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 September 30, 2006
------------------
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 Identification No.)
incorporation or organization)
Box 725, Kimberton Road, Kimberton, Pa 19442
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 935-2050
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N/A
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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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of Exchange Act). 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 November 17, 2006.
TABLE OF CONTENTS
Part I. Financial Information Page No.
--------------------- --------
Item 1. - Financial Information 2
Consolidated Balance Sheets as of
September 30, 2006 (unaudited) and June 30, 2006 2
Consolidated Statements of Operations for the Three
Months Ended September 30, 2006 (unaudited) and
2005 (unaudited) 3
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2006 (unaudited) and
2005 (unaudited) 4
Notes to Consolidated Financial Statements 5 - 10
Item 2. - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 15
Item 3. - Quantitative and Qualitative Disclosure
about Market Risk 15
Item 4. - Controls and Procedures 15
Part II. Other Information 16
Signatures 17
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, 2006
(unaudited) June 30, 2006
------------ ------------
Current assets:
Cash and cash equivalents $ 1,142,804 $ 1,613,567
Accounts receivable, net of allowance for doubtful
accounts of $979,188 and $964,188, respectively 2,881,771 2,329,601
Inventory 162,456 142,220
Prepaid and other 394,232 269,353
------------ ------------
Total current assets 4,581,263 4,354,741
Property and equipment, net 6,608,137 6,637,073
Other assets:
Restricted cash 250,000 250,000
Note receivable 130,365 134,865
Advances to employees 420,594 423,294
Deferred income taxes 2,082,952 2,004,333
Bond issue costs, net of accumulated amortization of $143,239
and $139,597, respectively 149,285 151,731
Other assets 10,205 11,401
------------ ------------
Total other assets 3,043,401 2,975,624
------------ ------------
Total assets $ 14,232,801 $ 13,967,438
============ ============
Current liabilities:
Current portion of long-term debt $ 165,000 $ 165,000
Current portion of line of credit 3,499,922 0
Current portion of note payable 164,746 0
Accounts payable 3,033,166 2,998,049
Accrued payroll and related expenses 223,633 226,611
Accrued expenses 290,103 213,883
Other 173,756 64,075
------------ ------------
Total current liabilities 7,550,326 3,667,618
Long-Term liabilities:
Long-term debt, net of current portion 2,215,000 5,714,922
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 1,165,064 1,282,487
Less: treasury stock (Class A common: 253,000 and 253,000
shares, respectively) - at cost (499,563) (499,563)
------------ ------------
Total stockholders' equity 4,467,475 4,584,898
------------ ------------
$ 14,232,801 $ 13,967,438
============ ============
See Notes to Unaudited Consolidated Financial Statements
2
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended September 30,
2006 2005
----------- -----------
Food Service Revenue $ 5,325,602 $ 6,210,508
Cost of Operations
Payroll and related expenses 2,151,188 2,523,940
Other costs of operations 2,131,675 2,471,059
----------- -----------
Total cost of operations 4,282,863 4,994,999
----------- -----------
Gross Profit 1,042,739 1,215,509
Expenses
General and administrative expenses 1,045,242 1,188,091
Depreciation and amortization 71,684 137,722
Provision for doubtful accounts 15,000 30,000
----------- -----------
Total expenses 1,131,926 1,355,813
----------- -----------
Loss from operations (89,187) (140,304)
Other income/(expense)
Other (4,565) 0
Interest income 13,005 24,205
Interest expense (115,295) (89,728)
----------- -----------
Total other income/(expense) (106,855) (65,523)
----------- -----------
Loss before income taxes (196,042) (205,827)
Provision for income taxes (78,619) --
----------- -----------
Net loss (117,423) (205,827)
Other comprehensive income/(loss) (net of tax):
Unrealized holding gains/(losses) arising during period 0 17,167
----------- -----------
Total other comprehensive income 0 17,167
----------- -----------
Comprehensive income/(loss) $ (117,423) $ (188,660)
=========== ===========
Net income/(loss) per share - basic and diluted $ (0.04) $ (0.07)
=========== ===========
Weighted average number of shares 2,847,000 2,847,000
=========== ===========
See Notes to Unaudited Consolidated Financial Statements
3
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended September 30,
2006 2005
----------- -----------
Operating activities:
Net loss $ (117,423) $ (205,827)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 71,684 137,722
Provision for bad debts 15,000 30,000
Amortization of bond costs 3,641 3,642
(Benefit)/expense for deferred taxes (78,619) 0
Changes in assets and liabilities:
Accounts receivable (562,670) 59,187
Inventory (20,236) (16,007)
Prepaid and other current assets (124,879) 5,249
Income tax refund 0 43,730
Accounts payable 35,117 (615,764)
Accrued payroll and related expenses (2,978) (39,868)
Accrued expenses and other 185,901 (287,570)
----------- -----------
Net cash used in operating activities (595,462) (885,506)
Investing activities:
Purchase of property and equipment (42,747) 0
