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, 2009. The financial information presented should be read in conjunction with the Company's 2008 financial statements that were filed under Form 10-K.
2. New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Statement No. 162 improves financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles for nongovernmental entities. Statement No. 162 is effective sixty days following the SEC’s approval of the Public Company Accounting Oversight Board auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is evaluating the impact of Statement No. 162.
In April 2008, the Financial Accounting Standards Board issued FASB Staff Position FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is evaluating the impact of FSP No. FAS 142-3.
In March 2008, the Financial Accounting Standards Board issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also requires disclosure of derivative features that are credit risk-related and cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. Statement No. 161 is effective for financial statements issued for fiscal years and interim periods after November 15, 2008, with early application encouraged. The Company is evaluating the impact of Statement No. 161 on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement No. 141(R), “Business Combinations.” Statement No. 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Statement No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 141(R) on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” Statement No. 160 requires that a reporting entity provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. Statement No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact of Statement No. 160 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and enhances disclosures about fair value measurements. SFAS 157 applies when other accounting pronouncements require fair value measurements; it does not require new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those years. The Company has adopted the requirements contained in this statement. The adoption of this statement is not expected to have a material impact on the financial statements of the Company.
In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.” FSP No. 157-2 delays the effective date of FASB Statement No. 157, “Fair Value Measurements,” for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of this FSP. The Company is currently assessing the implications of this Statement on its consolidated financial statements.
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, 2008 and 2007. 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 the prejudgment interest. A trial has been scheduled for January 2009.
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, 2008:
| | | Food Service Management | | | Training and Conference Center | | | Total | |
| Food service revenue | | $ | 5,291,653 | | | $ | 62,885 | | | $ | 5,354,538 | |
| Depreciation and amortization | | | 5,618 | | | | 1,196 | | | | 6,814 | |
| Income (loss) from operations | | | 89,266 | | | | (97,973 | ) | | | (8,707 | ) |
| Interest income | | | 1,222 | | | | -- | | | | 1,222 | |
| Interest expense | | | (49,102 | ) | | | (13,832 | ) | | | (62,934 | ) |
| Income (loss) before taxes (benefit) | | | 41,386 | | | | (116,314 | ) | | | (74,928 | ) |
| Net income (loss) | | | 41,386 | | | | (116,314 | ) | | | (74,928 | ) |
| Total assets | | $ | 6,387,882 | | | $ | 6,960,236 | | | $ | 13,348,118 | |
| | | | | | | | | | | | | |
For the quarter ended September 30, 2007:
| | | Food Service Management | | | Training and Conference Center | | | Total | |
| Food service revenue | | $ | 4,937,237 | | | $ | 103,626 | | | $ | 5,040,863 | |
| Depreciation and amortization | | | 8,843 | | | | 57,906 | | | | 66,749 | |
| Income (loss) from operations | | | 29,142 | | | | (135,546 | ) | | | (106,404 | ) |
| Interest income | | | 1,084 | | | | -- | | | | 1,084 | |
| Interest expense | | | (76,132 | ) | | | (28,810 | ) | | | (104,942 | ) |
| Income (loss) before taxes (benefit) | | | (45,906 | ) | | | (168,865 | ) | | | (214,771 | ) |
| Net income (loss) | | | (45,906 | ) | | | (168,865 | ) | | | (214,771 | ) |
| Total assets | | $ | 6,497,782 | | | $ | 7,421,008 | | | $ | 13,918,790 | |
| | | | | | | | | | | | | |
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. As of September 30, 2008 and June 30, 2008 all of the cash collateral account has been released and is available for operations.
At September 30, 2008 and June 30, 2008, the Company had approximately $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. The company and the bank reached an agreement in June 2008 which maintains the revolving credit line in place to September 30, 2008. The Company is currently negotiating to replace or retire this debt with alternate financing.
Subsequent to September 30, 2008, on November 7,2008 Wilmington Bank filed a Confession of Judgment against the Company in the amount of $3,520,887 in the Court of Common Pleas of Chester County, Pennsylvania. Under the terms of the Confession of Judgment, if the Company does not file a petition seeking relief from the judgment then the sheriff of Chester County has the right any time after December 7,2008 to take sufficient funds or property from the Company to pay the judgment. The Company is in the process of attempting to resolve this matter with Wilmington Bank. However, there can be no assurance as to the outcomes of these discussions and the failure to resolve this matter or a resolution of this matter on terms which are not beneficial to the Company will have a material adverse effect on the business and financial operations of the Company.
