that it believes will net
cash proceeds of not less than $2,000,000 during the fiscal year ending June 30,
2004.
In an effort to extend our current bank debt, we may seek to access the public
equity market whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. Any additional funding may
result in significant dilution and could involve the issuance of securities with
rights, which are senior to those of existing stockholders. We may also need
additional funding earlier than anticipated, and our cash requirements, in
general, may vary materially from those now planned, for reasons including, but
not limited to, competitive advances and higher than anticipated expenses and
lower than anticipated revenues from operations.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS 150 clarifies the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in statements of financial position. SFAS 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This statement is not expected to have a material
impact on the Company's financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to
clarify the financial accounting and reporting for derivative instruments and
hedging activities. SFAS 149 is intended to improve financial reporting by
requiring comparable accounting methods for similar contracts. SFAS 149 is
effective for contracts entered into or modified subsequent to June 30, 2003.
11
The requirements of SFAS 149 do not affect the Company's current accounting for
derivative instruments or hedging activities; therefore, it has no effect on the
Company's financial condition or results of operations.
In January 2003 the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). This interpretation of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," addresses consolidation by business
enterprises of certain variable interest entities where there is a controlling
financial interest in a variable interest entity or where the variable interest
does not have sufficient equity at risk to finance its activities without
additional subordinated financial support from other parities. The
interpretation applies in the first year or interim period beginning after
January 31, 2003 and applies in the first year or interim period beginning after
December 15, 2003 to variable interest entities in which enterprise holds a
variable interest that it acquired before February 1, 2003. The Company will
apply the consolidation requirement of FIN 46 in future periods if the Company
should own any interest in any variable interest entity.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transaction and Disclosure, an amendment of FASB Statement 123"
("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123, to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, SFAS 148 amends
Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial information. SFAS
148 is effective for financial statements for fiscal years ending after December
15, 2002. The Company expects to continue to utilize the intrinsic valuation
method for recoding employee stock based compensation.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that a guarantor recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee of indemnification. FIN 45 also requires additional
disclosure by a guarantor in its interim and annual financial statements about
its obligations under certain guarantees and indemnifications. The initial
recognition and measurement provisions of FIN 45 are applicable for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
45 are effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company adopted the recognition and measurement
provisions of FIN 45 prospectively to guarantees issued or modified after
12
December 31, 2002, and the adoption did not have an impact on the Company's
financial position or results of operations.
On July 30, 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS 146 has had no affect on
the Company's financial position of results or operation.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
REVENUE RECOGNITION
Revenue is generated primarily from fees for food service management and
facilities management at continuing care and health care facilities and the
Collegeville Inn restaurant. Revenue is recognized when services are performed.
Ongoing assessments of the credit worthiness of customers provide the Company
reasonable assurance of collectibility upon performance of services.
ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based on payment history and the customer's current credit
worthiness, as determined by a review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based on historical experience
and any specific customer collection issues that have been identified. While
13
such credit losses have historically been within the Company's expectations and
the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
IMPAIRMENT OF DISPOSAL OF LONG LIVED ASSETS
The carrying value of property, plant, and equipment is evaluated based upon
current and anticipated undiscounted operating cash flows before debt service
charges. An impairment is recognized when it is probable that such estimated
future cash flows will be less than the carrying value of the assets.
Measurement of the amount of impairment, if any, is based upon the difference
between the net carrying value and the fair value, which is estimated based on
anticipated undiscounted operating cash flows before debt service charges.
INCOME TAX ACCOUNTING
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.
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.
EMPLOYMENT CONTRACTS
For the fiscal year ended June 30, 2003, the Company paid a base salary of
$327,212 and $228,899 to Joseph Roberts, Chairman and Chief Executive Officer
and Kathleen Hill, Chief Operating Officer, respectively. The Company currently
has no employment contracts with either of such individuals and 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, 2004.
A substantial portion of the Company's revenue is dependent upon the payment of
its fees by customer health care facilities, which, in turn, are dependent upon
third-party payers such as state governments, Medicare and Medicaid. Delays in
payment by third party payers, particularly state and local governments, may
lead to delays in collection of accounts receivable.
14
The Company has no other material commitments for capital expenditures and
believes that its existing cash and cash equivalents, cash from operations and
available revolving credit will be sufficient to satisfy the needs of its
operations and its capital commitments for the next twelve months. 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
Substantially 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,
food and supplies. 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.
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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 28, 2003, the Company, upon the recommendation and approval of its
Audit Committee, dismissed Grant Thorton LLP ("Grant") as the Company's
principal independent public accountant. On September 2, 2003, the Company
engaged BDO Seidman, LLP ("BDO Seidman") to serve as the Company's principal
independent public accountant, effective immediately. The decision to dismiss
Grant was recommended by the Audit Committee of the Company's Board of Directors
and approved by the Company's Board of Directors.
