UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
-----------------
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-19824
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Nutrition Management Services Company
-------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2095332
- ----------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Box 725, Kimberton Road, Kimberton, PA 19442
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 935-2050
----------------
N/A
-----------------------------
Former name, former address and former fiscal year, if change
since last report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days Yes /X/ No / /.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes / / No /X/.
2,747,000 Shares of Registrant's Class A Common Stock, with no par value, and
100,000 shares of Registrant's Class B Common Stock, with no par value, are
outstanding as of January 3, 2005.
TABLE OF CONTENTS
Part I. Financial Information Page No.
--------------------- --------
Consolidated Balance Sheets as of
December 31, 2004 (unaudited) and June 30, 2004 2
Consolidated Statements of Operations for the Three
and Six Months Ended December 31, 2004 (unaudited) and
2003 (unaudited) 3
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2004 (unaudited) and
2003 (unaudited) 4
Notes to Consolidated Financial Statements 5 - 8
Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 14
Item 9A - Controls and Procedures 14
Part II. Other Information 15
Signatures 16
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 JUNE 30, 2004
(UNAUDITED)
----------------- -------------
Current assets:
Cash and cash equivalents $ 782,675 $ 946,523
Marketable securities 216,303 202,969
Accounts receivable, net of allowance for doubtful
accounts of $2,982,280 and $2,877,336, respectively 2,778,316 2,259,582
Deferred income taxes 405,320 405,320
Inventory 155,745 159,181
Prepaid and other current assets 653,886 525,556
------------ ------------
Total current assets 4,992,245 4,499,131
Property and equipment, net 7,294,219 7,563,568
Other assets:
Restricted cash 250,000 250,000
Note receivable 111,374 120,608
Advances to employees 435,283 435,283
Deferred income taxes 1,218,521 1,218,521
Bond issue costs, net of accumulated amortization of $117,745
and $110,461, respectively 173,579 180,863
Other assets 11,321 11,321
------------ ------------
Total other assets 2,200,078 2,216,596
------------ ------------
Total assets $ 14,486,542 $ 14,279,295
============ ============
Current liabilities:
Current portion of long-term debt $ 145,000 $ 145,000
Current portion of note payable 0 154,453
Accounts payable 4,035,583 3,303,947
Accrued payroll and related expenses 152,935 222,176
Accrued expenses and other 170,937 447,114
------------ ------------
Total current liabilities 4,504,455 4,272,690
Long-Term liabilities:
Long-term debt, net of current portion 5,609,922 5,376,922
Commitments and contingencies
Stockholders' equity:
Undesignated preferred stock - no par, 2,000,000 shares authorized, none
issued or 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, issued and outstanding 48 48
Retained earnings 1,069,754 1,327,272
Less: treasury stock (Class A common: 253,000 and 253,000
shares, respectively) - at cost (499,563) (499,563)
------------ ------------
Total stockholders' equity 4,372,165 4,629,683
------------ ------------
$ 14,486,542 $ 14,279,295
============ ============
See Notes to Unaudited Consolidated Financial Statements
2
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
---- ---- ---- ----
Food Service Revenue $6,610,033 $7,175,557 $13,379,580 $13,882,411
Cost of Operations
Payroll and related expenses 2,525,661 2,851,728 5,228,008 5,362,130
Other costs of operations 2,740,113 2,984,272 5,504,001 5,867,390
---------- ---------- ----------- -----------
Total cost of operations 5,265,774 5,836,000 10,732,009 11,229,520
--------- ---------- ----------- -----------
Gross Profit 1,344,259 1,339,557 2,647,571 2,652,891
Expenses
General and administrative expenses 1,159,971 1,190,626 2,385,265 2,367,466
Depreciation and amortization 151,308 155,547 302,984 309,945
Provision for doubtful accounts 30,000 60,000 105,000 120,000
---------- ---------- ----------- ----------
Total expenses 1,341,279 1,406,173 2,793,249 2,797,411
---------- ---------- ----------- ----------
Income/(loss) from operations 2,980 (66,616) (145,678) (144,520)
Other income/(expense)
Other 13,983 (4,509) 11,600 (9,018)
Interest income 1,220 1,917 2,255 3,557
Interest expense (67,035) (47,441) (125,695) (92,624)
---------- --------- ----------- ----------
Total other income/(expense) (51,832) (50,033) (111,840) (98,085)
---------- --------- ----------- ----------
Loss before income taxes (48,852) (116,649) (257,518) (242,605)
Provision for income taxes -- -- -- --
---------- ---------- ------------ ---------
