1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
FRM NEXUS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3754422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
271 North Avenue New Rochelle, NY 10801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (914) 636-3432
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share
(Title of Class)
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ITEM 1. BUSINESS
Formation of the Company
FRM NEXUS, INC. (the "Company" or "Nexus") was incorporated in the
State of Delaware on November 17, 1993 under the name of PSI Settlement Corp.
pursuant to a Stipulation of Settlement dated as of November 15, 1993 (the
"Stipulation") filed in the United States District Court for the Southern
District of New York (the "Federal Court") in a shareholder Class Action,
Sandler v. Programming and Systems Incorporated ("PSI") et al, 92 Civ 5292 (the
"Class Action"). Prior to 1994 PSI was engaged in the business of owning and
operating vocational schools in twelve cities in the United States, principally
teaching computer programming and maintenance.
The Class Action was commenced on July 16, 1992 against the defendants
for damages sustained by shareholders of PSI by reason of alleged understatement
of net income for the fiscal year ended February 28, 1989 and the alleged
overstatement of net income for the fiscal years ended February 28, 1990 and
1991, which were alleged to be violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, the Rules promulgated thereunder and the common
law.
After certain discovery and independent investigation by plaintiff's
counsel into the facts and circumstances relevant to the allegations in the
Class Action, the parties entered into the Stipulation, which released the
defendants from all claims which the Class Members asserted, or could have
asserted, in the Class Action in consideration of the payment by PSI of (i)
$1,400,000 and (ii) the transfer to the Company of the non-vocational-school
assets of PSI and the delivery to Escrow Agents of all outstanding shares of the
Company to hold for the benefit of the shareholders of PSI.
The assets transferred by PSI to the Company in payment of the
settlement included all of the Wendy's Restaurants assets, the real estate
investments held by PSI and all of the outstanding capital stock of the
wholly-owned subsidiaries which owned restaurant and real estate assets.
Initially the Stipulation contemplated that the Company would liquidate these
assets and distribute the proceeds to the PSI shareholders. However on April 28,
1995 the Stipulation was amended to provide that the Company could continue to
operate rather than liquidate provided the escrowed shares of Nexus were
delivered out to PSI shareholders by June 12, 1997 and listed for trading on
NASDAQ. It was anticipated that the shares of the Company's stock would be
released from escrow, registered pursuant to Section 12(g) of The Securities
Exchange Act of 1934 (the "Exchange Act") and followed by an application to list
the common stock on NASDAQ.
On November 17, 1993 Judge Sweet signed his Order granting preliminary
approval of the Settlement and ordered a Settlement Hearing to be held on
January 5, 1994, pursuant to the
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Federal Rules of Civil Procedure ("FRCP"), to determine whether the Settlement
is fair, reasonable and adequate and should be approved by the Court. Notice of
the Settlement Hearing was given to all PSI shareholders and after all persons
having any objection to the proposed Settlement had been given an opportunity to
present such objections to the Court, Judge Sweet signed the Final Judgment and
Order on January 21, 1994 approving the Settlement Stipulation.
The same procedure under the FRCP was followed with respect to the
Amendment to the Settlement Stipulation signed on April 28, 1995. The Hearing
was held on June 12, 1995 and the Court signed the Order Amending the Final
Judgment and Order on June 12, 1995.
On February 23, 1996, the Company amended its certificate of
incorporation to change its corporate name to FRM Nexus, Inc. and to change its
authorized capital stock to 2,000,000 shares of common stock of the par value of
ten (10(cent)) cents per share. On July 23, 1996 Judge Sweet signed the
Stipulation and Order authorizing the Escrow Agents to release 1,211,635 shares
of Nexus' common stock to the holders of record of PSI common stock in the ratio
of one share of Nexus common stock for each three shares of PSI common stock. On
or about August 12, 1996 the said shares were released to 1,186 record holders
of PSI common stock representing about 2,500 beneficial owners of the Company's
shares.
On November 14, 1996 an annual meeting of stockholders of Nexus was
held pursuant to Section 211 of the Delaware General Corporation Law and the
Order of the Court of Chancery of the State of Delaware (New Castle County)
dated October 10, 1996. At that meeting the four persons named herein as
Directors and Daniel Elstein were elected as Directors of Nexus until the next
Annual Meeting of Stockholders which will be held in 1998. None of those five
Directors was an officer, director or employee of PSI prior to November 15, 1993
and none of them has been an officer, director or employee of PSI since they
were elected as Directors of Nexus on November 14, 1996. Three of those five
Directors of Nexus were never an officer, director or employee of PSI and the
other two, Seth Grossman and Jed Schutz, were directors of PSI only during the
period that the Escrow Agents held the Company's shares for the benefit of the
Company's present shareholders. Daniel Elstein resigned as a Director of Nexus
on October 15, 1997.
Description of Business
The FRM in the Company's name stands for the three markets in which
Nexus is presently engaged - Food Services, Real Estate Development and Medical
Financing.
THE FOOD SERVICES DIVISION presently consists of sixteen Wendy's
restaurants, eight in West Virginia and eight in New York owned by Wendclark
Corp. and Wendcello Corp., wholly owned subsidiaries of Nexus. The restaurants
are operated by two management corporations,
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in which Nexus has no interest, under franchise agreements with Wendy's
International, the public company listed on the New York Stock Exchange. The
management agreements provide for the sharing of the operating profits of the
restaurants and certain proceeds of the sale or refinancing of the restaurants.
