Nutrition Management Services (NMSCA) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2008

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

Nutrition Management Services Company

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2095332
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Box 725, Kimberton Road, Kimberton, PA	19442
(Address of principal executive offices)	(Zip Code)

(610) 935-2050

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed 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 reports), 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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No x

2,747,000 Shares of Registrant’s Class A Common Stock, with no par value, and 100,000 shares of Registrant’s Class B Common Stock, with no par value, are outstanding as of November 14, 2008.

TABLE OF CONTENTS

Part I.	Financial Information	Page No.
	Item 1. – Financial Information	2
	Consolidated Balance Sheets as of December 31, 2008 (unaudited) and June 30, 2008	2
	Consolidated Statements of Operations for the Three Months and Six Months Ended December 31, 2008 (unaudited) and 2007 (unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2008 (unaudited) and 2007 (unaudited)	4
	Notes to Consolidated Financial Statements	5 - 9
	Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations	9 - 14
	Item 3. – Quantitative and Qualitative Disclosure about Market Risk	15
	Item 4T. – Controls and Procedures	15 - 16
Part II.	Other Information	17
	Signatures	18

Item 1.

Financial Information

NUTRITION MANAGEMENT SERVICES COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31, 2008
	(unaudited)			June 30, 2008
Current assets:
Cash and cash equivalents	$	334,692		$	307,902
Accounts receivable, net of allowance for doubtful accounts of $833,833 and $808,887, respectively		2,406,289			2,648,181
Inventory		160,023			142,073
Prepaid and other		619,669			342,655
Assets held for sale		6,295,450			6,295,450
Total current assets		9,816,123			9,736,261
Property and equipment, net		94,026			104,939
Other assets:
Advances to employees		228,537			238,381
Deferred income taxes		2,265,908			2,265,908
Bond issue costs, net of accumulated amortization of $179,649 and $168,724, respectively		116,516			123,800
Other assets		246,831			248,566
Total other assets		2,857,792			2,876,655
Total assets	$	12,767,941		$	12,717,855
Current liabilities:
Current portion of long-term debt	$	180,000		$	180,000
Current portion of line of credit		3,489,114			3,499,114
Current portion of note payable		29,726			7,551
Accounts payable		3,277,746			3,196,032
Accrued payroll and related expenses		142,167			208,366
Accrued expenses		155,010			266,727
Note payable-related parties		385,000			-
Other		62,153			105,718
Total current liabilities		7,720,916			7,463,508
Long-Term liabilities:
Long-term debt, net of current portion		1,685,000			1,865,000
Total Liabilities		9,405,916			9,328,508
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock - no par, 2,000,000 shares authorized, none issued or outstanding
Common stock:
Class A - no par, 10,000,000 shares authorized; 3,000,000 issued, 2,747,000 outstanding, and no par 10,000,000 shares authorized; 3,000,000 issued, 2,747,000 outstanding, respectively		3,801,926			3,801,926
Class B - no par, 100,000 shares authorized, issued and outstanding		48			48
Retained earnings		59,614			86,936
Total		3,861,588			3,888,910
Less:  treasury stock (Class A common: 253,000 and 253,000 shares, respectively) - at cost		(499,563	)		(499,563	)
Total stockholders’ equity		3,362,025			3,389,347
Total liabilities and stockholders’ equity	$	12,767,941		$	12,717,855

See Notes to Unaudited Consolidated Financial Statements

2

NUTRITION MANAGEMENT SERVICES COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended December 31,						Six months ended December 31,
	2008			2007			2008			2007
Food Service Revenue	$	5,246,936		$	5,283,004		$	10,601,474		$	10,323,867
Cost of Operations
Payroll and related expenses		2,510,943			2,530,899			5,169,053			4,881,917
Other costs of operations		1,673,305			1,758,457			3,329,379			3,454,282
Total cost of operations		4,184,248			4,289,356			8,498,432			8,336,199
Gross Profit		1,062,688			993,648			2,103,042			1,987,668
Expenses
General and administrative expenses		929,391			1,005,187			1,961,725			2,026,948
Depreciation and amortization		6,664			64,606			13,478			131,355
Provision for doubtful accounts		15,000			13,418			24,911			25,335
Total expenses		951,055			1,083,211			2,000,114			2,183,638
Income/(loss) from operations		111,633			(89,563	)		102,928			(195,970	)
Other income/(expense)
Other		(4,509	)		(4,509	)		(9,018	)		(9,018	)
Interest income		325			9,345			1,547			10,429
Interest expense		(59,845	)		(94,762	)		(122,779	)		(199,704	)
Total other income/(expense)		(64,029	)		(89,926	)		(130,250	)		(198,293	)
Income/(Loss) before income taxes		47,604			(179,489	)		(27,322	)		(394,263	)
Provision for income taxes		0			0			0			0
Net Income/(Loss)		47,604		$	(179,489	)	$	(27,322	)	$	(394,263	)
Net loss per share - basic and diluted	$	0.02		$	(0.06	)	$	(0.01	)	$	(0.14	)
Weighted average number of shares		2,847,000			2,847,000			2,847,000			2,847,000