Advances to employees 2,700 1,000
Marketable Securities 0 (690)
----------- -----------
Net cash provided by/(used in) investing activities (40,047) 310
Financing activities:
Proceeds from note payable 177,661 189,698
Repayments of note payable (12,915) (52,733)
----------- -----------
Net cash provided by financing activities 164,746 136,965
----------- -----------
Net decrease in cash (470,763) (748,231)
Cash and cash equivalents - beginning of period 1,613,567 2,889,616
----------- -----------
Cash and cash equivalents - end of period $ 1,142,804 $ 2,141,385
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest Paid $ 91,296 $ 89,069
Taxes Paid 13,420 358
See Notes to Unaudited Consolidated Financial Statements
4
NUTRITION MANAGEMENT SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
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, 2007. The financial information presented should be read
in conjunction with the Company's 2006 financial statements that were
filed under Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R (Revised 2005)
"SHARE-BASED PAYMENT." The statement requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the
equity or liability instrument issued. The statement covers a wide range
of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. The Company has adopted the
requirements contained in this statement, the effects of which are
reflected in the financial statements for this quarter. The Company was
required to adopt SFAS 123 (R) as of July 1, 2006.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47)
"Accounting for Conditional Asset Retirement Obligations," which refers
to a legal obligation to perform an asset retirement activity in which
the timing or method of settlement are conditional on a future event that
may or may not be within the control of the entity. A liability must be
recognized for such an obligation (e.g. major clean-up costs under a
leasehold) when incurred if the liability's fair value can be reasonably
estimated. The adoption of this statement is required for fiscal years
beginning after December 15, 2005. The adoption of this statement is not
expected to have a material impact on the consolidated financial
statements of the Company.
In May 2005, the FASB issued SFAS No. 154 "ACCOUNTING CHANGES AND ERROR
CORRECTIONS". This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, "REPORTING ACCOUNTING CHANGES IN
INTERIM FINANCIAL STATEMENTS", and changes the requirements for the
accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific
transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. Adoption of this
statement is required for fiscal years starting after December 15, 2005.
The Company has adopted the requirements contained in this statement, the
effects of which are reflected in the financial statements. The adoption
of this statement is not expected to have a material impact on the
consolidated financial statements of the Company.
5
In February 2006, the FASB issued SFAS No. 155 "ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS (AS AMENDED)". This Statement amends FASB
Statements No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, and No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, and, resolves issues
addressed in Statement No. 133 Implementation Issue No. D1, "APPLICATION
OF STATEMENT NO. 133 TO BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL
ASSETS". This Statement requires the evaluation of interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation. This Statement clarifies that
embedded derivatives do not include concentrations of credit risk in the
form of subordination and further clarifies the accounting for
interest-only and principal-only strips. This statement also eliminates
the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. Lastly, this
statement permits fair value measurement for any hybrid financial
instrument that contains an embedded derivative that would otherwise
require bifurcation. The adoption of this Statement is effective for
financial statements with fiscal years beginning on or after September
15, 2006, or for all financial instruments acquired or issued beginning
on or after September 15, 2006. The adoption of this statement is not
expected to have a material impact on the consolidated financial
statements of the Company.
In March, 2006, the FASB issued SFAS No. 156, "ACCOUNTING FOR SERVICING
OF FINANCIAL ASSETS- An Amendment of FASB Statement No. 140". This
Statement amends FASB Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement requires the recognition of a
servicing asset or liability initially measured at fair value, for every
obligation incurred for contracts to service financial assets in certain
sales-type transfers, qualifying special purpose entity transfers, or in
certain acquisitions that do not relate to the financial servicer or its
consolidated affiliates. This Statement permits the choice of either the
amortization method or the fair value method for each class of separately
recognized servicing assets and servicing liabilities, and, requires
separate disclosure at fair value in the statement of financial position.
The adoption of this Statement is effective for financial statements
beginning with fiscal years on or after September 15, 2006. The adoption
of this statement is not expected to have a material impact on the
consolidated financial statements of the Company.