This division commenced business in 1990, when it was part of PSI, with the
purchase of eleven restaurants. Since 1990 five additional restaurants were
constructed or acquired with the funds and credit of the two Nexus subsidiaries
and the management companies. This division has usually been profitable,
although just as the economy has fluctuated, so too have the results of
operations of the restaurants. Since February 28, 1997 sales and net income of
this division has improved, as has Wendy's franchisees generally.
THE REAL ESTATE DEVELOPMENT DIVISION of the Company presently conducts
its operations through PSI Capital Corp and Yolo Equities Corp., wholly-owned
subsidiaries which own and/or control the fee interests in a variety of parcels
of real estate, in which co-investors also have interests. Nexus controls the
development, for residential and commercial use, of this real estate which is
located in New York and Connecticut. See Note 5 of Notes to Consolidated
Financial Statements for the fair market values of these properties or the
values that were carried on the Company's Balance Sheet, if less than fair
market value at the respective Balance Sheet dates.
A brief description of each parcel follows:
Goshen, New York. A subdivision plan for the development of 165 single family
homes in the Village of Goshen, Orange County, New York, was recently agreed
upon in settlement of a lawsuit between the Company and the Village of Goshen.
The lawsuit had been commenced by the Company to enforce a previously approved
subdivision plan for the property. Participating in the settlement was Windemere
in the Pines at Goshen, Inc., a part of the Windemere Group of construction
companies, in which Jed Schutz, a director of Nexus, is an officer, director and
shareholder ("Windemere"). Nexus has agreed with Windemere for the joint
development of the parcel on terms which will assure Nexus of a specified profit
on its land, with the financing to be provided by Windemere and a sharing of the
profits or losses to be realized in the joint construction and sale of the
homes.
In February and August, 1996, Nexus sold the 165 building lots to
Windemere for $2,499,150 to be paid principally from construction loan funding
plus an additional $2,499,750 contingent on the amount of profit to be realized
on the construction and sale of the homes to be built on the lots. The sale was
accounted for using the installment method resulting in a deferral of income
until the initial and continuing investment criteria is sufficient. The long
term deferred income attributable to the construction loan funding and any
contingent profit have not been reflected in the Company's net income. See Notes
5C and 9D2 of Notes to Consolidated Financial Statements.
East Granby, Connecticut. The Company owned a partially built two-story office
building located at 2 Gateway Boulevard in East Granby, Connecticut which was
carried at the value of $900,000 on February 28, 1995. In the fiscal year ended
February 29, 1996, the Company spent about $1,300,000 in developing the site and
improving a portion of the building. In
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February 1996, the property was sold to Gateway Granby, LLC. ("Gateway") for
$4,800,000, of which $3,700,000 has since been paid and $1,100,000, as reduced
by amortization and partial prepayment on December 8, 1997, is held by the
Company pursuant to a purchase money second mortgage. The Company originally
retained a lease on the first floor of the building for sublease to a subtenant.
The Company was using the financing method to report this sale-leaseback
transaction until January 1, 1998 when its involvement as a guarantor of the
first mortgage and its tenancy of the first floor were terminated. See Notes
1-0, 2, 5F, 9D1 and 9H of Notes to Consolidated Financial Statements.
Nexus sold the building in order to realize the cash proceeds. It
retained the leasehold of the unfinished space in order to make the sale at the
negotiated price, and have the risk and benefit of subleasing the first floor to
an occupant. In June 1997 a major tenant signed an agreement to lease the entire
first floor commencing September 1, 1997. The construction and landscaping costs
were completed by that tenant and the Company's contribution was $559,750. The
rental payable by the major tenant for Nexus' benefit for the first five years
exceeded the rental payable under Nexus' retained leasehold. Nexus disposed of
its lease and sublease for the first floor premises as of January 1, 1998 and
has no further involvement in the property except for its continued ownership of
the second mortgage. Gateway is owned and managed by investors, unrelated to the
officers and directors of Nexus, except that Daniel Elstein, who has 10.5%
interest in Gateway, was a director of Nexus from November 1996 to October 1997.
Hunter, New York. Nexus controls the fee interest in various properties in
Hunter, New York, in which it owns the principal co-investment interest. The
properties consist of undeveloped acreage in an area known as Hunter Highlands,
which is adjacent to the Hunter Mountain Ski Slopes in the town of Hunter,
Greene County, New York. The undeveloped acreage, which Nexus plans to develop,
is zoned for single family residences, condominium units and a hotel site. There
is already constructed on the property a water treatment plant, a clubhouse with
restaurant, tennis courts and swimming pool, a small office building and 8
unsold condominium units. Adjoining the site are some 200 condominium units
owned by unrelated persons, who purchased their resort homes from prior owners
of Hunter Highlands.
Hunter, New York has been depressed economically in recent years, which
gave rise to the Company's acquisition of this property through the mortgage
foreclosure process. Management believes that these properties have a present
value in excess of the cost of $1,097,897 carried on its balance sheet at
February 28, 1997 and have potential for profitable development if there is
recovery in the market for second homes in that area. See Note 5 of Notes to
Consolidated Financial Statements.