In connection with the audits for the two most recent fiscal years ended June
30, 2002 and 2001 and the subsequent interim period through September 2, 2003,
there were no disagreements between the Company and Grant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Grant, would
have caused Grant to make reference to the subject matter of such disagreements
in connection with its reports on the Company's consolidated financial
statements for such years. During the fiscal years ended June 30, 2002 and 2001
and the subsequent interim period through September 2, 2003, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The reports of Grant on the consolidated financial statements of the Company, as
of and for the fiscal years ended June 30, 2002 and 2001, did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
15
to uncertainty, audit scope, or accounting principles.
The foregoing disclosures were previously reported in Item 4 of the Company's
Current Report on Form 8-K filed with the SEC on September 2, 2003. The Company
provided Grant with a copy of the foregoing disclosures and requested that Grant
furnish the Company with a letter addressed to the SEC stating that it agreed
with such statements. A copy of such letter, dated September 5, 2003, was filed
as Exhibit 16.1 to Form 8-K, dated September 5, 2003.
During the fiscal years ended June 30, 2002 and 2001 and through September 2,
2003, neither the Company nor someone on its behalf consulted BDO Seidman
regarding (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on the Company's financial statements, or (iii) any other
matters or reportable events as set forth in Items 304(a)(1)(iv) and (a)(1)(v)
of Regulation S-K.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Proxy Statement of the Company for the
2003 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
2003 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
2003 Annual Meeting of Shareholders under the caption "Security Ownership" and
"Election of Directors" and is incorporated herein by reference.
16
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Proxy Statements of the Company for
the 2003 Annual Meeting of Shareholders under the caption "Certain Relationships
and Related Transactions" and is incorporated herein by reference.
ITEM 14 - CONTROLS AND PROCEDURES
Our management, including our chief executive officer and principal financial
manager, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of June 30, 2003, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based up that evaluation, our chief executive officer
and principal financial manager have concluded that as of such date, our
disclosure controls and procedures in place are adequate to ensure material
information and other information requiring disclosure is identified and
communicated on a timely basis. There have been no significant changes in
internal controls or in other factors that could significantly affect these
controls subsequent to the date of our evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Consolidated Financial Statements
Reports of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of
June 30, 2003 and 2002 F-4
Consolidated Statements of Operations for the
Years Ended June 30, 2003, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the
Years Ended June 30, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-8
to
F-20
Schedule of Valuation Accounts F-22
17
(B) Reports on Form 8-K
On September 9, 2003, the Company filed a current report on Form 8-K
relating to a change in auditors. BDO Seidman, LLP was engaged as the
independent public accountants replacing Grant Thornton, LLP.
(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 Statement
on Form S-1 (File No. 33-4281) (the "S-1").
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).
10.11 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).
18
10.14 Loan Agreement between the Montgomery County Industrial Development
Authority and Collegeville Inn Conference & Training Center, Inc. (a
wholly-owned subsidiary of the Company). (Incorporated by reference
to exhibit 10.14, annual report on Form 10-K Filed on September 27,
1997.)
10.15 Trust Indenture between Montgomery County Industrial Development
Authority and Dauphin Deposit Bank and Trust Company, as Trustee.
(Incorporated by reference to exhibit 10.15, annual report on Form
10-K filed September 27, 1997.)
10.16 Loan Agreement between Montgomery County Industrial Development
Authority and Apple Fresh Foods Limited (a wholly-owned subsidiary of
the Company). (Incorporated by reference to exhibit 10.16, annual
report on Form 10-K Filed on September 27, 1997.)
10.17 Trust Indenture between the Montgomery County Development Authority
and Dauphin Deposit Bank and Trust Company, as Trustee. (Incorporated
by reference to exhibit 10.17, annual report on Form 10-K Filed on
September 27, 1997.)
10.18 Loan Agreement between the Company and Corestates Bank, N.A.
(Incorporated by reference to exhibit 10.18, annual report on Form
10-K Filed on September 27, 1997.)
21 Subsidiaries of the Company
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.
19
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: October 20, 2003
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 29, 2003.
/s/ Joseph V. Roberts /s/ Kathleen A. Hill
- -------------------------- -----------------------------------
Joseph V. Roberts, Chief Kathleen A. Hill, President and
Executive Officer and Director Director
(Principal Financial Officer)
- -------------------------- -----------------------------------
Richard Kresky, Director Samuel R. Shipley,
Director
/s/ Michael M. Gosman /s/ Michelle L. Roberts-O'Donnell
- -------------------------- -----------------------------------
Michael M. Gosman, Director Michelle L. Roberts-O'Donnell,
Director
/s/ Jane Scaccetti
- -------------------------
Jane Scaccetti, Director
20
Financial Statements and Report of Independent Certified Public Accountants
NUTRITION MANAGEMENT SERVICES COMPANY AND SUBSIDIARIES
June 30, 2003 and 2002
TABLE OF CONTENTS
Page
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F - 2
CONSOLIDATED BALANCE SHEETS F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS F - 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8
SUPPLEMENTAL INFORMATION
SCHEDULE OF VALUATION ACCOUNTS F - 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Nutrition Management Services Company
Kimberton, Pennsylvania
We have audited the accompanying consolidated balance sheet of Nutrition
Management Services Company and Subsidiaries as of June 30, 2003 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurances 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 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nutrition Management
Services Company and Subsidiaries at June 30, 2003, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited the schedule of valuation accounts for Nutrition Management
Services Corporation and its subsidiaries for the year ended June 30, 2003. In
our opinion, this Schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ BDO Seidman, LLP
Philadelphia, Pennsylvania
October 7, 2003, except for Note D,
Which is as of October 20, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Nutrition Management Services Company
Kimberton, Pennsylvania
We have audited the accompanying consolidated balance sheet of Nutrition
Management Services Company and subsidiaries as of June 30, 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurances 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 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 consolidated financial position of
Nutrition Management Services Company and subsidiaries at June 30, 2002, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended June 30, 2002, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited the schedule of valuation accounts for Nutrition Management
Services Corporation and its subsidiaries for each of the two years in the
period ended June 30, 2002. In our opinion, this Schedule presents fairly, in
all material respects, the information required to be set forth therein.