3

NUTRITION MANAGEMENT SERVICES COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	Six months ended December 31,
	2008			2007
Operating activities:
Net loss	$	(27,322	)	$	(394,263	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		13,478			131,355
Provision for bad debts		24,911			25,335
Amortization of bond costs		7,282			7,282
Changes in assets and liabilities:
Accounts receivable		216,981			(24,470	)
Accrued Income		(232,922	)		-
Inventory		(17,950	)		(214	)
Prepaid and other current assets		-			(254,049	)
Other Assets		(42,317	)		-
Accounts payable		81,713			204,208
Accrued Expenses		(33,629	)		-
Accrued payroll and related expenses		(66,199	)		(40,742	)
Accrued Professional		(78,088	)		-
Accrued expenses and other		(43,563	)		(37,679	)
Net cash provided (used) in operating activities		(197,625	)		(383,237	)
Investing activities:
Purchase of property and equipment		(2,605	)		(10,688	)
Advances to employees		9,844			181,078
Net cash provided (used) in investing activities		7,239			170,390
Financing activities:
Repayments of long-term debt		(190,000	)		(170,000	)
Proceeds from note payable-related parties		385,000			-
Proceeds from note payable		102,585			327,413
Repayments of note payable		(80,409	)		(181,554	)
Net cash provided (used) by financing activities		217,176			(24,141	)
Net increase (decrease) in cash		26,790			(236,988	)
Cash and cash equivalents - beginning of period		307,902			701,858
Cash and cash equivalents - end of period	$	334,692		$	464,870
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest Paid	$	62,488		$	203,362
Taxes Paid		6,507			2,562

4

NUTRITION MANAGEMENT SERVICES COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008

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.

5

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, “Non-controlling 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 non-controlling 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 non-financial assets and non-financial 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 December 31, 2008 and 2007.  The Company did not have any dilutive stock options and warrants that impacted earnings per share in each period.

4. Litigation

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 December 31, 2008:

	Food Service Management			Training and Conference Center			Total
Food service revenue	$	5,154,372		$	92,564			5,246,936
Depreciation and amortization		5,470			1,194			6,664
Income (loss) from operations		193,277			(81,644	)		111,633
Interest income		325			0			325
Interest expense		(44,409	)		(15,436	)		(59,845	)
Income (loss) before taxes (benefit)		149,192			(101,588	)		47,604
Net income (loss)		149,192			(101,588	)		47,604
Total assets	$	6,046,473		$	6,721,468		$	12,767,941

For the quarter ended December 31, 2007:

	Food Service Management			Training and Conference Center			Total
Food service revenue	$	5,195,939		$	87,065		$	5,283,004
Depreciation and amortization		6,803			57,803			64,606
Income (loss) from operations		97,435			(186,998	)		(89,563	)
Interest income		9,345			0			9,345
Interest expense		(69,626	)		(25,136	)		(94,762	)
Income (loss) before taxes (benefit)		37,154			(216,643	)		(179,489	)
Net income (loss)		37,154			(216,643	)		(179,489	)
Total assets	$	6,300,392		$	6,681,841		$	12,982,233

7

For the six months ended December 31, 2008:

	Food Service Management			Training and Conference Center			Total
Food service revenue	$	10,446,025		$	155,449		$	10,601,474
Depreciation and amortization		11,087			2,391			13,478
Income (loss) from operations		282,535			(179,607	)		102,928
Interest income		1,547			--			1,547
Interest expense		(93,511	)		(29,268	)		(122,779	)
Income (loss) before taxes (benefit)		190,571			(217,893	)		(27,322	)
Net income (loss)		190,571			(217,893	)		(27,322	)
Total assets	$	6,046,473		$	6,721,468		$	12,767,941