Brookfield, Connecticut. Nexus owns the fee interest in two parcels of
undeveloped land in Brookfield, Connecticut which is carried on the balance
sheet at $476,472, which is the face value of the mortgage which the Company
foreclosed to acquire its fee title plus foreclosure costs and capitalized
costs. The $476,472 is believed to be less than fair market value. Nexus plans
to develop both parcels for commercial use unless it receives an acceptable
offer to purchase or lease either or both of them.. One parcel is on Federal
Road, across from the
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popular Stew Leonards' Supermarket. The other is a short distance from this
location. Nexus has obtained approval to develop a 23,000 square foot retail
building on the first parcel and plans to seek approval to develop the second
parcel.
Middletown, Connecticut. Nexus formerly owned several parcels of improved land
in Middletown, Connecticut. These parcels were not readily available for
profitable development and have been sold.
Pound Ridge, New York. This parcel consisted of an unimproved 4 acre lot zoned
for one family residence in Pound Ridge, New York. It has been sold for
$225,000, the price at which it was carried on the Company's balance sheet.
Other Properties. Nexus, alone or with co-investors and joint ventures, intends
to acquire other lands for development of residential, commercial and office
structures, when management identifies opportunities for enhancement of
shareholder values.
THE MEDICAL FINANCING DIVISION of the Company conducts its operations
through a wholly-owned subsidiary, Medical Financial Corp. ("MFC"), a start-up
company with its first full year of operations included in the fiscal year ended
February 28, 1996. MFC purchases insurance company receivables, paying cash to
the medical provider in return for a negotiated fee. For its clients, MFC
delivers valuable services and increased liquidity, which is normally
unavailable to medical groups from traditional lenders. MFC's services include
an organized, efficient collection of the customers' receivables and management
information systems reports of their clients' practices. The profitability of
this division in the current and future fiscal years will depend on management's
ability to obtain favorable contracts with additional clients and employ its
resources at fuller capacity. In the Company's current fiscal year the value of
contracts currently in force increased from financing approximately $600,000 per
month in March 1997 to about $1,200,000 per month in January 1998.
Marketing
The Company's Wendy's Restaurants participate in Wendy's national
advertising campaigns pursuant to the franchise agreements with Wendy's
International. National advertising includes network television, radio and print
media. The Company's restaurants supplement the franchisor's national efforts
with local and regional newspapers, TV, radio and outdoor advertising, where
appropriate to the locale. See Note 9A to the Consolidated Financial Statements.
The Company's marketing in its real estate activities has been limited
in the past, and for the present, to working with real estate brokerage firms in
connection with the sale and leasing of properties. Development of the homes in
Goshen, NY is expected to commence in 1998 and
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Nexus is planning to employ a marketing firm to assist it in pricing,
advertising and selling the one-family homes during the construction phases of
the development.
The Medical Financing Division has heretofore marketed its services to
medical groups through its own individual employees and consultants. MFC
recently retained a marketing firm to design a brochure for a direct mail and
personal recruiting campaign scheduled to begin in April 1998.
Competition
The Company's restaurant business is highly competitive, with the many
stores in the diverse fast food service field, particularly the McDonalds and
Burger King franchisees which are members of larger national restaurant chains.
The Company's presently owned real estate held for development and sale
(i) for its own account is located in Hunter, New York and Brookfield,
Connecticut and (ii) in joint venture with Windemere is located in Goshen, New
York. The real estate markets in those communities have been depressed in the
past years, so that competition has not been a factor. With the expectation of
improved demand and financing for purchasers, the Company will be competing with
many owners and developers in the locale to market properties which it presently
owns and which will be developed and built for sale or lease.
MFC competes with a wide variety of financial service companies,
including banks, and other lending and factoring companies which provide
financial assistance and bill collection services to medical providers. The
Company's services are designed to serve a niche market and in its focus on
purchasing and collecting insured receivables of certain medical groups, the
competition is limited to only a few companies of which it is aware.
Trademarks
The Company's use of the tradename, trademark and logo for Wendy's is
pursuant to franchise agreements with Wendy's International for each of its 16
restaurants. These agreements have terms extending many years and there is no
reason to expect that the franchises will not be renewed whenever they expire.
The day to day operations of the Wendy's subsidiaries, Wendcello Corp. and
Wendclark Corp. are managed by two management companies, whose principals have
similar agreements with other Wendy's franchisees. Their experience and
performance as franchise managers has forged a mutually respected relationship
with Wendy's International which has enabled Wendclark and Wendcello to grow the
number
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of restaurants in their region and to foster the expectation of continuing
cooperation. See Notes 9A and 8 to the Consolidated Financial Statements.
Employees
As of December 1, 1997 the Company had 538 employees in its Wendy's operations,
10 employees at MFC and 4 employees in its real estate and parent company
operations. None of the Company's employees is represented by a union and Nexus
considers its relationship with its employees to be good.
Regulatory Laws
The Company is in compliance with all environmental laws relating to hazardous
substances in real property. Future compliance with such environmental laws is
not expected to have a material effect on its business. In addition the Company
must comply with health and occupancy regulatory laws of the federal, state and
municipal governments relating to the Wendy Restaurants and the regulations of
said governments relating to businesses generally. The cost of such compliance
is important but continued compliance is not expected to have a material effect
on its business.
ITEM 2. FINANCIAL INFORMATION.