Net loss ($48,852) ($116,649) ($257,518) ($242,605)
=========== ========= ============ =========
Net loss per share - basic and diluted ($.02) ($0.04) ($.09) ($0.08)
========== ========= =========== =========
Weighted average number of shares 2,847,000 2,847,000 2,847,000 2,847,000
========== ========= =========== =========
See Notes to Unaudited Consolidated Financial Statements
3
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED DECEMBER 31,
2004 2003
---- ----
Operating activities:
Net loss ($ 257,518) ($ 242,605)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 302,984 309,945
Provision for bad debts 105,000 120,000
Amortization of bond costs 7,284 7,282
Changes in assets and liabilities:
Marketable securities (13,334) --
Accounts receivable (614,500) (743,640)
Inventory 3,436 (12,118)
Prepaid and other current assets (128,330) (34,644)
Accounts payable 731,636 (72,657)
Accrued payroll and related expenses (69,241) (5,607)
Accrued expenses and other (276,177) (7,673)
----------- ----------
Net cash used in operating activities (208,760) (681,717)
Investing activities:
Purchase of property and equipment (33,635) (50,774)
----------- ----------
Net cash used in investing activities (33,635) (50,774)
Financing activities:
Repayment of note payable (154,453) (154,453)
Repayment of term loan -- (35,403)
Repayments of long-term borrowing (203,000) (1,680,000)
Proceeds from long-term borrowing 436,000 2,005,000
----------- -----------
Net cash provided by financing activities 78,547 135,144
----------- -----------
Net decrease in cash (163,848) (597,347)
Cash and cash equivalents - beginning of period 946,523 1,360,512
---------- ----------
Cash and cash equivalents - end of period $ 782,675 $ 763,165
========== ===========
See Notes to Unaudited Consolidated Financial Statements
4
NUTRITION MANAGEMENT SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with generally accepted accounting principles
for interim financial information for quarterly reports on Form 10-Q
and, therefore, do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. However, all adjustments that, in the opinion of
management, are necessary for fair presentation of the financial
statements have been included and such adjustments are of a normal
recurring nature. The results of operations for the interim period
presented is not necessarily indicative of the results that may be
expected for the entire fiscal year ending June 30, 2005. The
financial information presented should be read in conjunction with the
Company's 2004 financial statements that were filed under Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 the FASB issued Financial Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities" and in December
2003 the FASB issued Financial Interpretation No. 46 (revised) ("FIN
46(R)"),"Consolidation of Variable Interest Entities (revised)". These
interpretations of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," address 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 Company will apply the consolidation requirement of FIN
46 and FIN 46(R) in future periods if the Company should own any
interests in any variable interest entity.
3. EARNINGS PER COMMON SHARE
Earnings per common share amounts are based on the weighted-average
number of shares of common stock outstanding during the three and six
month periods ended December 31, 2004 and 2003. The Company did not
have any stock options and warrants that impacted earnings per share
in each period.
5
4. LITIGATION
On February 7, 2001, the Company filed a suit against a major client
in the Court of Common Pleas in Chester County, Pennsylvania. 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. The trial
commenced on February 8, 2005.
The Company is involved in litigation with two separate construction
contractors related to the renovations of Collegeville Inn Conference
and Training Center. The Company denies its liability for each claim
and has asserted offsets against the amounts claimed. One case is
listed for trial in early 2005, while the other case is in discovery.
Although it is not possible to predict with certainty the outcome of
these unresolved legal actions or the range of possible loss or
recovery, the Company believes these unresolved legal actions will not
have a material adverse 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.
5. 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 Company's reportable segments are (1) food service management and
(2) training and conference center. The Company reports segment
performance on an after-tax basis. Deferred taxes are not allocated to
segments. The management accounting policies and processes utilized in
compiling segment financial information are highly subjective and,
unlike financial accounting, are not based on authoritative guidance
similar to 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.