/s/ Grant Thorntorn LLP
Philadelphia, Pennsylvania
September 20, 2002
F-3
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
2003 2002
------------ ------------
Current assets
Cash and cash equivalents $ 1,360,512 $ 593,310
Accounts receivable (net of allowance for doubtful accounts of $2,292,326
and $1,774,753 in 2003 and 2002, respectively) 2,843,764 5,659,990
Unbilled revenue 51,147 46,505
Deferred income taxes 1,209,454 882,487
Inventory 155,945 230,238
Prepaid and other 365,558 289,079
Income Tax Refund 63,348 --
------------ ------------
Total current assets 6,049,728 7,701,609
------------ ------------
Property and equipment - net 8,103,456 8,683,712
------------ ------------
Other assets
Investment in contracts (net of accumulated amortization expense of $280,000
and $ 120,000 in 2003 and 2002, respectively -- 120,000
Note Receivable 136,110 --
Advances to officers 435,283 523,490
Deferred income taxes 212,687 103,089
Bond issue costs (net of accumulated amortization of $95,892
and $81,328 in 2003 and 2002, respectively) 195,430 210,096
Other assets 10,020 10,020
------------ ------------
Total other assets 989,530 966,695
------------ ------------
$ 15,142,714 $ 17,352,016
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 196,813 $ 191,814
Current portion of note payable 575,687 336,982
Accounts payable (including a current portion of note payable
totaling $575,687 as of June 30, 2003) 2,883,496 3,474,128
Accrued expenses 303,756 443,483
Accrued payroll 246,622 260,861
Other 116,880 71,192
------------ ------------
Total current liabilities 4,323,254 4,778,460
------------ ------------
Long-term liabilities
Long-term debt - net of current portion 5,184,891 5,543,852
Long-term note payable 154,452 730,146
------------ ------------
Total long-term liabilities 5,339,343 6,273,998
------------ ------------
Stockholders' equity
Undesignated 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
Retained earnings 2,177,706 2,997,147
------------ ------------
5,979,680 6,799,121
Less treasury stock - (Common - Class A: 253,000 shares - at cost ) (499,563) (499,563)
------------ ------------
Total stockholders' equity 5,480,117 6,299,558
------------ ------------
Total liabilities and stockholders' equity $ 15,142,714 $ 17,352,016
============ ============
The accompanying notes are an integral part of these statements.
F-4
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
2003 2002 2001
------------ ------------ ------------
Food service revenue $ 27,306,030 $ 29,906,631 $ 40,870,720
Cost of operations
Payroll and related expenses 10,938,468 10,170,603 13,024,040
Other costs of operations 11,745,972 13,512,144 20,225,624
------------ ------------ ------------
Cost of operations 22,684,440 23,682,747 33,249,664
------------ ------------ ------------
Gross profit 4,621,590 6,223,884 7,621,056
------------ ------------ ------------
Expenses
General and administrative expenses 4,556,706 4,562,244 5,954,094
Depreciation and amortization 775,057 847,727 678,242
Provision for doubtful accounts 389,262 900,000 850,000
------------ ------------ ------------
Expenses 5,721,025 6,309,971 7,482,336
------------ ------------ ------------
(Loss) income from operations (1,099,435) (86,087) 138,720
------------ ------------ ------------
Other (expense) income
Interest expense (211,953) (261,037) (486,512)
Interest income 9,763 9,131 32,773
Other (15,203) (38,710) (9,146)
------------ ------------ ------------
Other expense - net (217,393) (290,616) (462,885)
------------ ------------ ------------
Loss before income taxes (1,316,828) (376,703) (324,165)
Income tax benefit (497,387) (89,979) (8,213)
------------ ------------ ------------
Net loss $ (819,441) $ (286,724) $ (315,952)
============ ============ ============
Net loss per share - basic and diluted $ (0.29) $ (0.10) $ (0.11)
============ ============ ============
Weighted average number of shares 2,847,000 2,847,000 2,847,000
============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three years ended June 30, 2003
Class A Class B
Common stock Common stock
-------------------------- ----------------------------
Number Number
of shares Amount of shares Amount
----------- ----------- ----------- -----------
Balance - June 30, 2000 2,747,000 $ 3,801,926 100,000 $ 48
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance - June 30, 2001 2,747,000 3,801,926 100,000 48
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance - June 30, 2002 2,747,000 3,801,926 100,000 48
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance - June 30, 2003 2,747,000 $ 3,801,926 100,000 $ 48
=========== =========== =========== ===========
Treasury stock
----------------------------- Total
Retained Number stockholders'
earnings of shares Amount equity
----------- ----------- ----------- -----------
Balance - June 30, 2000 $ 3,599,823 (253,000) $ (499,563) $ 6,902,234
Net loss (315,952) -- -- (315,952)
----------- ----------- ----------- -----------
Balance - June 30, 2001 3,283,871 (253,000) (499,563) 6,586,282
Net loss (286,724) -- -- (286,724)
----------- ----------- ----------- -----------
Balance - June 30, 2002 2,997,147 (253,000) (499,563) 6,299,558
Net loss (819,441) -- -- (819,441)
----------- ----------- ----------- -----------
Balance - June 30, 2003 $ 2,177,706 (253,000) $ (499,563) $ 5,480,117
=========== =========== =========== ===========
F-6
The accompanying notes are an integral part of these statements.