There are filed as part of this registration statement, (i) the
Unaudited Consolidated Financial Statements and Data listed in the Index at page
U-1 hereof and (ii) the Audited Consolidated Financial Statements and Schedules
listed in the Index at page F-1 hereof. Selected Consolidated Financial Data for
the Four Fiscal Years Ended February 28, 1997 and the Nine Months Ended November
30, 1997 and November 30, 1996 and as of February 28, 1994, 1995, 1996, 1997 and
November 30, 1996 and 1997 is provided at page U-2 hereof.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
All statements contained herein that are not historical facts,
including but not limited to, statements regarding future operations, financial
condition and liquidity, expenditures to develop real estate owned by the
Company, future borrowing, capital requirements and the Company's future
development plans are based on current expectations. These statements are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to differ materially are the following: changes in the business of the
Company's medical provider clients, changes in the real estate, fast food and
financial markets, and other risk factors described in the Company's reports
filed and to be filed from time to time with the Commission.
The discussion and analysis below is based on the Company's
Consolidated Financial Statements and related Notes thereto included herein and
incorporated herein by reference.
OVERVIEW
Nexus generates revenues from three business segments: food services,
real estate and medical financing. Revenues in the real estate division vary
substantially from period to period depending on when a particular transaction
closes and depending on whether the closed transaction is recognized for
accounting purposes as a sale or reflected as a financing or is deferred to a
future period. The following selected segment data for the three years ended
February 28, 1995, 1996 and 1997 and the nine months ended November 30, 1996 and
1997 is derived from the Company's consolidated financial statements.
Nine Months
Ended November 30,
Fiscal Year Ended February 28, (Unaudited)
----------------------------------------- -----------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
(In Thousands)
Operating revenue:
Food services $14,524 $14,536 $16,263 $12,504 $13,011
Real estate 0 293 820 784 110
Medical financing 0 254 217 78 531
------- ------- ------- ------- -------
Total revenue $14,524 $15,083 $17,300 $13,366 $13,652
======= ======= ======= ======= =======
Operating profit (loss):
Food services $622 $ (60) $ 99 $ 170 $ 388
Real estate (123) (277) (1,424) (942) (963)
Medical Financing (12) 138 78 6 314
------- ------- ------- ------- -------
Total Profit (Loss) $487 $ (199) $(1,247) $ (766) $ (261)
======= ======= ======= ======= =======
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RESULTS OF OPERATIONS
COMPARISON OF RESULTS FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997 TO THE NINE
MONTHS ENDED NOVEMBER 30, 1996.
REVENUES
Total revenues of the Company in the nine months ended November 30, 1997
increased $286,000 from $13,366,000 in the prior nine months ended November 30,
1996 to $13,652,000 in the nine months ended November 30, 1997. This was a
result of increases in the food services and medical financing divisions of
$507,000 and $453,000, respectively, a total of $960,000 of increases which were
reduced by the $674,000 of decrease in revenues in the real estate division.
Revenues in the food services division increased to $13,011,000 in the nine
months ended November 30, 1997 from $12,504,000 in the prior nine month period,
attributable primarily to increases in food sales in the same number of
restaurants. Revenues in the medical financing division rose to $531,000 in the
nine months ended November 30, 1997 from $78,000 in the nine months ended
November 30, 1996 due to the increase in the insurance company receivables
purchased in the current period and the realization of income therefrom.
Revenues in the real estate division declined to $110,000 in the nine months
ended November 30, 1997 from $784,000 in the prior nine month period because
there were no sale transactions in the current period in which revenue was
recognized as there was in the prior period.
OPERATING LOSS
The Company's operating loss decreased $505,000 from a loss of $766,000 in the
nine months ended November 30, 1996 to an operating loss of $261,000 in the nine
months ended November 30, 1997. The operating profits of the food services and
medical financing divisions increased $218,000 and $308,000, respectively, in
the current nine months over the prior period. The balance of the change in the
Company's operations is attributable to an increase in the operating loss of
$21,000 in the real estate division. Operating profit in the food services
division increased to $388,000 in the nine months ended November 30, 1997 from
$170,000 in the prior nine month period, attributable to the increased revenues
noted above. Operating profit in the medical financing division increased to
$314,000 in the nine months ended November 30, 1997 from $6,000 in the nine
months ended November 30, 1996 by reason of the increase in the purchase of
receivables and the income realized therefrom. The operating loss in the real
estate division of $963,000 in the nine months ended November 30, 1997 increased
from an operating loss of $942,000 in the prior nine month period
notwithstanding the greater reduction in operating revenue in 1997 because the
real estate sales in the nine month period ended November 30, 1996 were not
profitable.
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COMPARISON OF RESULTS FOR THE YEAR ENDED FEBRUARY 28, 1997 TO THE YEAR ENDED
FEBRUARY 29, 1996.
REVENUES
Total revenues increased 15% from $15,083,000 in fiscal 1996 to $17,300,000 in
fiscal 1997. Two new Wendy's restaurants were opened in fiscal 1996 and sales at
the Company's Wendy restaurants rose from $14.5 million in fiscal 1996 to $16.2
million in fiscal 1997. Real estate revenues increased $527,000 from $293,000 in
fiscal 1996 to $820,000 fiscal 1997 because the volume of sale transactions
closed in fiscal 1997 was higher than in fiscal 1996. Revenues from the medical
financing division declined $37,000 from $254,000 in fiscal 1996 to $217,000 in
fiscal 1997 primarily because of a reduction in the initial fees for new
customer contracts.
