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 MARCH 31, 2007
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
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(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 February 8, 2007.
TABLE OF CONTENTS
Part I. Financial Information Page No.
--------------------- --------
Item 1. - Financial Information
Consolidated Balance Sheets as of
March 31, 2007 (unaudited) and June 30, 2006 1
Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 2007 (unaudited) and
2006 (unaudited) 2
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2007 (unaudited) and
2006 (unaudited) 3
Notes to Consolidated Financial Statements 4 - 10
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 17
Item 3. - Quantitative and Qualitative Disclosure about
Market Risk 17
Item 4T. - Controls and Procedures 18
Part II. Other Information 18
Signatures 19
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, 2007 June 30, 2006
(Unaudited)
-------------- -------------
Current Assets:
Cash and cash equivalents 322,033 1,613,567
Accounts receivable, net of allowance for doubtful accounts
of $979,188 and $964,188 respectively 2,465,684 2,329,601
Inventory 154,710 142,220
Prepaid and Other 398,428 269,353
------------ ------------
Subtotal Current Assets 3,340,855 4,354,741
Property and equipment, net 125,526 114,921
Assets held for sale 6,345,134 6,522,152
Other Assets
Restricted cash 250,000 250,000
Note receivable 102,842 134,865
Advances to employees 410,190 423,294
Deferred income taxes 2,265,908 2,004,333
Bond issue costs, net of accumulated
amortization of $150,523 and $139,597 respectively 142,001 151,731
Other assets 10,205 11,401
------------ ------------
Subtotal Other Assets 3,181,146 2,975,624
------------ ------------
Total Assets $ 12,992,661 $ 13,967,438
============ ============
Current Liabilities
Current portion of Bonds Payable 170,000 165,000
Current portion of Revolving Credit Line 3,499,922 0
Current portion of Note Payable 25,446 0
Accounts payable 2,647,141 2,998,049
Accrued payroll and related expenses 299,128 226,611
Accrued expenses 202,113 213,883
Other 120,504 64,075
------------ ------------
Subtotal Current Liabilities 6,964,254 3,667,618
Long Term Liabilities
Bonds Payable, net of current portion 2,045,000 2,215,000
Revolving Credit Line due greater than one year 0 3,499,922
------------ ------------
Subtotal Long-term Liabilities, net of current portion 2,045,000 5,714,922
------------ ------------
Total Liabilities 9,009,254 9,382,540
------------ ------------
Stockholders' Equity
Undesignated preferred stock - no par;
2,000,000 shares authorized; none issued or outstanding
Common Stock:
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
Common Stock Class B - no par; 100,000 shares
authorized, issued, and outstanding 48 48
Retained Earnings 680,996 1,282,487
Less: Treasury Stock (Class A Common: 253,000
and 253,000 shares, respectively) - at cost (499,563) (499,563)
------------ ------------
Total Stockholder's Equity 3,983,407 4,584,898
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,992,661 $ 13,967,438
============ ============
See Notes to Unaudited Consolidated Financial Statements
1
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, Nine Months Ended March 31,
2007 2006 2007 2006
--------------- -------------- --------------- ---------------
Food service revenue $ 4,953,280 $ 5,515,970 $ 15,438,157 $ 17,949,350
Cost of operations
Payroll and related expenses 2,212,564 2,382,632 6,504,534 7,447,719
Other costs of operations 1,844,824 2,237,426 6,061,520 7,269,551
------------ ------------ ------------ ------------
Total Cost of operations 4,057,388 4,620,058 12,566,054 14,717,270
Gross Profit 895,892 895,912 2,872,103 3,232,080
Expenses
General and Administrative 1,078,212 1,321,411 3,203,277 3,812,057
Depreciation and Amortization 67,497 86,970 208,788 316,354
Bad Debt (15,000) 0 15,000 60,000
------------ ------------ ------------ ------------
Total Expenses 1,130,709 1,408,381 3,427,065 4,188,411
Income from operations (234,817) (512,469) (554,962) (956,331)
Other Income
Other income (4,510) 84,132 612 82,398
Gain on Sale of Securities 0 44,256 0 44,256
Interest income 8,338 17,615 37,171 59,849
Interest expense (115,772) (100,015) (345,887) (284,728)
------------ ------------ ------------ ------------
Total other (expense) / income (111,944) 45,988 (308,104) (98,225)
Income before taxes (346,761) (466,481) (863,066) (1,054,556)
Income Tax Benefit (104,272) (190,454) (261,575) (434,595)
Net (Loss) (242,489) (276,027) (601,491) (619,961)
Net loss per share - basic and diluted $ (0.09) $ (0.10) $ (0.21) $ (0.22)
============ ============ ============ ============