Nutrition Management Services Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
2003 2002 2001
----------- ----------- -----------
Operating activities
Net loss $ (819,441) $ (286,724) $ (315,952)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization 775,057 847,727 678,242
Amortization of bond costs 14,666 14,567 14,566
Provision for bad debts 389,262 900,000 850,000
Amortization of deferred gain -- (50) (26,364)
(Benefit) for deferred taxes (436,565) (156,690) (52,361)
Changes in assets and liabilities
Accounts receivable 2,290,854 (135,361) (717,360)
Unbilled revenue (4,642) 131,462 417,261
Inventory 74,293 2,631 (5,490)
Prepaid and other (76,479) 127,930 43,894
Income tax refund (63,348) -- --
Accounts payable (590,629) (726,630) 567,083
Accrued expenses (139,727) 102,198 (248,512)
Accrued payroll (14,239) (12,356) (77,330))
Accrued income taxes -- -- (18,466)
Other 45,687 (54,812) (6,043)
----------- ----------- -----------
Net cash provided by operating activities 1,444,749 753,892 1,103,168
----------- ----------- -----------
Investing activities
Purchase of property and equipment (74,800) (243,698) (222,523)
(Advances) repayments to employees and officers 88,207 (194,503) (26,767)
----------- ----------- -----------
Net cash provided by (used in) investing activities 13,407 (438,201) (249,290)
----------- ----------- -----------
Financing activities
Proceeds from long-term borrowings 1,775,900 1,217,000 2,633,611
Repayment of long-term borrowings (2,129,866) (1,054,268) (3,833,346)
Repayment of long-term accounts payable (336,988) (336,988) (336,988)
----------- ----------- -----------
Net cash used in financing activities (690,954) (174,256) (1,536,723)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 767,202 141,435 (682,845)
Cash and cash equivalents - beginning of year 593,310 451,875 1,134,720
----------- ----------- -----------
Cash and cash equivalents - end of year $ 1,360,512 $ 593,310 $ 451,875
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the years for
Interest $ 213,625 $ 270,483 $ 508,646
Income taxes $ 6,475 $ (113,473) $ 90,825
The accompanying notes are an integral part of these statements.
F-7
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 ("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 restaurant. 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.
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. 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 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.
4. UNBILLED REVENUE
Unbilled revenue represents amounts for services provided, but not billed
as of the balance sheet date.
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. For the remaining customers, a
payable or receivable is recorded for the goods purchased on behalf of the
Company's customers, and billed back to customers. As of June 30, 2003 and
2002, inventory receivable from customers is $21,730 and $13,484
respectively, while inventory payable to customers is $15,525 and $9,775,
respectively.
6. REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting
bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). Under SAB 101 revenue is recognized when services have been rendered
and the contract price is determinable, and collectibility is reasonably
assured. Revenue is generated primarily from fees for food
The accompanying notes are an integral part of these statements.
F-8
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. REVENUE RECOGNITION - (CONTINUED)
service management and facilities management at continuing care and health
care facilities, and the Collegeville Inn restaurant. Revenue is recognized
when services are performed. Revenues are recorded net of discounts and
rebates. 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.
8. INVESTMENTS IN CONTRACTS
Investments in contracts are capital costs incurred by the Company on behalf
of their customers. These costs are amortized over the life of the contract.
As of June 30, 2003 and 2002, investments in contracts are $0 and $120,000,
respectively. The associated accumulated amortization is $280,000 and
$160,000 as of June 30, 2003 and 2002 respectively.
9. 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.
10. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS "123"). For its stock options. This
statement 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" ("APB Opinion 29"). 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. There are no
elements of compensation that require disclosure.