COSTS AND EXPENSES
Direct costs in the food services division increased from $5 million in fiscal
1996 to $5.7 million in fiscal 1997 and selling, general and administrative
expenses increased from $9.3 million to $9.8 million, primarily attributable to
the two new restaurants opened during fiscal 1996. The total revenue increase in
the food services division of $1.7 million was offset by these total increases
of $1.2 million plus the additional interest expense, depreciation, amortization
and other expense increases of $341,000, resulting in an increase in operating
income of the food services division of $159,000 from an operating loss $60,000
in fiscal 1996 to an operating profit of $99,000 in fiscal 1997.
Cost of sales and operating expenses in the real estate division increased from
$570,000 in fiscal 1996 to $2,244,000 in fiscal 1997 an increase of $1,674,000
of which $817,000 was attributable to the higher cost of the real estate sold
fiscal 1997 over fiscal 1996 and the balance primarily to increased selling,
general and administrative expenses. Revenue increased only $527,000, so that
the increased costs and expenses of $1,674,000 produced an increased loss of
$1,147,000 from a loss of $277,000 in fiscal 1996 to a loss of $1,424,000 in
fiscal 1997.
Operating expenses of the medical financing division increased $23,000 in fiscal
1997 over fiscal 1996, and the revenues decreased $37,000, resulting in a
reduction of $60,000 in operating profit, from $138,000 in fiscal 1996 to
$78,000 in fiscal 1997. This was attributable to gearing up on staff and systems
in anticipation of increased volume in fiscal 1998, which had occurred by August
31, 1997.
See Note 10 of Notes to Consolidated Financial Statements with respect to income
taxes.
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COMPARISON OF RESULTS FOR THE YEAR ENDED FEBRUARY 28, 1996 TO THE YEAR ENDED
FEBRUARY 28, 1995.
REVENUES.
Total revenues increased $559,000 from $14,524,000 in fiscal 1995 to $15,083,000
in fiscal 1996. This was attributable to increased revenues of $293,000 and
$254,000 in the real estate division and medical finance division which had no
revenues in fiscal 1995. The real estate division had no sale transactions in
fiscal 1995 and had not yet realized income from rents or mortgages in that
year. In fiscal 1996 the real estate division had revenues of $257,000 from sale
transactions and $36,000 from rent and interest. There was a small increase of
$12,000 in revenues of the food service division from $14,524,000 in fiscal 1995
to $14,536,000 in fiscal 1996. While there was a decline in revenues from the
older restaurants, the revenues from two new stores opened in fiscal 1996
accounted for the net increase.
COSTS AND EXPENSES
In the food service division, the direct costs increased $119,000 from
$4,854,000 in fiscal 1995 to $4,973,000 in fiscal 1996 and $575,000 in all other
expenses, a total expense increase of $694,000, which were primarily
attributable in each case to the new store openings. Since this increase of
$694,000 was offset by only a $12,000 increase in revenues, there was a $682,000
drop in operating profit, from a profit $622,000 in fiscal 1995 to a loss of
$60,000 in fiscal 1996. This result was due to lower margins relating to food
sales and larger expenses relating to restaurant openings and improvements which
did not produce increases in sale volume until the following year.
Total costs in the real estate division increased $447,000 in fiscal 1996 over
fiscal 1995 because there were no real estate sales in fiscal 1995 and minimal
operating expenses in the division in that year. Since revenues increased
$293,000, the increase in costs of $447,000 resulted in a $154,000 reduction in
operating profit from a loss of $123,000 in fiscal 1995 to a loss of $277,000 in
fiscal 1996.
Total operating expenses of the medical financing division were $104,000 higher
in fiscal 1996 compared with fiscal 1995 because the division had minimal
start-up costs in fiscal 1995 compared to its first full year of operations in
fiscal 1996. The revenue increase of $254,000, when reduced by the increased
costs of $104,000, produced an increase of $150,000 in operating profit, from a
loss of $12,000 in fiscal 1995 to a profit of $138,000 in fiscal 1996.
For Nexus combined, there was a $686,000 reduction in operating profit from a
profit of $487,000 in fiscal 1995 to a loss of $199,000 in fiscal 1996,
attributable principally to the decline in the operating profits of the food
service division described above. The increase in
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the net profit of the medical financing division was offset by the comparable
increase in the net loss in the real estate division.
See Note 10 of the Notes to Consolidated Financial Statements with respect to
income taxes.
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION AT FEBRUARY 29, 1997 TO FEBRUARY 28, 1996.
Stockholders' equity declined by $1,269,325 from $5,616,310, or $4.64
per share, at February 29, 1996 to $4,346,985, or $3.59 per share, at February
28, 1997, attributable to a net loss of $1,259,009 in the fiscal year ended
February 28, 1997 plus $10,316 of costs incurred on behalf of PSI. The reduction
in stockholders' equity is principally attributable to the Company's use of the
financing method to report a sale-leasehold transaction described in Notes 1-0
and 9B of the Notes to Consolidated Financial Statements. Also, the Company
expects that its continuing involvement in the property, which precludes the
reporting of the profit on the sale, will be extinguished in 1998, permitting
the Company to eliminate this Finance Obligation and report the income on the
sale. The working capital of the Company increased by $1,855,636 from a deficit
working capital of $442,940 at February 29, 1996 to a positive working capital
of $1,412,696 at February 28, 1997. The increase in the net book value of the
fixed assets of $1,214,277 from $3,944,483 at February 29, 1996 to $5,158,760 at
February 28, 1997 is primarily attributable to the purchase of the land and
building of four of the Company's restaurants described in Note 7B4 of Notes to
Consolidated Financial Statements; as is a concomitant increase in Notes
Payable.