7. Collegeville Inn Conference & Training Center
The Company owns approximately twenty-two acres of land in Collegeville, Pennsylvania. In 1997, the Company completed its renovations of an existing 40,000 square foot building to serve as a training facility and conference center. On October 8, 2008 the Company entered into an agreement of sale for the tracts or parcels of land together with the building, Collegeville Inn Conference & Training Center for the sum of $5,500,000. The agreement provides for an initial deposit of $500,000 to be placed into escrow within three days after the effective date of the agreement. At closing the Purchaser shall pay the remaining balance of the purchase price. The Purchaser shall have a period of sixty (60) days after the Agreement Date for a due diligence period for the purpose of inspecting, investigating, examining, surveying, appraising, and any other testing as Purchaser may elect to perform. The agreement of sale provides that settlement occur within forty five (45) days of purchaser’s receipt of all permits and approvals. Upon closing of the transaction, the Company plans on using the proceeds to retire the outstanding debt associated with the property. However, there can be no assurance that this transaction will be completed in accordance with the terms of the agreement of sale.
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. On October 8, 2008 the Company entered into an agreement of sale for certain tracts or parcels of land together with the building, Collegeville Inn Conference & Training Center for the sum of $5,500,000. Upon closing of the transaction, the Company plans on using the proceeds to retire the outstanding debt associated with the property. However, there can be no assurance that this transaction will be completed in accordance with the terms of the agreement of sale.
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, and reduction of operating expenses.
The Company had positive working capital at September 30, 2008 of approximately $2.2 million.
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 September 30, 2009.
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 an ongoing 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.
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 for Quarter Ended September 30, 2008
Revenues for the quarter ended September 30, 2008 were $5,354,538, an increase of $313,675 or 6.2% compared to revenues of $5,040,863 in the corresponding quarter last year. This increase is primarily due to the net impact of revenues from new contracts offset by revenues from lost contracts. Revenues from ongoing accounts were consistent with prior years. Revenues for the quarter from Collegeville Inn operations decreased over the same quarter last year, primarily due to a decrease in catering events and a slight decrease in cook chill operations.
Cost of operations provided for the current quarter was $4,314,184, compared to $4,046,843 for similar expenses in the same period last year, an increase of $267,341 or 6.6%. This increase is the result of increased revenues mentioned above and the expenses associated with those revenues.
Gross profit for the current quarter was $1,040,354, or 19.4% of gross revenue, compared to $994,020, or 19.7% of gross revenue, for the same period last year, an increase of $46,334 or 4.7%. The increase in gross profit is due to the net impact of new contracts and lost contracts, partially offset by the renegotiation of contract rates in the normal course of business.
General and administrative expenses for the quarter were $1,032,336 or 19.3% of revenue, compared to $1,021,758 or 20.3% of revenue for the same quarter last year, an increase of $10,578 or 1.0%. The current quarter includes additional marketing and business development costs, and higher professional fees.
Provision for doubtful accounts for the quarter ended September 30, 2008 was $9,911 compared to $11,917 for the corresponding quarter last year.
Interest income for the quarter ended September 30, 2008 was $1,222 compared to $1,084 for the same period last year.
Interest expense for the quarter ended September 30, 2008 was $62,934 compared to $104,942 for the same period last year. This decrease is primarily due to long term debt repayment and a reduction of interest rates.
For the reasons stated above, net loss before taxes for the quarter ended September 30, 2008 was $74,928 compared to $214,771 for the corresponding quarter last year.
Net loss per share for the current quarter was $0.03 compared to net loss per share of $0.08 for the same quarter last year.
Liquidity and Capital Resources
At September 30, 2008 the Company had positive working capital of $2,211,550 compared to working capital of $2,570,151 for the same quarter last year. This change in working capital is primarily attributable to the use of cash in operations.