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. 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.
The accompanying notes are an integral part of these statements.
F-9
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. EARNINGS PER SHARE
The Company follows the provisions of SFAS No. 128, "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 82,750, 89,750 and 89,750 shares of common stock at
$4.00 per share were outstanding during 2003, 2002 and 2001, respectively.
The Company has sustained a net loss for each of the fiscal years presented.
As a result, the common stock equivalents of stock options issued and
outstanding at June 30, 2003 were not included in the computation of diluted
earnings per share for the three years then ended as they were antidilutive.
13. 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,
2003, 2002 and 2001 was $53,196, $62,448 and $24,048, respectively.
14. RECLASSIFICATION
Certain 2002 and 2001 items have been reclassified to conform to the current
year presentation.
15. 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.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts we have reported in the
accompanying balance sheet for cash and cash equivalents approximate their
fair values.
Investments: We estimate the fair values of investments based on quoted
market prices. For investments for which there are no quoted market prices,
we derive fair values from available yield curves for investments of similar
quality and terms. The carrying amounts are reported in the accompanying
balance sheet for investments in contracts approximate their fair values.
Long- and short-term debt: We base the fair values of debt instruments on
quoted market prices. Where quoted prices are not available, we base 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 are reported in the accompanying balance sheet for debt
approximate their fair values. See footnotes D and E for further discussion.
17. IMPAIRMENT OF DISPOSAL OF LONG LIVED ASSETS
During the first quarter of fiscal 2003, the Company adopted SFAS No. 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
The accompanying notes are an integral part of these statements.
F-10
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
18. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 clarifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. SFAS requires that those instruments be classified as liabilities in
statements of financial position. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. This statement is not expected to have a material impact on the
Company's financial position or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" to clarify the financial accounting and reporting for derivative
instruments and hedging activities. SFAS 149 is intended to improve
financial reporting by requiring comparable accounting methods for similar
contracts. SFAS 149 is effective for contracts entered into or modified
subsequent to June 30, 2003. The requirements of SFAS 149 do not affect the
Company's financial condition or results of operations as the Company
currently does not engage in the use of derivative instruments of the
hedging activities.
In January 2003 the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," addresses consolidation by business
enterprises of certain variable interest entities where there is a
controlling financial interest in a variable interest entity or where the
variable interest does not have sufficient equity at risk to finance its
activities without additional subordinated financial support from other
parities. The interpretation applies in the first year or interim period
beginning after January 31, 2003 and applies in the first year or interim
period beginning after December 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company will apply the consolidation requirement of
FIN 46 in future periods if the Company should own any interest in any
variable interest entity.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transaction and Disclosure, an amendment of FASB
Statement 123" ("SFAS 148"). SFAS 148 amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of that Statement to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, this
Statement amends Accounting Principles Board Opinion No. 28, Interim
Financial Reporting, to require disclosure about those effects in interim
financial information. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company expects to continue
to utilize the intrinsic valuation method for recoding employee stock based
compensation.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee of indemnification.
FIN 45 also requires additional disclosure by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
and indemnifications. The initial recognition and measurement provisions of
FIN 45 are applicable for guarantees issued or modified after December
31,2002. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
Company adopted the recognition and
The accompanying notes are an integral part of these statements.
F-11
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
measurement provisions of FIN 45 prospectively to guarantees issued or
modified after December 31, 2002, and the adoption did not have an impact on
the Company's financial position or results of operations.
On July 30, 2002, the Financial Accounting Standards Board (FASB) issued
Statement 146, "Accounting for Costs Associated With Exit or Disposal
Activities" ("SFAS 146"). The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 is to
be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 has had no affect on the
Company's financial position or results of operations.
Reclassification: Certain prior year amounts for the fiscal years ended June
30, 2002 and 2001 have been reclassified to conform to the presentation
adopted in fiscal 2003.
NOTE C - PROPERTY AND EQUIPMENT
The following details the composition of property and equipment.
Estimated
useful lives 2003 2002
------------ ---------------- ----------------
Property and equipment
Land - $ 497,967 $ 497,967
Building 40 7,491,984 7,491,984
Machinery and equipment 2-8 3,812,628 3,763,746
Furniture and fixtures 2-8 749,434 749,434
Other, principally autos and trucks 2-10 379,119 371,722
-------------- --------------
12,931,132 12,874,853
Less accumulated depreciation 4,827,676 4,191,141
-------------- --------------
$ 8,103,456 $ 8,683,712
=============== ===============
Depreciation expense amounted to $661,168, $687,728 and $678,242 for the years
ended June 30, 2003, 2002 and 2001 respectively
NOTE D - LONG- TERM DEBT
Long-term debt consisted of the following:
2003 2002
---------- ----------
Bank revolving credit, interest due monthly at the National Consumer
rate minus .25% (effectively 4.0% as of June 30, 2003), secured by
all corporate assets; matures on December 31, 2004 $2,505,922 $2,662,922
Note payable, term loan incurred in connection with purchased computer
equipment, payable in equal monthly installments of $6,722 at a
fixed rate of interest at 7.4%, maturing on May 1, 2004; the
acquired equipment was pledged as
collateral 65,782 132,744
Industrial Revenue Bonds (Collegeville Inn Projects) (see bonds
payable) 2,030,000 2,120,000
Industrial Revenue Bonds (Apple Fresh Foods Projects) (see bonds
payable) 780,000 820,000
---------- ----------
5,381,704 5,735,666
Less current maturities 196,813 191,814
---------- ----------
$5,184,891 $5,543,852
========== ==========
The accompanying notes are an integral part of these statements.