For the six months ended December 31, 2007:

	Food Service Management			Training and Conference Center			Total
Food service revenue	$	10,133,176		$	190,691		$	10,323,867
Depreciation and amortization		15,646			115,709			131,355
Income (loss) from operations		126,574			(322,544	)		(195,970	)
Interest income		10,429			--			10,429
Interest expense		(145,758	)		(53,946	)		(199,704	)
Income (loss) before taxes (benefit)		(8,755	)		(385,508	)		(394,263	)
Net income (loss)		(8,755	)		(385,508	)		(394,263	)
Total assets	$	6,300,392		$	6,681,841		$	12,982,233

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 December 31, 2008 and September 30, 2008 all of the cash collateral account has been released and is available for operations.

At December 31, 2008 and September 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 December 2008 which maintains the revolving credit line in place to March 31, 2009.  The Company is currently negotiating to replace or retire this debt with alternate financing.

The Company and Wilmington Trust bank have been working together in an attempt to resolve a claim filed by Wilmington Trust Bank in the amount of $3,520,887 in the Court of Common Pleas of Chester County, Pennsylvania.  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.  To date, the Company has made all principal, interest and bond payments which have been owed to Wilmington Trust Bank.

8

7. Related Party Transactions

As of December 15, 2008, included in current liabilities –related parties is owed $385,000 to an officer and director of the company.  Amounts due to and from officers are unsecured, interest bearing at 4% and due on demand.

8. 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 provided for an initial deposit of $500,000, which has been received and held in escrow. At closing the Purchaser shall pay the remaining balance of the purchase price.  The Purchaser had a period of sixty (60) days after the Agreement Date for a due diligence period, and that period has expired.  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.

9. 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 December 31, 2008 of approximately $2.1 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 December 31, 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.

9

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 the Period Ended December 31, 2008

Revenues for the quarter ended December 31, 2008 were $5,246,936, a decrease of $36,068 or .07% compared to revenues of $5,283,004 in the corresponding quarter last year.  This decrease 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 six month period ended December 31, 2008 were $10,601,474, compared to $10,323,867 for the six month period ended December 31, 2007, an increase of $277,607 or 2.7%.  The increase is primarily due to the net impact of revenues from new contracts not offsetting revenues from lost contracts during the quarter ended December 31, 2007.  Revenues for the six month period from Collegeville Inn operations decreased over the same period 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 $4,184,248, compared to $4,289,356 for similar expenses in the same period last year, a decrease of $105,108or 2.5%.  This decrease is the result of revenues mentioned above and the expenses associated with those revenues.  Cost of operations for the six month period ended December 31, 2008 were $8,498,432 compared to $8,336,199 for the six month period ended December 31, 2007, an increase of $162,233 or 2.0%.  The increase is primarily due to higher revenues during the six month period and the expenses associated with those revenues over the same period.

Gross profit for the current quarter was $1,062,688, or 20.3% of gross revenue, compared to$993,648, or 18.8% of gross revenue, for the same period last year, an increase of $69,040 or 7.0%.    Gross profit for the six month period ended December 31, 2008 was $2,103,042, or 19.8% of gross revenue, compared to $1,987,668, or 19.3%, for the six month period ended December 31, 2007, an increase of $115,374 or 5.8%.   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.

10

General and administrative expenses for the quarter were $929,391 or 17.7% of revenue, compared  to $1,005,187 or 19.0% of revenue  for the  same  quarter  last  year,  a  decrease  of  $75,796  or  7.5% General and administrative expenses for the six month period ended December 31, 2008 were $1,961,725 compared to $2,026,948 for the six month period ended December 31, 2007, a decrease of $65,223 or 3.2%.  This decrease is due to lower payroll and related expenses in the period as well as a reduction in travel and legal expenses.

Provision for doubtful accounts for the quarter ended December 31, 2008 was $15,000 compared to $13,418 for the corresponding quarter last year.   Provision for doubtful accounts for the six month period ended December 31, 2008 was $24,911 compared to $25,335 for the six month period ended December 31, 2007.

Interest income for the quarter ended December 31, 2008 was $325 compared to $9,345 for the same period last year.