COMPARISON OF FINANCIAL CONDITION AT NOVEMBER 30, 1997 TO FEBRUARY 28, 1997 AND
NOVEMBER 30, 1996.
Stockholders' equity declined $199,586 in the nine months ended
November 30, 1997, attributable to the Company's net loss in that period, from
$4,346,985, or $3.59 per share, at February 28, 1997 to $4,147,399, or $3.42 per
share, at November 30, 1997. The Company's working capital, decreased by
$308,083 from $1,412,696 at February 28, 1997 to $1,104,613 at November 30,
1997. The Company's Finance Obligation increased by $145,795 in the nine months
ended November 30, 1997 from $3,036,466 at February 28, 1997 to $3,182,261 at
November 30, 1997 because the Company received additional financing from this
source.
The reduction of stockholders' equity of $655,615 from $4,803,014 at
November 30, 1996 to $4,147,399 at November 30, 1997 is attributable to net loss
in the twelve months ended November 30, 1997. The principal effect on the
comparable financial condition was a reduction of working capital of $804,593
from November 30, 1996 to November 30, 1997.
-12-
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities in fiscal 1998 including investments
in the purchase of insured medical receivables will result in cash used by
operations this year. The Company expects this trend to continue with the growth
of its medical financing division. The funds for those needs are expected to be
provided from financing activities such as asset-based borrowing on the
Company's mortgages and accounts receivable.
The Company anticipates that cash will be provided from its food
service operations in fiscal 1998, which has shown improvement in operating
profit in the first nine months ended November 30, 1997. The real estate
division is not expected to be a significant user of cash flow from operations
after November 30, 1998 by reason of the disposition as of January 1, 1998 of
the formerly vacant space in the East Granby, Connecticut property.
The Company's real estate assets in Hunter, N.Y. and Brookville, CT are
owned free and clear of mortgages. Further development of those properties, at
any significant cost, is expected to be funded by asset-based financing.
The Company believes that its present cash resources and the cash
available from financing activities will be sufficient on a short-term basis and
over the next 12 months to fund continued expansion of its medical financing
business, its company-wide working capital needs and expected investments in
property and equipment. The Company intends to pace its growth in the medical
financing division to its capacity to provide the funds from its financing
activities. The Company has no present intention of increasing its capital from
the sale of common stock, but that may be an option it will explore in the
future should management decide that it will assist its goal of increasing the
per-share value of the Company's outstanding shares.
-13-
15
ITEM 3. PROPERTIES.
In addition to the real property held for development and sale as set
forth in Item 1 above, Nexus owns certain property, land and equipment utilized
in its Wendy's operations which are described in Notes 4 and 7A to the
Consolidated Financial Statements herein, which secure, to the extent described
in Note 7B, the four separate notes payable by Wendcello Corp.
and Wendclark Corp.
The Wendy's restaurants are tenants in the various restaurant operating
leases described in Note 9B to the Consolidated Financial Statements herein.
Nexus' lease for its offices in New Rochelle, New York, which also
house MFC's operations, expires on February 28, 2001.
All of the space leased by the Company is leased from unaffiliated
third parties.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of Nexus common stock as of January 30, 1998 by (i) each person who
owns beneficially more than 5% of Nexus Common Stock to the extent known to
management and (ii) each executive officer and director of Nexus and (iii) all
directors and executive officers, as a group. Unless otherwise indicated, the
named persons exercise sole voting and investment power over the shares that are
shown as beneficially owned by them.
-14-
16
Beneficially Owned
Name Number Percent
- ---- ------ -------
Seth Grossman (a)(b) 101,777 8.4%
Jed Schutz (b) 101,777 8.4%
Joseph Dolan (c) - -
Allan Kornfeld (c) - -
Deborah Knowlton (b) - -
Lester Tanner (d) 149,392 12.3%
All directors and executive
officers as a group (5 persons) 203,554 16.8%
- --------
(a) Includes all shares owned by Seymour Grossman Pension Trust of which Seth
Grossman is sole Trustee and beneficiary of 50% thereof.
(b) The addresses of Seth Grossman, Jed Schutz and Deborah Knowlton is 271 North
Avenue, Suite 520, New Rochelle, N.Y. 10801.
(c) The address of Joseph Dolan is 35 Huckleberry Lane, East Hampton, NY 11937.
The address of Allan Kornfeld is 5 Patterson Square, Newtown Sqaure, PA 19073.
(d) Includes all shares owned by Tanner & Gilbert P.C. Retirement Plan Trust, of
which Lester Tanner is the sole Trustee and beneficiary of the shares in his
segregated account. The address of Lester Tanner is 99 Park Avenue, New York,
NY 10016. Seth Grossman is the son of Lester Tanner's wife, Dr. Anne-Renee
Testa. Lester Tanner previously served as a director of the Company and is
currently counsel to Nexus.