F-12
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG- TERM DEBT - Continued
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 March 2003, the revolving credit was extended
from March 31, 2004 to December 31 2004 and the letters of credit are
available for four years with annual renewals. At June 30, 2003, the Company
had available approximately $1,494,108 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 covenants also
include the maintenance of a certain fixed coverage ratio, total liabilities
to consolidated tangible net worth, and minimum working capital.
Compensating balances required for these credit agreements totaled $655,102
as of June 30, 2003.
At June 30, 2003 the Company was not in compliance with these covenants. On
October 20, 2003, the Company entered into an amended credit agreement
whereby the non-compliance at June 30, 2003 was waived and new financial
covenants were negotiated through June 30, 2004, which reflect the Company's
current operating projections. As a condition of obtaining said waivers and
amendments, the Loan Facility availability was reduced from $4,000,000 to
$3,500,000 and $500,000 was placed in a cash collateral account and pledged
as additional collateral against the revolver note.
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, 2003 was
(1.3%)
Term - 20 years (2016)
Purpose - Rehabilitate, furnish and equip the Collegeville Inn facility.
ISSUE #2
--------
Title - Montgomery County Industrial Development Authority, $1,000,000
aggregate principal amount, federally taxable variable rate demand/fixed
rate revenue bonds (Apple Fresh Foods, Ltd. Project) Series of 1996.
Rate - Variable, to a maximum of 15% (Variable Rate at June 30, 2003 was
1.25%)
Term - 20 years (2016)
Purpose - Develop a cook-chill food preparation technology.
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 accompanying notes are an integral part of these statements.
F-13
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D - LONG- TERM DEBT - Continued
The sinking fund requirements of the bonds are as follows:
Collegeville Apple Fresh
Inn Foods Total
------------ ----------- ----------
2003 $ 90,000 $ 40,000 $130,000
2004 95,000 40,000 135,000
2005 100,000 45,000 145,000
2006 105,000 45,000 150,000
2007 115,000 50,000 165,000
Maturities of principal due in the following years are set forth below:
Year ending June 30,
2004 $ 196,813
2005 2,654,891
2006 150,000
2007 165,000
2008 170,000
Thereafter 2,045,000
---------
$5,381,704
==========
NOTE E - LONG-TERM NOTE PAYABLE
The Company entered into an agreement with a third party in July 2000. The
agreement calls for the following payment terms: $100,000 due on August 1,
2000, followed by 37 monthly payments of $28,000, $323,000 due on October
1, 2003, and the remaining balance paid at a rate of $28,000 per month
until paid in full the payment schedule at June 30, 2003. The payment
schedule includes total payments of $575,687 in 2004 and $154,452 in 2005.
NOTE F - INCOME TAXES
The components of income tax (benefit) expense are:
Year Ended June 30,
-------------------
2003 2002 2001
--------- --------- ---------
Current
Federal $ (47,422) $ 24,736 $ 13,898
State (13,400) 41,975 30,889
--------- --------- ---------
(60,822) 66,711 44,787
--------- --------- ---------
Deferred
Federal (345,191) (125,650) (71,000)
State (91,374) (31,040) 18,000
--------- --------- ---------
(436,565) (156,690) (53,000)
--------- --------- ---------
$(497,387) $ (89,979) $ (8,213)
========== ========= =========
The accompanying notes are an integral part of these statements.
F-14
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - INCOME TAXES - Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
approximately:
June 30
-------------------------
2003 2002
---------- ----------
Deferred tax assets
Provision for doubtful accounts $1,094,000 $ 763,000
Excess of tax over financial statement
basis of investments in contracts 185,000 222,000
Deferred gains - 2,000
Vacation accrual 116,000 119,000
Charitable contribution carryforward 27,000 39,000
Federal net operating loss 165,000 -
Other 63,000 64,000
---------- ----------
Total deferred tax assets 1,650,000 1,209,000
Deferred tax liabilities
Depreciation 228,000 223,000
---------- ----------
Net deferred tax assets $1,422,000 $ 986,000
========== ==========
These amounts are classified in the balance sheet as follows:
June 30
-------------------------
2003 2002
---------- ----------
Current asset $1,209,000 $ 883,000
Non-current asset 213,000 103,000
---------- ----------
$1,422,000 $ 986,000
========== ==========
The Company has not provided a valuation against its deferred tax assets
after consideration of a future gain on the disposal of certain land
adjacent to its Collegeville facility, anticipated future profitable
operating results and other items.