Interest expense for the quarter ended December 31, 2008 was $59,845 compared to $94,762 for the same period last year.  Interest expense for the six-month period ended December 31, 2008 was $122,779 compared to $199,704 for the six-month period ended December 31, 2007, a decrease of $76,925 or 39.0%. This decrease is primarily due to long term debt repayment and a reduction of interest rates.

For the reasons stated above, net profit before taxes for the quarter ended December 31, 2008 was $47,604 compared to a net loss of $179,489 for the corresponding quarter last year.   The net loss for the six-month period ended December 31, 2008 was $27,322 compared to $394,263 for the six-month period ended December 31, 2007.

 Net profit per share for the current quarter was $0.02 compared to net loss per share of $0.06 for the same quarter last year.  Net loss per share for the six-month period ended December 31, 2008 was $.01 compared to $.14 for the six-month period ended December 31, 2007.

Liquidity and Capital Resources

At December 31, 2008 the Company had positive working capital of $2,095,207 compared to working capital of $2,408,395 for the same quarter last year.  This change in working capital is primarily attributable to the use of cash in financing activities for the six months ended December 31, 2008 as well as the use of cash in operating activities for the six months ended June 30, 2008.

Operating Activities.  Cash provided in operations for the six months ended December 31, 2008 was $197,625 compared to $383,237 used in operations for the six months ended December 31, 2007.  The current period’s activity is primarily attributable to an increase in accounts payable, decrease in accounts receivable and increase in prepaid expenses as well as operating income sustained in the current period.

Investing Activities.Investing activities provided $7,239 in cash in the current six months compared to $170,390 in cash used in the same period last year.  Investing activities include capital expenditures in the amount of $2,605 in the current period and $10,688 in the same period last year.

Financing Activities.  Current quarter financing activities provided $217,176 in cash compared to $24,141 provided in the same period last year.  The current period’s activity was the result of proceeds from the insurance notes payable, notes payable from related party, and repayment of long-term debt.

Capital Resources.  The Company has certain credit facilities with its bank including a revolving credit of $3,500,000.  At December 31, 2008 and 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 $1,685,000 as of December 31, 2008.  In June 2008, the Company entered into an agreement whereby the credit loan facility was extended to March 31, 2009.  The Company is currently negotiating to replace or retire this debt with alternate financing.

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The Company and Wilmington Trust bank have been working together in an attempt to resolve a claim filed by Wilmington Trust Bank in the amount of $3,520,887 in the Court of Common Pleas of Chester County, Pennsylvania.  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.  To date, the Company has made all principal, interest and bond payments which have been owed to Wilmington Trust Bank.

	Payment Due By Period
Contractual Obligations	Total		Less than 1 year		2 – 3 years		4 – 5 years		After 5 years
Debt  *	$	5,383,840		3,698,840		1,685,000	$	--	$	--
Operating Leases		810		810		--		--		--
Total Contractual Cash Obligations	$	5,384,650	$	3,699,650	$	1,685,000	$	--	$	--

·   Long-Term Debt includes approximately $3,489,114 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 year
Lines of Credit	$	3,489,114	$	3,489,114	$	--	$	--	$	--
Standby Letter of Credit		1,865,000		180,000		1,685,000		--		--
Total Commercial Commitments	$	5,354,114	$	3,669,114	$	1,685,000	$	--	$	--

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 provided for an initial deposit of $500,000 which has been received and held in escrow.  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, and that period has expired.  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.

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The Company had positive working capital at December 31, 2008 of approximately $2.1 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 December 31, 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.

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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 December 31, 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 December 31, 2008 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.

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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 President and Chief Operating Officer (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 President and Chief Operating Officer (Principal Financial Manager) (Principal Financial Manager) concluded that, as of December 31, 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 December 31, 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.

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The Company’s management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 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 weakness in our internal control over financial reporting as of December 31, 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.

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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 December 31, 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.

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PART II - OTHER INFORMATION

Item 1.		Legal Proceedings		None
Item 2.		Changes in Securities		None
Item 3.		Defaults Upon Senior Securities		None
Item 4.		Submission of Matters to a Vote of Security Holders		None
Item 5.		Other Information		None
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 President and Chief Operating Officer (Principal Financial Manager) 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 President and Chief Operating Officer (Principal Financial Manager) pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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/ Kathleen A. Hill

Kathleen A. Hill

President and Chief Operating Officer

(Principal Financial Manager)

Date:  February 17, 2009

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