-15-
17
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The executive officers and directors of Nexus are:
Name Age Position
- ---- --- --------
Seth Grossman 30 Mr. Grossman has been President and Chief Executive
Officer of Nexus since January 1, 1997 and a Director of
Nexus since January 1994. He is a director of M & A
London, LLC, of New York, NY, which provides corpo-
rate development services to mid-range public and private
companies. In 1991, Mr. Grossman founded a transporta-
tion company which he sold in 1994.
Jed Schutz 38 Mr. Schutz has been Chairman of the Board of Nexus since
January 1, 1997 and a Director of Nexus since January
1994. He is a 50% owner and President of Windemere
Development Corp. of Hauppauge, NY, which builds one-
family homes in New York State by itself and with affili-
ated companies. He has been in the real estate business for
more than five years.
Joseph Dolan 59 Mr. Dolan recently retired from Dun & Bradstreet, Inc.
where he worked for 31 years rising to a senior manage-
ment position in D & B's marketing division. He was
elected a Director of Nexus in November 1996. Mr.
Dolan is a consultant to, and a director of, unaffiliated real
estate companies in East Hampton, New York.
Allan Kornfeld 60 Mr. Kornfeld, a certified public accountant and attorney,
was elected a Director of Nexus in November 1996. He
was an accountant and audit partner at Ernst & Young from
1960-1975, a comptroller, Vice President and Senior Vice
President of Ametek, Inc. (NYSE) from 1975-1986 and
then Chief Financial Officer and Executive Vice President
of Ametek from 1986-1994. Presently Mr. Kornfeld is a
member of M & A London, LLC and an independent
consultant on financial matters.
Deborah Knowlton 46 Ms. Knowlton was elected Secretary -Treasurer of Nexus
in June 1997 and is presently serving as Chief Financial
Officer. Previously she has worked with Kenneth Fuld,
President of Medical Financial Corp., on accounting
matters for other companies in which Mr. Fuld was an
executive officer.
-16-
18
Dr. Daniel Elstein, 64, a practicing orthopedic surgeon in Syracuse, NY was
elected a Director of Nexus in November, 1996 and served until October 1997. He
has been the manager and participant for more than 25 years in the development
and ownership of commercial and residential real estate throughout the United
States. He is the operating manager of Gateway Granby, LLC, the company to which
Nexus sold the East Granby, Connecticut office building in February 1996 for
$4,800,000.
ITEM 6. EXECUTIVE COMPENSATION
The following table shows for the years ended February 28, 1997, 1996
and 1995, compensation paid by Nexus, including salaries, bonuses and certain
other compensation, to the only persons who were executive officers in those
periods:
Name and Fiscal Salary Bonus Other Annual
Principal Position Year $ $ Compensation(e)
- ------------------ ----- --------- ------- ---------------
Peter Barotz 1997 121,530(f) - 22,000
President and CEO 1996 111,537 60,000 21,000
until 12/31/96 1995 101,539 - 20,000
Bridget Dewsnap, 1997 60,000 - -
Treasurer, Secretary 1996 58,000 - -
and CFO until 6/1/97 1995 56,000 - -
Seth Grossman, 1997 6,000 - -
President and CEO 1996 - - -
1/1/97 - 2/28/97 1995 -
Jed Schutz, Chairman 1997 6,000
of the Board 1996 - - -
1/1/97 - 2/28/97 1995 - - -
- --------
(e) The amounts in this column represent automobile allowances and certain
unaccountable and reasonable expense allowances.
(f) Peter Barotz's salary during his incumbency as President of Nexus in the
period from March 1, 1994 to December 31, 1996 is shown above and includes for
the two months, from January 1, 1997 to February 28, 1997, the compensation for
his employment contract and consulting agreement with Nexus, which continued
until December 31, 1997. See Note 9C of Notes to Consolidated Financial
Statements.
-17-
19
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since March 1, 1996 Nexus, through its subsidiary PSI Capital Corp.,
sold building lots in Goshen, NY to Windemere in the Pines at Goshen, Inc., a
part of the Windemere Group of construction companies, in which Jed Schutz, a
director of Nexus, is an officer, director and shareholder ("Windemere"). The
total selling price for the Goshen lots, sold in February and August 1996, was
$2,499,150 resulting in a deferred profit of $1,860,270. In addition the Company
received a debenture for $2,499,750 with payment contingent on, and related to,
50% of the profits to be realized on the construction and sale of the homes to
be built on the 165 lots. This $2,499,750 has not been reflected in the
Company's net income nor is it carried as an asset on the balance sheet, because
of its contingent nature. It is management's opinion that this transaction would
be at the same terms had Jed Schutz not been a director of Nexus at the time it
took place.
In February 1996 Nexus sold the property in East Granby, to Gateway
Granby, LLC (see Item 1 herein) at a time when Lester Tanner was a director of
Nexus. Shari Stack, the 44 year old daughter of Lester Tanner, owned then and
now a 24% interest in Gateway Granby, LLC.