In June, 2006, the FASB issued FIN No. 48, "ACCOUNTING FOR UNCERTAINTY
IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109 ACCOUNTING
FOR INCOME TAXES". This interpretation requires a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return. This interpretation also provides guidance on derecognition,
classification, interest, penalties, accounting in interim periods,
disclosure and transition. This interpretation requires the evaluation of
whether the technical merits of a tax position is more likely or not to
be sustained upon examination, including the resolution of any related
appeals or litigation. The Statement requires the measurement of the
largest amount of benefit that is greater than a 50% likelihood of being
realized upon final settlement, presuming the position will be examined
by the appropriate taxing authority with the benefit of full knowledge
and relevant information. The adoption of this interpretation is
effective for fiscal years beginning after December 15, 2006.
In September, 2006, the FASB issued SFAS No. 157, "Fair VALUE
MEASUREMENTS". This Statement defines fair value as 'exit prices' NOT
'entry prices' in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements for the purpose of
promoting consistency and simplification of the existing codification of
accounting principles. To eliminate differences in practice and reduce
6
complexity in the application of GAAP, the Statement emphasizes that fair
value is a market-based measurement, not an entity specific measurement
and should be determined based on the assumptions that market
participants would use in pricing the asset or liability. This statement
establishes a fair value hierarchy that distinguishes between observable
and unobservable inputs and clarifies the need for adjustments to fair
value based on nonperformance, other market risk assessment criteria,
certain asset or event restrictions, and trading blockage. The adoption
of this Statement is effective for financial statements beginning with
fiscal years on or after September 15, 2007, including interim financial
statements within that fiscal year.
In October, 2006, the FASB issued SFAS No.158, "EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS- AN AMENDMENT OF
FASB STATEMENTS NO. 87, 88, 106 AND 132( R )". This statement requires an
employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan, other than a multi-employer plan, as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes
occur through the comprehensive income of a business entity. This
statement requires the measurement and recognition of the difference
between plan assets at fair value and the benefit obligation, as of the
date of the employer's fiscal year-end statement of financial position.
This statement also requires additional disclosure in the footnotes to
the financial statements about certain effects on net periodic benefit
cost for the next fiscal year that arise from delayed recognition of the
gains or losses, prior service costs or credits, and transition assets or
obligations. Employers who have issued outstanding publicly traded equity
securities are required to adopt this Statement by initially recognizing
the funded status of a defined benefit postretirement plan including the
required footnote disclosures as of the end of the fiscal year ending
after December 15, 2006.
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-month
period ended September 30, 2006 and 2005. The Company did not have any
dilutive stock options and warrants that impacted earnings per share in
each period.
4. LITIGATION
On February 7, 2001, the Company filed a suit against a major client in
the Court of Common Pleas of Chester County, Pennsylvania, which was
subsequently removed to the United States District Court for the Eastern
District of Pennsylvania. On February 25, 2005, judgment was entered on a
jury verdict in favor of the Company, in the amount of $2,500,000 for
damages related to its claims, including breach of contract and
contractual interference. The client's counterclaim was dismissed by the
judge. The Company filed a post-trial motion to amend the judgment to add
prejudgment interest. On June 1, 2006 this motion was denied. The Company
has engaged independent legal counsel to pursue alternative recourse in
regards to the denial of prejudgment interest.
7
The Company is involved in litigation with a construction contractor
related to the renovations of Collegeville Inn Conference and Training
Center. The Company denies its liability for the contractor's claims and
has asserted offsets against the amounts claimed. The case is currently
in discovery.
Although it is not possible to predict with certainty the outcome of the
unresolved legal action, 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 normal course of business. 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.