Weighted average basic and diluted shares 2,847,000 2,847,000 2,847,000 2,847,000
============ ============ ============ ============
2
NUTRITION MANAGEMENT SERVICES COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended March 31,
2007 2006
----------- -----------
OPERATING ACTIVITIES:
Net Income/(loss) ($ 601,491) ($ 619,961)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activitites:
Gain on Sale of Marketable Securities 0 (44,256)
Depreciation and amortization 208,788 316,354
Provision for bad debts 15,000 60,000
Amortization of bond costs 10,923 10,326
Deferred tax (benefit) (261,575) (434,595)
Changes in assets and liabilities
Accounts receivable, net (119,060) (187,019)
Inventory and other (12,490) (31,031)
Prepaid and other current assets (39,075) 94,240
Income tax refund 0 43,730
Accounts payable (350,908) (879,836)
Accrued payroll and related expenses 72,517 4,928
Accrued expenses and other (45,340) (422,975)
----------- -----------
Net cash provided by (used in) operating activities (1,122,711) (2,090,095)
INVESTING ACTIVITIES:
Purchase of property and equipment (net) (42,374) (46,686)
Proceeds from Sale of Marketable Securities 0 249,577
Repayment of Advances to Employees 13,104 9,489
----------- -----------
Net cashprovide by (used in) investing activities (29,270) 212,380
FINANCING ACTIVITIES:
Proceeds from note payable 297,659 238,869
Repayment of note payable (272,213) (197,137)
Proceeds from long term borrowing 0 275,000
Repayment of long term borrowing (165,000) (150,000)
----------- -----------
Net cash provided by(used In) financing activities (139,554) 166,732
----------- -----------
Net (decrease) in cash (1,291,534) (1,710,983)
Cash - beginning of period 1,613,567 2,889,616
Cash - end of period $ 322,033 $ 1,178,633
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest Paid $ 321,682 $ 276,984
Taxes Paid $ 30,913 $ 5,362
3
NUTRITION MANAGEMENT SERVICES COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
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 has adopted 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.
4
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
5
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 and nine-month
period ended March 31, 2007 and 2006. The Company did not have any 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.
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.
6
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 March 31, 2007:
Food Service Training and
Management Conference Center Total
Food service revenue $ 4,814,173 $ 139,107 $ 4,953,280
Depreciation and amortization 9,179 58,318 67,497
Income (loss) from operations 1,369 (236,186) (234,817)
Interest income 8,338 0 8,338
Other income 0 (4,510) (4,510)
Interest expense (79,624) (36,148) (115,772)
Income (loss) before taxes (benefit) (69,917) (276,844) (346,761)
Net income (loss) 34,355 (276,844) (242,489)
Total assets $ 5,686,447 $ 7,306,214 $ 12,992,661
7
For the quarter ended March 31, 2006:
Food Service Training and
Management Conference Center Total
Food service revenue $ 5,369,310 $ 146,660 $ 5,515,970
Depreciation and amortization 12,235 74,735 86,970
Income (loss) from operations (322,841) (189,628) (512,469)
Interest income 17,615 0 17,615
Other income 0 85,000 85,000
Interest expense (62,485) (37,530) (100,015)
Income (loss) before taxes (benefit) (323,455) (143,026) (466,481)
Net income (loss) (133,001) (143,026) (276,027)
Total assets $ 7,135,317 $ 7,295,965 $ 14,431,282
For the Nine Months ended March 31, 2007:
Food Service Training and
Management Conference Center Total
Food service revenue $ 14,917,899 $ 520,258 $ 15,438,157
Depreciation and amortization 28,253 180,535 208,788
Income (loss) from operations (26,099) (528,863) (554,962)
Interest income 37,171 0 37,171
Other income 14,140 (13,528) 612
Interest expense (235,192) (110,695) (345,887)
Income (loss) before taxes (benefit) (209,980) (653,086) (863,066)
Net income (loss) 51,595 (653,086) (601,491)
Total assets $ 5,686,447 $ 7,306,214 $ 12,992,661
For the Nine Months ended March 31, 2006:
Food Service Training and
Management Conference Center Total
Food service revenue $ 17,587,432 $ 361,918 $ 17,949,350
Depreciation and amortization 37,317 279,037 316,354
Income (loss) from operations (245,224) (711,107) (956,331)
Interest income 59,849 0 59,849
Other income 0 85,000 85,000
Interest expense (176,557) (108,171) (284,728)
Income (loss) before taxes (benefit) (317,676) (736,880) (1,054,556)
Net income (loss) 116,919 (736,880) (619,961)
Total assets $ 7,135,317 $ 7,295,965 $ 14,431,282
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 March 31, 2007 and June 30, 2006, the Company maintained
restricted cash balances of $250,000, which was not available for operating
purposes.