6
For the quarter ended December 31, 2004:
Food Service Training and
Management Conference Center Total
---------- ----------------- -----
Food service revenue $ 6,372,603 $ 237,430 $ 6,610,033
Depreciation and amortization 26,910 124,398 151,308
Income (loss) from operations 252,042 (249,062) 2,980
Interest income 1,220 0 1,220
Interest expense (40,930) (26,105) (67,035)
Income (loss) before taxes (benefit) 227,182 (276,034) (48,852)
Net income (loss) 227,182 (276,034) (48,852)
Total assets $ 6,784,204 $ 7,702,338 $ 14,486,542
For the quarter ended December 31, 2003:
Food Service Training and
Management Conference Center Total
---------- ----------------- -----
Food service revenue $ 6,875,555 $ 300,002 $ 7,175,557
Depreciation and amortization 31,164 124,383 155,547
Income (loss) from operations 276,526 (343,142) (66,616)
Interest income 1,917 0 1,917
Interest expense (29,513) (17,928) (47,441)
Income (loss) before taxes (benefit) 248,921 (365,570) (116,649)
Net income (loss) 248,921 (365,570) (116,649)
Total assets $ 6,850,100 $ 8,160,648 $ 15,010,784
For the six months ended December 31, 2004
Food Service Training and
Management Conference Center Total
---------- ----------------- -----
Food service revenue $ 12,902,161 $ 477,419 $ 13,379,580
Depreciation and amortization 54,186 248,798 302,984
Income (loss) from operations 453,574 (599,252) (145,678)
Interest income 2,255 0 2,255
Interest expense (76,144) (49,551) (125,695)
Income (loss) before taxes 393,019 (650,537) (257,518)
Net income (loss) 393,019 (650,537) (257,518)
Total assets $ 6,784,204 $ 7,702,338 $ 14,486,542
For the six months ended December 31, 2003
Food Service Training and
Management Conference Center Total
---------- ----------------- -----
Food service revenue $ 13,403,435 $ 478,976 $ 13,882,411
Depreciation and amortization 61,443 248,502 309,945
Income (loss) from operations 565,045 (709,565) (144,520)
Interest income 3,557 0 3,557
Interest expense (57,758) (34,866) (92,624)
Income (loss) before taxes 510,836 (753,441) (242,605)
Net income (loss) 510,836 (753,441) (242,605)
Total assets $ 6,850,101 $ 8,160,647 $ 15,010,748
7
6. REVOLVING CREDIT FACILITY
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 Industrial Revenue Bonds, totaling
$4,000,000 and $3,065,000, respectively. In October 2003 the Company
entered into an amended credit agreement whereby the $4,000,000 Revolving
Credit Loan Facility was reduced to $3,500,000 and $500,000 was placed in a
cash collateral account and pledged as additional collateral against the
revolving credit line. At December 31, 2004, the Company had approximately
$275,078 available 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 consolidated fixed debt service
coverage ratio, ratio of total consolidated liabilities to consolidated
tangible net worth, and minimum working capital. At December 31, 2004 the
Company was in compliance with these covenants.
As of December 31, 2004 and June 30, 2004 the Company maintained restricted
cash balances of $250,000, which was not available for operating purposes.
On December 15, 2004 the Company entered into an amended agreement whereby
the non-compliance was waived and new financial covenants were negotiated
through June 30, 2005, which reflect the Company's current operating
projections. As part of the amended agreement, the Company's Chief
Executive Officer was required to execute a limited personal guarantee in
the amount of $3,000,000.
7. COLLEGEVILLE INN
On September 8, 2004 the Company entered into an agreement of sale for the
land adjacent to its Collegeville Inn Conference & Training Center. The
agreement provides for an initial deposit of $10,000 within ten days of the
effective date of the agreement, with additional deposits of $50,000 and
$25,000 payable to the Company upon the occurrence of certain events,
including, but not limited to, zoning approvals. The deposits are
non-refundable upon the end of a 120-day inspection period, which commenced
on the date the buyer received a fully executed original of the agreement
of sale. Pursuant to the terms of the agreement of sale, the Company may
realize gross proceeds of not less than $1,710,000. However, the Company
may realize gross proceeds in excess of $1,710,000, if the buyer is able to
maximize the yield of the property. The agreement of sale provides that
settlement occur within twenty-four months of the date of the agreement,
however, upon payment of additional deposits, settlement may be extended an
additional twelve months. Upon closing of the transaction, the Company
plans on using the proceeds to retire a proportional amount of outstanding
debt associated with the parcel of land. There can be no assurance that the
sale of this land will be completed in accordance with the terms of the
agreement of sale.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended, that are intended to be covered by the safe
harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
adequacy of the Company's cash from operations, existing balances and available
credit line. 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-Q 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,
results of operations of Collegeville Inn Conference & Training Center, the sale
of land adjacent to the Collegeville Inn discussed in Note 7 - Collegeville Inn,
and the outcome of the Company's litigation discussed in Note 4 - Litigation. In
light of 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.