For the quarter ended September 30, 2006:
Food Service Training and
Management Conference Center Total
------------ ----------------- -----
Food service revenue $ 5,148,200 $ 177,402 $ 5,325,602
Depreciation and amortization 9,130 62,554 71,684
Income (loss) from operations 55,814 (145,001) (89,187)
Interest income 13,005 -- 13,005
Interest expense (77,958) (37,337) (115,295)
Income (loss) before taxes (benefit) (9,195) (186,847) (196,042)
Net income (loss) 69,424 (186,847) (117,423)
Total assets $ 6,950,880 $ 7,281,921 $ 14,232,801
For the quarter ended September 30, 2005:
Food Service Training and
Management Conference Center Total
------------ ----------------- -----
Food service revenue $ 6,119,510 $ 90,998 $ 6,210,508
Depreciation and amortization 12,847 124,875 137,722
Income (loss) from operations 158,558 (298,862) (140,304)
Interest income 24,205 -- 24,205
Interest expense (54,971) (34,757) (89,728)
Income (loss) before taxes (benefit) 127,792 (333,619) (205,827)
Net income (loss) 127,792 (333,619) (205,827)
Total assets $ 7,919,772 $ 7,267,724 $ 15,187,496
8
6. REVOLVING CREDIT FACILITY
In February 2001, the Company executed a loan agreement with a bank for a
revolving credit facility and two irrevocable letters of credit issued in
conjunction with the issuance of the Industrial Revenue Bonds, totaling
$4,000,000 and $3,065,000, respectively. In October 2003, the Company
entered into an amended credit agreement whereby the $4,000,000 Revolving
Credit Loan Facility was reduced to $3,500,000 and $500,000 was placed in a
cash collateral account and pledged as additional collateral against the
revolving credit line. A portion of the cash collateral account has been
released and as of September 30, 2006 and June 30, 2006, the Company
maintained restricted cash balances of $250,000, which was not available for
operating purposes.
At September 30, 2006 and June 30, 2006, the Company had $3,500,000
outstanding under the revolving credit. Advances under the revolving credit
are used for working capital purposes. These credit agreements contain
covenants that include the submission of specified financial information and
the maintenance of insurance coverage for the pledged assets during the term
of the loans. At September 30, 2006 the Company was in compliance with these
covenants.
At June 30, 2006 the covenants also included 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 June 30, 2006, the Company was not in compliance with these covenants.
While not waiving these covenants, the Company and the bank reached an
agreement in October, 2006 which maintains the revolving credit line in
place to July 1, 2007.
The Company is currently in discussion with several financing institutions
to obtain new credit facilities that would replace the outstanding debt
prior to July 1, 2007. However, there can be no assurance that the Company
will in fact obtain a new credit facility.
7. COLLEGEVILLE INN CONFERENCE & TRAINING CENTER
Effective June 27, 2005, the Company closed the buffet restaurant at the
Collegeville Inn Conference & Training Center to make the facility available
for catered events. The Company is exploring all reasonable alternatives to
improve its operating results, including but not limited to, increasing food
service revenues with targeted marketing efforts, increasing revenues from
the sale of the Company's Cook Chill products, the sale or lease of all or
part of the Collegeville Inn Conference and Training Center, sale of excess
land at the Collegeville Inn Conference and Training Center and reduction of
operating expenses. There can be no assurance as to the success of any or
all of these alternatives.
8. BUSINESS CONDITIONS
The Company's primary sources of revenues are the management fees it
receives from contracts to provide food and housekeeping services to
continuing care facilities, hospitals, retirement communities and schools,
as well as the Collegeville Inn, which includes the Conference and Training
Center, Catering facilities and the Cook Chill operations. The Company has a
business plan in place to improve the operating results from the
Collegeville Inn. Effective June 27, 2005, the Company closed the buffet
restaurant at the Collegeville Inn to make the facility available for
catered events.
The Company is exploring all reasonable alternatives to improve its
operating results, including but not limited to, increasing food service
revenues with targeted marketing efforts, increasing revenues from the sale
of the Company's Cook Chill products, the sale or lease of all or part of
the Collegeville Inn, sale of excess land at the Collegeville Inn and
reduction of operating expenses. The Company has entered into agreements
with industry experts to assess and examine these alternatives.
The Company's financial statements as of September 30, 2006 have been
presented on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business.
9
Although the Company had negative working capital of approximately $3
million as of September 30, 2006, which raised some doubt as to its ability
to satisfy its obligations during that next fiscal year as they become due,
such doubt was alleviated after careful review of Management's plans for the
future relating to the Collegeville Inn Assets and operations, and the
protections relating to the management fees from its contracts and future
contracts. These plans, together with the fact that the Company still had
stockholders equity of approximately $4.3 million as of September 30, 2006,
supports the Company's ability to continue as a going concern.
Management believes that operating cash flow, proceeds from the sale of the
land, available cash and available credit resources will be adequate to make
repayments of indebtedness, meet the working capital needs, satisfy the
needs of its operations, and to meet anticipated capital expenditures during
the next twelve months ending September 30, 2007.