At March 31, 2007 and June 30, 2006, the Company had $3,499,922 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 March 31, 2007 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 discussions with several financing institutions
to obtain new credit facilities that would replace the outstanding debt
prior to July 1, 2007. The Company is also in discussions with the bank to
extend the Revolving Credit Facility to December 31, 2007. However, there
can be no assurance that the Company will in fact obtain a new credit
facility or that the Revolving Credit Facility will be extended.
7. COLLEGEVILLE INN
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.
The Company conducted a one-day auction on February 22, 2007 to attempt to
sell its banquet and training facility as well as the surrounding land. The
offers received were not acceptable to the Company. The auction identified
several interested and qualified parties. The Company continues its efforts
to lease or sell all or part of the facility and land. The Company is in
active discussion with several parties; however, there can be no assurances
that the Company will successfully conclude these discussions, or that it
will be able to lease or sell all or part of the facilities and land on
acceptable terms, if at all.
9
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 while it continues its sale / lease efforts. 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. However,
there can be no assurance as to the success of any of these efforts.
The Company's financial statements as of March 31, 2007 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 $3.6
million as of March 31, 2007, which raised some doubt as to its ability to
satisfy its obligations during that next fiscal year as they become due,
such doubt was alleviated after careful review of Management's plans for
the future relating to the Collegeville Inn Assets and operations, and the
protections relating to the management fees from its contracts and future
contracts. The Company believes that these plans, supported by the fact
that the Company still had stockholders equity of approximately $4.0
million as of March 31, 2007, reinforces the Company's ability to continue
as a going concern.
Management believes that operating cash flow, proceeds from the sale or
lease of certain assets, available cash and available credit resources will
be adequate to make repayments of indebtedness, if any, meet the working
capital needs, satisfy the needs of its operations, and to meet anticipated
capital expenditures during the next twelve months ending March 31, 2008.
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.
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 - QUARTER ENDED MARCH 31, 2007
Revenues for the quarter ended March 31, 2007 were $4,953,280, a decrease of
$562,690 or 10.2% compared to revenues of $ 5,515,970 in the corresponding
quarter last year. The decrease is primarily due to two high revenue accounts
which had been in the prior year. New accounts during this fiscal year more than
offset the impact of other scheduled contract terminations. Revenues from
ongoing accounts were consistent with prior year levels.
Cost of operations for the current quarter was $4,057,388, compared to
$4,620,058 for similar expenses in the same period last year, a decrease of
$562,670 or 12.2%. The decreases are associated with the lower revenues
mentioned above and better operating performance at ongoing accounts.
Gross profit for the current quarter was $895,892, or 18.1 % of gross revenue,
essentially even in dollar terms with the $895,912 reported for the same period
last year. The Gross Margin Percentage of Sale increased to 18.1% from 16.2 %
due to cost takeouts and improved operating performance at Fixed Rate accounts.
The Company has adapted to changing market conditions with cost reductions in
all of the Cost of Operations and General & Administrative areas. These cost
reductions, along with improved operating processes, have enabled the Company to
maintain and improve profit margins despite the decline in volume.
General and administrative expenses for the quarter were $1,078,212 or 21.8% of
revenue, compared to $1,321,411 or 24.0% of revenue for the same quarter last
year, a decrease of $243,199 or 18.4%. This decrease is due to lower staffing
related expenses in the period as well as a reduction in travel and related
costs.