Operating Activities. Cash used in operations for the three months ended September 30, 2008 was $68,119 compared to $37,298 used in operations for the three months ended September 30, 2007. The current period’s activity is primarily attributable to an increase in accounts payable, accounts receivable and prepaid expenses as well as operating losses sustained in the current period.
Investing Activities. Investing activities provided $2,361 in cash in the current quarter compared to $5,706 in cash used in the same period last year. Investing activities include capital expenditures in the amount of $2,606 in the current period and $10,688 in the same period last year.
Financing Activities. Current quarter financing activities provided $98,601 in cash compared to $207,046 provided in the same period last year. The current period’s activity was the result of proceeds from the notes payable.
Capital Resources. The Company has certain credit facilities with its bank including a revolving credit of $3,500,000. At June 30, 2008, the Company had approximately $3,500,000 outstanding under its revolving credit. The Company issued two series of Industrial Bonds totaling $3,560,548 in December 1996. The outstanding balance on the bonds was $2,045,000 as of June 30, 2008. In June 2008, the Company entered into an agreement whereby the credit loan facility was extended to September 30, 2008. The Company is currently negotiating to replace or retire this debt with alternate financing.
Subsequent to September 30, 2008, on November 7,2008 Wilmington Bank filed a Confession of Judgment against the Company in the amount of $3,520,887 in the Court of Common Pleas of Chester County, Pennsylvania. Under the terms of the Confession of Judgment, if the Company does not file a petition seeking relief from the judgment then the sheriff of Chester County has the right any time after December 7,2008 to take sufficient funds or property from the Company to pay the judgment. The Company is in the process of attempting to resolve this matter with Wilmington Bank. However, there can be no assurance as to the outcomes of these discussions and the failure to resolve this matter or a resolution of this matter on terms which are not beneficial to the Company will have a material adverse effect on the business and financial operations of the Company.
| | | Payment Due By Period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 2 – 3 years | | | 4 – 5 years | | | After 5 years | |
| Debt * | | $ | 5,650,265 | | | | 3,785,265 | | | | 350,000 | | | | 390,000 | | | | 1,125,000 | |
| Operating Leases | | | 9,493 | | | | 7,810 | | | | 1,683 | | | | -- | | | | -- | |
| Total Contractual Cash Obligations | | $ | 5,659,758 | | | $ | 3,793,075 | | | $ | 351,683 | | | $ | 390,000 | | | $ | 1,125,000 | |
* Long-Term Debt includes approximately $3,500,000 outstanding on the revolving credit facility.
| | | | | | Amount of Commitment Expiration Per Period | |
| Other Commercial Commitments | | Total Amounts Committed | | | Less than 1 year | | | 1 – 3 years | | | 4 – 5 years | | | Over 5 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 is exploring all reasonable alternatives to improve its operating results, including but not limited to, increasing food service revenues with targeted marketing efforts, and increasing revenues from the sale of the Company’s Cook Chill products. In addition, on October 8, 2008 the Company entered into an agreement of sale for the tracts or parcels of land together with the building, Collegeville Inn Conference & Training Center for the sum of $5,500,000. The agreement provides for an initial deposit of $500,000 to be placed into escrow within three days after the effective date of the agreement. At closing the Purchaser shall pay the remaining balance of the purchase price. The Purchaser shall have a period of sixty (60) days after the Agreement Date for a due diligence period for the purpose of inspecting, investigating, examining, surveying, appraising, and any other testing as Purchaser may elect to perform. The agreement of sale provides that settlement occur within forty five (45) days of purchaser’s receipt of all permits and approvals. Upon closing of the transaction, the Company plans on using the proceeds to retire the outstanding debt associated with the property. However, there can be no assurance that this transaction will be completed in accordance with the terms of the agreement of sale.
The Company had positive working capital at September 30, 2008 of approximately $2.2 million. 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 September 30, 2009.
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 an ongoing 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.
The Company provides its services under several different financial arrangements including a fee basis and guaranteed rate basis. For Fee Contracts, certain expenses are paid directly by the Customer and certain expenses are paid by the Company and billed to the Customer. The Company recognizes Revenue in the amount of the expenses billed and the fees for providing services.
For Guaranteed Rate Contracts, 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.