In view of the matters described above, recoverability of a major portion of
the recorded asset amounts shown in the Company's accompanying balance sheet
is dependent upon continued operations of a continuing basis, to maintain
present financing, and to succeed in its future operations. The Company's
financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Based on the Company's current activities, the only component of accumulated
other comprehensive income consists of changes in the unrealized gains or
losses of marketable securities. The Company sold the marketable securities
during the third quarter of fiscal 2006 and realized a gain of $44,256. As
of September 30, 2006 and June 30, 2006 there were no marketable securities.
Three Months Ended
September 30,
2006 2005
-------- --------
Beginning balance $ 0 $ 8,240
Current period change 0 14,878
Tax effect 0 (5,951)
-------- --------
Ending balance $ 0 $ 17,167
======== ========
10
ITEM 2.
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 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 September 30, 2006 were $5,325,602, a decrease of
$884,906 or 14.2% compared to revenues of $6,210,508 in the corresponding
quarter last year. This decrease is primarily due to the net impact of revenues
from new contracts versus revenues from lost contracts.
11
Cost of operations provided for the current quarter was $4,282,863, compared to
$4,994,999 for similar expenses in the same period last year, a decrease of
$712,136 or 14.3%. This decrease is the result of lower revenues during the
period and the expenses associated with those revenues.
Gross profit for the current quarter was $1,042,739, or 19.6% of gross revenue,
compared to $1,215,509, or 19.6% of gross revenue, for the same period last
year, a decrease of $172,770 or 14.2%. The decrease in gross profit is due to
the net impact of new contracts and lost contracts, which was partially offset
by the renegotiation of contract rates in the normal course of business.
The Company has adapted to changing market conditions with cost reductions in
the Cost of Operations and general and administrative areas. These cost
reductions, along with improved operating processes, have enabled the Company to
maintain gross profit margins despite the decline in volume.
General and administrative expenses for the quarter were $1,045,242 or 19.6% of
revenue, compared to $1,188,091 or 19.1% of revenue for the same quarter last
year, a decrease of $142,849 or 12.0%. This decrease is due to lower payroll and
related expenses in the period.
Provision for doubtful accounts for the quarter ended September 30, 2006 was
$15,000 compared to $30,000 for the corresponding quarter last year.
Interest income for the quarter ended September 30, 2006 was $13,005 compared to
$24,205 for the same period last year.
Interest expense for the quarter ended September 30, 2006 was $115,295 compared
to $89,728 for the same period last year. The increase in interest expense is
primarily due to an increase in interest rates.
For the reasons stated above, net loss after taxes for the quarter ended
September 30, 2005 was $117,423 compared to $205,827 for the corresponding
quarter last year.
Net loss per share for the current quarter was $0.04 compared to net loss per
share of $0.07 for the same quarter last year. The Food Service Segment and
Collegeville Segment are performing according to expectations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006 the Company had negative working capital of $2,969,063
compared to positive working capital of $1,531,514 for the same quarter last
year. This decrease in working capital is primarily attributable to the
Company's reclassification of the line of credit debt from long term to short
term.
OPERATING ACTIVITIES. Cash used in operations for the three months ended
September 30, 2006 was $595,461 compared to $885,506 used in operations for the
three months ended September 30, 2005. The current period's activity is
primarily attributable to an increase in accounts receivable as well as
operating losses sustained in the current period. The Company's Accounts
Receivable experienced a temporary increase of $562,000 compared with June 30,
2006. Because of budgetary concerns, the US Government delayed Medicare payments
to health care providers at the end of the quarter. Payments normally occurring
during September 22 through September 30 were delayed until after October 1,
allowing the government to record the expenditures in their new fiscal year.
This created a temporary liquidity issue with some customers who, in turn,
delayed payments to the company. Many of the delayed payments have been
subsequently received and Accounts Receivable are returning to historic levels.
INVESTING ACTIVITIES. Investing activities used $40,047 in cash in the current
quarter compared to $310 in cash provided in the same period last year.
Investing activities include capital expenditures in the amount of $42,747.
FINANCING ACTIVITIES. Current quarter financing activities provided $164,746 in
cash compared to $136,965 provided in the same period last year.
CAPITAL RESOURCES. The Company has certain credit facilities with its bank
including a revolving credit facility of $3,500,000. At September 30, 2006 and
June 30, 2006, the Company had $3,500,000 outstanding under its revolving
credit. The Company has pledged a $250,000 Certificate of Deposit as additional
collateral against the revolving line of credit. The Company issued two series
of Industrial Bonds totaling $3,560,548 in December 1996. The outstanding
balance on the bonds was $2,380,000 as of September 30, 2006 and June 30, 2006.