RESULTS OF OPERATIONS
Revenues for the quarter ended December 31, 2004 were $6,610,033, a decrease of
$565,524 or 7.8% compared to revenues of $7,175,557 in the corresponding quarter
last year. Revenues for the six month period ended December 31, 2004 were
$13,379,580, compared to $13,882,411 for the six month period ended December 31,
2003, a decrease of $502,831 or 3.6%. The decreases are primarily due to the net
impact of revenues from new contracts versus revenues from lost contracts.
Cost of operations for the current quarter was $5,265,744, compared to
$5,836,000 for similar expenses in the same period last year, a decrease of
$570,256 or 9.8%. Cost of operations for the six month period ended December 31,
2004 were $10,732,009 compared to $11,229,520 for the six month period ended
December 31, 2003, a decrease of $497,511 or 4.4%. The decreases are primarily
due to lower revenues during the period partially offset by inflationary price,
wage and expense increases.
Gross profit for the current quarter was $1,344,259, or 20.3% of gross revenue,
compared to $1,339,557, or 18.7% of gross revenue, for the same period last
year, an increase of $4,702 or .3%. The increase is due to a decrease in cost of
operations that exceeds the decrease in revenues. Gross profit for the six month
period ended December 31, 2004 was $2,647,571, or 19.8% of gross revenue,
compared to $2,652,891, or 19.1%, for the six month period ended December 31,
2003, a decrease of $5,320 or 0.2%.
9
General and administrative expenses for the quarter were $1,159,971 or 17.6% of
revenue, compared to $1,190,626 or 16.6% of revenue for the same quarter last
year, a decrease of $30,655 or 2.6%. The decrease was due to a reduction of
fixed costs within general and administrative expenses. General and
administrative expenses for the six month period ended December 31, 2004 were
$2,385,265 compared to $2,367,466 for the six month period ended December 31,
2003, an increase of $17,799, or .8%.
Provision for doubtful accounts for the quarter was $30,000 compared to $60,000
for the corresponding quarter last year. The decrease was due to the specific
allocation of the existing reserve to past due accounts. Provision for doubtful
accounts for the six month period ended December 31, 2004 was $105,000 compared
to $120,000 for the six month period ended December 31, 2003.
Interest expense for the three-month period totaled $67,035 compared to $47,441
for the same period last year, an increase of $19,594 or 41.3%. Interest expense
for the six-month period ended December 31, 2004 was $125,695 compared to
$92,624 for the six-month period ended December 31, 2003, an increase of $33,071
or 35.7%. The increases in interest expense are a result of additional
borrowings as well as an increase in interest rates.
For the reasons stated above, net loss after taxes for the quarter ended
December 31, 2004 was $48,852 compared to $116,649 for the corresponding quarter
last year, and the net loss for the six-month period ended December 31, 2004 was
$257,518 compared to $242,605 for the six-month period ended December 31, 2003.
Net loss per share for the current quarter was $0.02 compared to net loss per
share of $0.04 for the same quarter last year. Net loss per share for the
six-month period ended December 31, 2004 was $.09 compared to $.08 for the
six-month period ended December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004 the Company had working capital of $487,790.
OPERATING ACTIVITIES. Cash used in operations for the six months ended December
31, 2004 was $208,760 compared to $681,717 used by operations for the six months
ended December 31, 2003. The current period's activity is primarily attributable
to operating losses sustained in the current period as well as an increase in
accounts payable.
INVESTING ACTIVITIES. Investing activities used $33,635 in cash in the current
six month period compared to $50,774 in cash used in the same period last year.
This was due to purchases of property and equipment.
FINANCING ACTIVITIES. Current year to date financing activities provided $78,547
in cash compared to $135,144 provided in the same period last year.
10
CAPITAL RESOURCES. The Company has certain credit facilities with its bank
including a revolving credit facility of $3,500,000. At December 31, 2004 and
June 30, 2004, the Company had $275,078 and $653,078, respectively, available
under its revolving credit. The Company has pledged a $250,000 certificate of
deposit as additional collateral against the revolving line of credit. In
November 2004, the Company entered into an agreement whereby its credit loan
facility was extended to December 31, 2005. The maturity date of the revolving
line of credit has been extended to March 31, 2006. 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. On December 15, 2004 the Company entered into an amended
agreement whereby new financial covenants were negotiated through June 30, 2005,
which reflect the Company's current operating projections. As part of the
amended agreement, the Company's Chief Executive Officer was required to execute
a limited personal guarantee in the amount of $3,000,000. The Company is current
with all its obligations to its bank and on its bonds and has met all financial
covenants in its loan documents.