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 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, 2008 or fiscal year ended June 30, 2008; 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 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, 2008, the Company maintained a deferred tax asset of $2,265,908 and $2,265,908, respectively. The Company has provided a valuation allowance of $125,461 against its deferred tax assets after consideration of a future gain on the disposal of certain land and assets relative 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 4T. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Manager, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Principal Financial Manager concluded that, as of September 30, 2008, such controls and procedures were not effective.
In making this evaluation, management considered, among other matters, the material weaknesses in the Company’s internal control over financial reporting that have been identified. See “Management’s report on Internal Control over Financial Reporting” below.
There have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of September 30, 2008. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on its financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The Company’s management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2008, based upon criteria in Internal Control—Integrated Framework issued by COSO. Based on the Company’s assessment, management has concluded that its internal control over financial reporting was not effective as of September 30, 2008, based on the criteria in Internal Control—Integrated Framework issued by COSO.
The Company’s management identified the following deficiencies that would be considered a material weaknesses in our internal control over financial reporting as of September 30, 2008. A material weakness is a deficiency, or combination of deficiencies, that results in more than a reasonable possibility that a material misstatement in the Company’s annual or interim financial statements will not be prevented or detected on a timely basis:
(i). The Company did not maintain an effective control environment due to the lack of documented, formal policies and procedures; and
(ii) The Company did not maintain effective internal controls over the financial closing and reporting process.
In light of this conclusion, the Company has initiated documentation of its policies and procedures and will institute compensating procedures and processes as necessary to ensure the reliability of its financial reporting to include the development of a standard closing checklist with specific assignment of duties, responsibilities, and timetable for completions of assigned tasks. Management intends to remediate weaknesses in the control environment and financial reporting through specific process improvements that have been identified. The Company will develop new processes in its accounting department. Each new process will be evaluated to ensure it is supported by effectively designed level of controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company plans to devote additional resources to its internal controls, and is currently engaged in discussions with third parties regarding improvements. In addition, further resources will be devoted to developing and communicating its policies and procedures to its employees and management. This shall include development and enforcement of compliance programs. The compliance program shall also include communication to set and reinforce the right tone from the top.
These remediation efforts, primarily associated with financial reporting, will require significant ongoing effort and investment. Management, with the oversight of the audit committee, will continue to identify and take steps to remedy known deficiencies as expeditiously as possible and enhance the overall design and capability of the control environment. The Company intends to further expand its accounting policy and controls capabilities by providing additional resources where deemed necessary and to enhance training of existing staff in such matters. Management believes that the foregoing actions will continue to improve the Company’s internal control over financial reporting, as well as its disclosure controls and procedures.
This quarterly report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this quarterly report.
Subsequent to September 30, 2008, however, the Company has commenced a review by its internal staff, including its accounting staff, of new processes to provide an evaluation of the level of controls and related procedures currently in place for each process.
PART II - OTHER INFORMATION
| | Item 1. | Legal Proceedings | None |
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| | Item 1A. | Risk Factors Other than as set forth below, there have been 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, 2008. Subsequent to September 30, 2008, on November 7,2008 Wilmington Bank filed a Confession of Judgment against the Company in the amount of $3,520,887 in the Court of Common Pleas of Chester County, Pennsylvania. Under the terms of the Confession of Judgment, if the Company does not file a petition seeking relief from the judgment then the sheriff of Chester County has the right any time after December 7,2008 to take sufficient funds or property from the Company to pay the judgment. The Company is in the process of attempting to resolve this matter with Wilmington Bank. However, there can be no assurance as to the outcomes of these discussions and the failure to resolve this matter or a resolution of this matter on terms which are not beneficial to the Company will have a material adverse effect on the business and financial operations of the Company. |
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| | Item 2. | Changes in Securities | None |
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| | Item 3. | Defaults Upon Senior Securities | None |
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| | Item 4. | Submission of Matters to a Vote of Security Holders | None |
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| | Item 5. | Other Information | None |
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| | Item 6. | Exhibits and Reports on Form 8K | |
| | (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. |
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 |
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| | Joseph V. Roberts |
| | Chairman and Chief Executive Officer |
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| | Linda J. Haines |
| | (Principal Financial Manager) |
Date: November 19, 2008