11
Bad Debt Expense was a credit of $15,000 for the quarter compared to zero for
the corresponding quarter last year.
Interest expense for the three month period totaled $115,772 compared to
$100,015 for the same period last year, an increase of $15,757 or 15.8%. The
increases in interest expense are the result of an increase in amount borrowed
and increases in interest rates.
The loss before income taxes for the three month period ended March 31, 2007 was
$346,761 compared with $466,481 for the three month period ended March 31, 2006,
an improvement of $119,720 or 25.7% The net income tax benefit for the three
month period ended March 31, 2007 was $104,272 compared to $190,454 for the
three month period ended March 31, 2006, a decrease of $86,182.
For the reasons stated above, net loss after taxes for the quarter ended March
31, 2007 was $242,489, compared to $276,027 for the corresponding quarter last
year, an improvement of $33,538 - the result of cost effectiveness and
performance offsetting reduced revenues and lower net income tax benefit.
Net loss per share for the current quarter was $0.09 per share on, an
improvement of $0.01 per share from the prior year reflecting a lower loss and
no change in the amount of shares.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 2007
Revenues for the nine month period ended March 31, 2007 were $15,438,157,
compared to $17,949,350 for the nine month period ended March 31, 2006, a
decrease of $2,511,193 or 14.0 %. The decrease in almost entirely attributable
to accounts which had terminated during the previous fiscal year and for which
no revenues were recognized during the current year. Revenue from new accounts
during the current year have been sufficient to offset any contracts terminating
in the current year. Revenues at ongoing facilities increased slightly year over
year.
Cost of operations for the nine month period ended March 31, 2007 were
$12,566,054, compared to $14,717,270 for the nine month period ended March 31,
2006, a decrease of $2,151,216 or 14.6%. The decreases are associated with the
lower revenues mentioned above and better operating performance at ongoing
accounts.
Gross profit for the nine month period ended March 31, 2007 was $ 2,872,103,
compared to $3,232,080 for the nine month period ended March 31, 2006, a
decrease of $359,977 or 11.1 %. The Gross Margin Percentage of Sale increased to
18.6% from 18.0% due to cost takeouts and improved operating performance at
Fixed Rate accounts. The Company has adapted to changing market conditions with
cost reductions in all of the Cost of Operations and General & Administrative
areas.
General and administrative expenses for the nine month period ended March 31,
2007 were $3,203,277 compared to $3,812,057 for the nine month period ended
March 31, 2006, a decrease of $608,780 or 16.0%. This decrease is due to lower
staffing related expenses in the period as well as a reduction in travel and
related costs.
Bad Debt Expense for the nine month period ended March 31, 2007 was $15,000
compared to $60,000 for the for the nine month period ended March 31, 2006, a
decrease of $45,000.
12
Interest expense for the nine-month period ended March 31, 2007 was $345,887
compared to $284,728 for the nine month period ended March 31, 2006, an increase
of $61,159 or 21.5%. The increases in interest expense are the result of an
increase in amount borrowed and increases in interest rates.
The loss before income taxes for the nine month period ended March 31, 2007 was
$863,066 compared to $1,054,556 for the nine month period ended March 31, 2006,
an improvement of $191,490 or 18.2%. The net income tax benefit for the nine
month period ended March 31, 2007 was $261,575 compared to $434,595 for the nine
month period ended March 31, 2006, a decrease of $173,020.
The net loss for the nine month period ended March 31, 2007 was $601,491
compared to $619,961 for the nine month period ended March 31, 2006, an
improvement of $18,470 - the result of cost effectiveness and performance
offsetting reduced revenues and lower net income tax benefit.
Net loss per share for the nine month period ended March 31, 2007 was $0.21 per
share compared to $0.22 for the nine month period ended March 31, 2006, and
improvement of $0.01 per share reflecting improved net income and no change in
the number of shares.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2007 the Company had negative working capital of $3,623,399
compared to positive working capital of $960,636 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 and the
use of cash in operations.
OPERATING ACTIVITIES. Cash used in operations for the Nine Months ended March
31, 2007 was $1,122,711 compared to $2,090,095 used by operations for the Nine
Months ended March 31, 2006. The current period's activity is primarily
attributable to operating losses sustained in the current period as well as an
increase in accounts receivable and decreases in accounts payables.