The Company issued two series of Industrial Revenue Bonds totaling $3,560,548 in
December 1996. The outstanding balance on the bonds was $2,530,000 and
$2,675,000 as of December 31, 2004 and June 30, 2004, respectively.
PAYMENT DUE BY PERIOD
---------------------
LESS
THAN 1 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
- ----------------------- ----- ---- ----- ----- -----
Long-Term Debt* $5,754,922 $ 145,000 $3,539,922 $ 350,000 $1,720,000
Operating Leases 78,921 41,702 37,219 -- --
Total Contractual Cash
Obligations $5,833,843 $ 186,702 $3,577,141 $ 350,000 $1,720,000
* Long-Term Debt includes the $3,224,922 outstanding balance on the revolving
credit facility.
AMOUNT OF COMMITMENT EXPIRATION
PER PERIOD
-------------------------------
OTHER LESS
COMMERCIAL TOTAL AMOUNTS THAN 1 1 - 3 4 - 5 OVER 5
COMMITMENTS COMMITTED YEAR YEARS YEARS YEARS
----------- --------- ---- ----- ----- -----
Lines of Credit $3,500,000 $ -- $3,500,000 $ -- $ --
Standby Letter of
Credit 3,065,000 -- 3,065,000 -- --
Total Commercial
Commitments $6,565,000 $ -- $ 6,565,000 $ -- $ --
11
Based upon its present plans, management believes that operating cash flow,
available cash and available credit resources will be adequate to make
repayments of indebtedness described herein, to meet the working capital cash
needs of the Company and to meet anticipated capital expenditure needs during
the twelve months ending June 30, 2005. In addition, the Company anticipates the
sale of certain land adjacent to its Collegeville facility that it believes if
the sale is consummated it will net cash proceeds of not less than $1,710,000.
In an effort to extend its current bank debt, the Company may seek to access the
public equity market whenever conditions are favorable, even if the Company does
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. The
Company 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 revenues from operations.
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 creditworthiness 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
creditworthiness, 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 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. During the fiscal year ended June 30, 2004, due to the passage of time,
the Company made a decision to increase the provision for doubtful accounts with
respect to certain delinquent customers.
12
IMPAIRMENT OR 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 upon
anticipated undiscounted operating cash flows before debt service charges. Based
upon a review of its long-lived assets, the Company did not recognize an
impairment loss for the quarters ended September 30, 2004 and December 31, 2004
or the fiscal year ended June 30, 2004; however, there can be no assurance that
the Company will not recognize an impairment loss on its long-lived assets in
future periods.
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 are also recognized as deferred tax assets.
When necessary, deferred tax assets are reduced by a valuation allowance to the
extent the Company concludes there is uncertainty as to their ultimate
realization. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change in tax
rates is recognized as income in the period that the change is enacted.
As of December 31, 2004 and June 30, 2004, the Company maintained a deferred tax
asset of $1,623,841. The Company has not provided a valuation allowance against
its deferred tax assets after consideration of a future gain on the disposal of
certain land adjacent to its Collegeville facility and anticipated future
profitable operating results. However, the amount realizable may be reduced if
future taxable income is reduced or is insufficient to utilize the entire
deferred tax asset.
CAPITAL EXPENDITURES
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.
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MEDICARE AND MEDICAID REIMBURSEMENTS
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.
ITEM 9A.
CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this report,
the Company's Chief Executive Officer and Principal Financial Manager have
concluded the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Security Holders None
Item 5. Other Information
As of January 6, 2005, the Company's Class A Common Stock was
no longer eligible for continued quotation on the OTC Bulletin
Board ("OTCBB") due to the Company's failure to file its Form
10-Q for the quarter ended September 30, 2004. The Company's
Class A Common Stock is currently traded on the pink sheets but
the Company believes that at such time as a broker/dealer files
a Form 211, the Company's Class A Common Stock will be eligible
for Quotation on the OTCBB. The fact that the Company's Class A
Common Stock is not currently eligible for quotation on the
OTCBB may negatively impact the liquidity of the Class A Common
Stock. The Company believes it has adopted the appropriate
measures to ensure that its future filings will be made on a
timely basis.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities and Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) under the Securities and Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S. C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
18 U.S. C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on October 22, 2004.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Nutrition Management Services Company
/s/ Joseph V. Roberts
-------------------------------------
Joseph V. Roberts
Chairman and Chief Executive Officer
/s/ Linda J. Haines
------------------------
Linda J. Haines
(Principal Financial Manager)
Date: February 17, 2005
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