The following reconciles the tax provision with the U.S. statutory tax
rates:
Year Ended June 30
--------------------------------
2003 2002 2001
------ ------ --------
Income taxes at U.S. statutory rates 34.0% 34.0% 34.0%
States taxes, net of federal tax benefit 5.3 (7.4) (6.3)
Nondeductible expenses (3.5) (8.6) (14.8)
Other 2.0 5.9 (10.4)
------ ------ --------
37.8 23.9% 23.9%
====== ======= ========
The Company also has a federal net operating loss carry forward of $384,473
expiring on December 31, 2017. The Company has charitable contribution
carry forwards in the amount of $62,569, which begin to expire in the year
2004.
NOTE G - RELATED PARTY TRANSACTIONS
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 was deferred and amortized
over the life of the lease. During each of the three years in the period
ended June 30, 2002, the Company recognized a gain of $26,426. As of June
30, 2002 and 2001, the balance of the unamortized gain on the sale was $ 0
and $26,426, respectively. Joseph V. Roberts, Chief Executive Officer and
Director of the Company, received long term advances of which $375,373
remain outstanding as of June 30, 2003. Kathleen A. Hill, President and
Director of the Company, received long term advances of which $59,910
remain outstanding as of June 30, 2003.
The accompanying notes are an integral part of these statements.
F-15
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - COMMITMENTS AND CONTINGENCIES - Continued
1. OPERATING LEASES
----------------
The Company leases its corporate office building from the above-mentioned
related party 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, 2003, 2002 and 2001, rent expense was $255,587, $248,252 and
$254,859, respectively.
The Company leases real estate facilities from a corporation owned by a
principal stockholder under month to month operating leases.
The Company is also obligated under various operating leases for operating
equipment for periods expiring through 2003. During the years ended June
30, 2003, 2002 and 2001, rent expense was $260,698, $275,054 and $285,295,
respectively, for all operating leases.
Minimum annual rentals under non-cancelable operating leases subsequent to
June 30, 2003, are as follows:
Operating
Year ending June 30, equipment
-------------------- ---------
2004 $18,580
2005 18,580
2006 18,580
2007 4,645
2. LITIGATION
----------
On February 7, 2001, the Company filed a suit against a major client in the
Court of Common Pleas in Chester County, PA. This suit has subsequently
been removed to the United States District Court for the Eastern District
of Pennsylvania. In the lawsuit, the Company has made various claims,
including among others a claim that the client failed to pay approximately
$2.1 million in invoiced amounts, a claim that the client failed to pay
approximately $1 million in other amounts owing, a claim for reimbursement
for start up costs in an amount in excess of $400,000, a claim for over $2
million in lost profits (or, alternatively, a claim for reimbursement for
over $300,000 in credits issued in exchange for the promise to extend the
arrangement), a claim in the nature of treble damages and counsel fees, and
other claims. The former client has filed a counterclaim which the Company
is contesting as part of the overall proceedings. Of the amounts sought in
this claim from the major client, $1,870,481 is included in accounts
receivable offset completely by a specifically identified allowance
recorded during fiscal year ended June 30 2001. 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 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.
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.
The accompanying notes are an integral part of these statements.
F-16
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I - STOCKHOLDERS' EQUITY - Continued
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 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 expired 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 Non- Weighted
outstanding qualified average
incentive stock exercise
stock options options Total price
------------ --------- --------- ---------
Outstanding at June 30, 2000 63,000 45,000 108,000 $4.00
Exercisable at June 30, 2000 56,000 45,000 101,000 4.00
Forfeited/exercised (18,250) - (18,250) 4.00
------------ --------- --------- ---------
Outstanding at June 30, 2001 44,750 45,000 89,750 4.00
Exercisable at June 30, 2001 44,750 45,000 89,750 4.00
Outstanding at June 30, 2002 44,750 45,000 89,750 4.00
Exercisable at June 30, 2002 44,750 45,000 89,750 4.00
Forfeited/exercised (7,000) - (7,000) 4.00
------------ --------- --------- ---------
Outstanding at June 30, 2003 37,750 45,000 82,750 4.00
Exercisable at June 30, 2003 37,750 45,000 82,750 4.00
The accompanying notes are an integral part of these statements.
F-17
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE J - STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN - Continued
All options were granted at exercise prices above market price. In addition
the Company has not granted any stock options since 1998.
The remaining contractual life of outstanding and exercisable options is
approximately four years with respect to the incentive stock options and
three years with respect to non-qualified stock options.
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, 2003, all employees were eligible to participate in the plan. A summary
of stock purchased under the plan is shown below.
2003 2002 2001
---------------- ---------------- ----------------
Aggregate purchase price $ 720 $ 4,445 $ 5,390
Shares purchased 4,235 19,202 17,505
Employee participants 14 16 23
The Company accounts for employee stock plans under the intrinsic value
method prescribed by Accounting Principles Board (APB) No. 25. The effect
of the proforma information in accordance with Financial Accounting
Standards Board SFAS No. 123, "Accounting for Stock-Based Compensation, was
determined immaterial.