INVESTING ACTIVITIES. Investing activities used $29,270 in cash in the Nine
Month period compared to $212,380 in cash provided in the same period last year.
Investing activities include capital expenditures in the amount of $42,374 and
are consistent with previous periods. The change is primarily the proceeds from
the sale of marketable securities $249,577 during the prior year.
FINANCING ACTIVITIES. Current year to date financing activities used $139,554 in
cash compared to $166,732 provided in the same period last year. The year to
date usage is primarily the scheduled sinking fund principle payment for the
long term bonds.
CAPITAL RESOURCES The Company has certain credit facilities with its bank
including a revolving credit facility of $3,500,000. At March 31, 2007 and June
30, 2006, the Company had utilized all of its revolving credit line. 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
$2,215,000 and $2,380,000 as of March 31, 2007 and June 30, 2006 respectively.
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. The Company is
also in discussion with the bank to extend the Revolving Credit Facility to
December 31, 2007. However, there can be no assurance that the Company will in
fact obtain a new credit facility or that the Revolving Credit Facility will be
extended.
13
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 or
lease a part of all of these assets in a fashion that will increase the
liquidity of the Company. The Company conducted a one-day auction on February
22, 2007 to attempt to sell its banquet and training facility as well as the
surrounding land. The offers received were not acceptable to the Company. The
auction identified several interest and qualified parties. The Company continues
its efforts to lease or sell all or part of the facility and land. 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
==============================================================
Contractual Less Than 1 1 - 3 4 - 5 After 5
Obligations Total Year Years Years Years
==================================================================================
Long-Term Debt * $5,740,388 $3,695,388 $ 350,000 $ 390,000 $1,305,000
==================================================================================
Operating Leases 27,250 12,520 14,730 -- --
==================================================================================
Total Contractual
Cash Obligations $5,767,638 $3,707,908 $ 364,730 $ 390,000 $1,305,000
==================================================================================
* Long-Term Debt includes the $3,499,922 outstanding balance on the revolving
credit facility.
==================================================================================
Amount of Commitment Expiration
Per Period
================================================================
Other Commercial Total Amounts Less 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 $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. However, there can be no assurance as to the success
of any of these efforts.
14
The Company's financial statements as of March 31, 2007 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 $3.6 million
as of March 31, 2007, which raised some doubt as to its ability to satisfy its
obligations during that next fiscal year as they become due, such doubt was
alleviated after careful review of Management's plans for the future relating to
the Collegeville Inn Assets and operations, and the protections relating to the
management fees from its contracts and future contracts. Management believes
that these plans, supported by the fact that the Company still had stockholders
equity of approximately $4.0 million as of March 31, 2007, reinforces the
Company's ability to continue as a going concern.
Management believes that operating cash flow, proceeds from the sale or lease of
certain assets, available cash and available credit resources will be adequate
to make repayments of indebtedness, meet the working capital needs, satisfy the
needs of its operations, and to meet anticipated capital expenditures during the
next twelve months ending March 31, 2008.
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.
15
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.
The Company provides its services under several different financial arrangements
including a fee basis and guaranteed rate basis. For Fee Contracts, the Company
manages Operations at a Customer facility and all expenses are paid by the
Customer. The Company recognizes Revenue in the amount of the Fee Charged.
For Guaranteed Rate Contract, the Company charges Customers an established
amount for services provided (for example, per Patient Day) and is responsible
for all the expenses related to the delivery of those services. The amount of
the billing is recorded as Revenue and the delivery costs are recorded as Cost
of Sales. These accounts are also referred to as P&L accounts.
Regardless of the different financial arrangements, the Company recognizes
revenue when services have been rendered and the contract price is determinable,
and collectibility is reasonably assured. Ongoing assessments of the credit
worthiness of customers provide the Company reasonable assurance of
collectibility upon performance of services. The Company has no other obligation
with respect to its services once services are performed.
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.
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 March 31, 2007 or 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.
16
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 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 March 31, 2007 and June 30, 2006, the Company maintained a deferred tax
asset of $2,265,908 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.
17
ITEM 4T.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 1A. There are no material changes to the risk factors
disclosed in the Company's Annual Report on Form 10-K
for the Fiscal Year ended June 30, 2006.
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 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.
18
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: May 15, 2007
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