The Company and the bank reached an agreement in October, 2006 which maintains
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the revolving credit line in place to July 1, 2007. The Company is currently in
discussion with several financing institutions to obtain new credit facilities
that would replace the outstanding debt prior to July 1, 2007. However, there
can be no assurance that the Company will in fact obtain a new credit facility.
As mentioned in previous filings, the Company has assets including its
Collegeville facility, which have appreciated substantially and are not
considered essential to its core business. These assets have been the subject of
Purchase Offers from several parties. The Company has plans to possibly sell a
part of all of these assets in a fashion that will increase the liquidity of the
Company. To date, the Company has no agreements, commitments or understandings
with respect to the sale of all or any part of these assets and there can be no
assurance that any such sale will occur.
================================================================================================================
PAYMENT DUE BY PERIOD
===============================================================================
LESS THAN 1
CONTRACTUAL OBLIGATIONS TOTAL YEAR 2 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
================================================================================================================
Long-Term Debt * $6,044,668 3,829,668 350,000 390,000 1,475,000
================================================================================================================
Operating Leases 16,748 13,060 3,688 -- --
================================================================================================================
Total Contractual Cash
Obligations $6,061,416 $3,842,728 $353,688 $390,000 $1,475,000
================================================================================================================
* Long-Term Debt includes the $3,499,922 outstanding balance on the revolving
credit facility.
===================================================================================================
AMOUNT OF COMMITMENT EXPIRATION
PER PERIOD
===============================================
OTHER TOTAL AMOUNTS
COMMERCIAL COMMITTED LESS THAN 1 4 - 5 OVER 5
COMMITMENTS YEAR 1 - 3 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 $3,500,000 $3,065,000 $ -- $ --
===================================================================================================
The Company's primary sources of revenues are the management fees it receives
from contracts to provide food and housekeeping services to continuing care
facilities, hospitals, retirement communities and schools, as well as the
Collegeville Inn, which includes the Conference and Training Center, Catering
facilities and the Cook Chill operations. The Company has a business plan in
place to improve the operating results from the Collegeville Inn. Effective June
27, 2005, the Company closed the buffet restaurant at the Collegeville Inn to
make the facility available for catered events.
The Company is exploring all reasonable alternatives to improve its operating
results, including but not limited to, increasing food service revenues with
targeted marketing efforts, increasing revenues from the sale of the Company's
Cook Chill products, the sale or lease of all or part of the Collegeville Inn,
sale of excess land at the Collegeville Inn and reduction of operating expenses.
The Company has entered into agreements with industry experts to assess and
examine these alternatives.
The Company's financial statements as of September 30, 2006 have been presented
on the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
Although the Company had negative working capital of approximately $3 million as
of September 30, 2006, which raised some doubt as to its ability to satisfy its
obligations during that next fiscal year as they become due, such doubt was
alleviated after careful review of Management's plans for the future relating to
the Collegeville Inn Assets and operations, and the protections relating to the
management fees from its contracts and future contracts. These plans, together
with the fact that the Company still had stockholders equity of approximately
$4.3 million as of September 30, 2006, supports the Company's ability to
continue as a going concern.
Management believes that operating cash flow, proceeds from the sale of the
land, available cash and available credit resources will be adequate to make
repayments of indebtedness, meet the working capital needs, satisfy the needs of
its operations, and to meet anticipated capital expenditures during the next
twelve months ending September 30, 2007.
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In view of the matters described above, recoverability of a major portion of the
recorded asset amounts shown in the Company's accompanying balance sheet is
dependent upon continued operations of a continuing basis, to maintain present
financing, and to succeed in its future operations. The Company's financial
statements do not include any adjustment relating to the recoverability and
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the Company be unable to continue in
existence.
The Company may seek to access the public equity market whenever conditions are
favorable. Any additional public funding may result in significant dilution for
existing shareholders 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 its 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, schools and
the Collegeville Inn Conference and Training Center. 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
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 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 quarter ended September 30, 2006 or fiscal year ended
June 30, 2006; 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 carry forwards also are recognized as deferred tax assets.
When necessary, deferred tax assets are reduced by a valuation allowance to the
14
extent the Company concludes there is uncertainty as to their ultimate
realization. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that the change is enacted.
As of September 30 and June 30, 2006, the Company maintained a deferred tax
asset of $2,082,952 and $2,004,333, respectively. 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.
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 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 4.
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.
15
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 None
Item 6. Exhibits
(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.
16
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: November 20, 2006
17