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, 2003, 2002 and 2001, Company contributions
to the plan, which were charged to expense, amounted to $23,649, $25,630
and $32,534, 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 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, 2003, 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.
The accompanying notes are an integral part of these statements.
F-18
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE M - MAJOR CUSTOMERS
The Company's Food Service Management Segment had sales to one customer
representing approximately 26% and 15% of total revenues for the years
ending June 30, 2003 and 2002, respectively. Amounts included in accounts
receivable from the customer totaled $298,258 at June 30, 2003. The loss of
such customer could have a material adverse effect on the Company's future
results of operations. The Company had sales to a different customer
representing approximately 25% of total revenues for the year ending June
30, 2001.
NOTE N - 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 adoption of SFAS No. 131 had no effect on the
Company's results of operations or financial position.
The financial information of the Company's reportable segments have been
compiled utilizing the accounting policies described in Note A Organization
and Business. The Company's reportable segments are (1) food service
management and (2) 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.
Training and
Food Service Conference
Management Center Total
-------------------- -------------------- ------------------
As of and for the year ended June 30, 2003:
Food service revenue $ 26,462,980 $ 843,050 $ 27,306,030
Depreciation and amortization 253,328 521,729 775,057
Income (loss) from operations 452,565 (1,552,000) (1,099,435)
Interest income 9,763 - 9,763
Interest expense (116,558) (95,395) (211,953)
Loss before taxes (benefit) (726,133) (590,695) (1,316,828)
Net loss (228,746) (590,695) (819,441)
Total assets 6,881,864 8,260,850 15,142,714
Capital expenditures 40,392 34,408 74,800
As of and for the year ended June 30, 2002:
Food service revenue $ 28,951,584 $ 955,047 $ 29,906,631
Depreciation and amortization 322,245 525,482 847,727
Income (loss) from operations 1,129,630 (1,215,717) (86,087)
Interest income 9,131 - 9,131
Interest expense (147,652) (113,385) (261,037)
Loss before taxes (benefit) (177,199) (199,504) (376,703)
Net loss (87,220) (199,504) (286,724)
Total assets 8,612,981 8,739,035 17,352,016
Capital expenditures 29,323 214,375 243,698
The accompanying notes are an integral part of these statements.
F-19
Nutrition Management Services Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - BUSINESS SEGMENTS - Continued
Training and
Food Service Conference
Management Center Total
-------------------- -------------------- ------------------
As of and for the year ended June 30, 2001:
Food service revenue $ 39,960,645 $ 910,075 $ 40,870,720
Depreciation and amortization 177,237 501,005 678,242
Income (loss) from operations 1,155,834 (1,017,114) 138,720
Interest income 32,773 - 32,773
Interest expense (249,161) (237,351) (486,512)
Income (loss) before taxes (benefit) (643,768) 319,603 (324,165)
Net income (loss) (635,555) 319,603 (315,952)
Total assets 9,452,365 9,052,182 18,504,547
Capital expenditures
222,253 - 222,253
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 2003
-----------------------------------------------------
September 30, December 31,
---------------------- ----------------------
Revenues $ 7,256,400 $ 7,166,653
Gross profit 1,312,420 1,217,980
Net income (loss) (174,945) (282,217)
Net income (loss) per share - basic
and diluted $ (0.06) $ (0.10)
----------------------------------------------------
March 31, June 30,
------------------ ----------------------
Revenues $ 6,358,301 $ 6,524,676
Gross profit 1,097,190 994,000
Net income (loss) (306,759) (55,520)
Net income (loss) per share - basic
and diluted $ (0.11) $ (0.02)
Fiscal 2002
-----------------------------------------------------
September 30, December 31,
---------------------- ----------------------
Revenues $ 7,422,218 $ 7,871,823
Gross profit 1,594,594 1,616,800
Net income (loss) (175,135) (36,428)
Net income (loss) per share - basic
and diluted $ (0.06) $ (0.01)
---------------------------------------------
March 31, June 30,
------------------ ------------------
Revenues $ 6,945,186 $ 7,667,404
Gross profit 1,469,724 1,542,766
Net income (loss) (79,774) 4,613
Net income (loss) per share - basic
and diluted $ (0.03) $ -
The accompanying notes are an integral part of these statements.
F-20
SUPPLEMENTAL INFORMATION
Nutrition Management Services Company and Subsidiaries
SCHEDULE OF VALUATION ACCOUNTS
For the three years ended June 30, 2003
The following sets forth the activity in the Company's valuation accounts:
Accounts
Receivable
-----------
Balance at June 30, 2000 $ 853,005
Provision for bad debts 850,000
Write-offs (527,409)
-----------
Balance at June 30, 2001 1,175,596
Provision for bad debts 900,000
Write-offs (300,843)
-----------
Balance at June 30, 2002 1,774,753
Provision for bad debts 389,262
Recovery net of write-offs 128,321
-----------
Balance at June 30, 2003 $ 2,292,336
===========