ITEM 8. LEGAL PROCEEDINGS
The Company's Yolo subsidiaries filed an action for breach of contract
and conversion in Supreme Court of New York, Westchester County against the
former managing agent of its real property in Hunter N.Y., and corporate
entities controlled by the agent, after the expiration of the agent's option to
purchase the property had expired. The defendants have counterclaimed seeking
damages of over $2,000,000 for not permitting exercise of the option. The option
price was then, and is now, more than twice the total of the value of the
property carried on the books ($1,097,897) and the defendants were not then, and
are not now, able to pay the option price (See Note 5 of the Notes to
Consolidated Financial Statements). The Company had negotiated to sell the
Hunter real estate to the defendants for much less than the option price before
the option had expired, but the defendants were unable to raise the financing
for the purchase. Discovery in the lawsuit has been completed and it is expected
that the matter will be placed on the trial calendar shortly. Company counsel
believes that the counterclaims of the defendants will be dismissed.
On March 25, 1992, PSI Capital Corp. filed in Connecticut for relief
under Chapter 11 of the Bankruptcy Code because RTC, which had taken over the
first mortgage positions of two Connecticut banks, was about to foreclose on the
properties, wiping out the value of the second mortgages held by PSI Capital
Corp. The stay in the Chapter 11 proceeding provided sufficient time to purchase
the first mortgages on the real estate (one of which was the building in East
Granby and the other in Greenwich) for less than the outstanding principal
amount and thereby protect PSI Capital's second mortgage position in the real
estate. A Plan of reorganization has been filed in the Chapter 11 proceeding,
confirmed and PSI Capital Corp emerged from Chapter 11 in October 1997.
-18-
20
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The registrant is unaware of any significant transfers of its common
stock, sales or trading since August 1996 when the shares were released from
escrow. The Company does not know of anyone making a market for its common
stock. After this application has been reviewed by the SEC, the Company plans to
send an Information Statement to its shareholders containing the financial
statements and information in this Form 10 and to seek market makers,
preliminary to its application to list the common stock for trading on NASDAQ.
The Company has never paid dividends on the common stock and there is
no present intention to do so in the foreseeable future.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
The only securities issued by the registrant within the past three
years were the 1,211,635 shares of its common stock issued to shareholders of
PSI pursuant to the Orders of the Federal Court, as described in Item 1 above.
As set forth in the opinion filed herewith as Exhibit 3.10, which was Exhibit
(g) to PSI's Current Report (Form 8-K) dated August 7, 1996, the shares were
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 3(a)(10) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The only authorized capital stock of the Company consists of 2,000,000
shares of common stock, $.10 par value. These are the securities to be
registered. There are issued and outstanding 1,211,635 shares held of record by
1,186 shareholders since August 1996.
The Company believes that it will meet the requirements for listing the
common stock on NASDAQ at such time as the market prices at which the common
stock will have traded in the over-the-counter market will permit, but there is
no assurance that this will occur.
There is no cumulative voting and each share of common stock has one
vote on all matters brought before the shareholders for a vote. There are no
preemption rights in the holders of common stock.
-19-
21
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII of the Company's By-Laws provides indemnification by the
Company for its directors, officers, employees, agents and other persons who may
be indemnified pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware (the "Indemnitee").
Nexus shall, and is obligated to, indemnify and advance the expenses of
the Indemnitee in every situation where it is obligated to do so pursuant to the
aforesaid statutory provisions provided Nexus had made the determination that
the Indemnitee has acted in good faith and in a manner such Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, in the case of any criminal action or proceeding, had not
reasonable cause to believe that such Indemnitee's conduct was unlawful.
See the text of Article VII in the By-laws filed as an Exhibit herein.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required by Regulation S-X and the
supplementary financial information required by Item 302 of Regulation S-K has
been furnished by the Company's independent accountants and the Company. They
are listed in Item 15 and filed as part of this registration statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Nexus has had the same independent accountants since its incorporation
and there have been no disagreements with them on accounting or financial
matters.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The response to this portion of Item 15 is submitted as a
separate Index to Unaudited Financial Statements and Data at page U-1 and a
separate Index to Financial Statements and Schedules at page F-1 hereto.
-20-
22
(b) Exhibits: All of the following exhibits were filed with the
original Form 10, dated June 27, 1997, except Exhibit 10.04
which was filed with Amendment No. 1 to Form 10. The new
consents which are Exhibit 23.01 are being filed herewith.
Exhibit
Number Description
- ------ -----------
3.01 Certificate of Incorporation of the Company.
3.02 Certificate of Amendment of Certificate of Incorporation of the Company.
3.03 Amended By-Laws of the Company.
3.04 Settlement Stipulation dated November 17, 1993.
3.05 Court Order dated November 17, 1993
3.06 Final Judgment and Order Approving Settlement.
3.07 Amendment to Settlement Stipulation.
3.08 Court Order Amending Final Judgment and Order.
3.09 Stipulation and Order Authorizing Release of Shares From Escrow.
3.10 Opinion re release of shares.
4.01 Specimen Common Stock Certificate
5.01 Opinion re legality of common stock.
10.01 Agreement for sale of lots in Goshen, NY to Windemere in the Pines at Goshen, Inc.
10.03 Management Agreement for Wendy's Restaurants.
10.04 Employment and Consulting Agreement of Peter Barotz.
19.01 Letter to shareholders dated January 5, 1996.
19.02 Letter to shareholders dated July 26, 1996.
23.01 Consents of Michael, Adest & Blumenkrantz and Eric Weston.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly cause this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
FRM NEXUS, INC.
(Registrant)
By /s/ Seth Grossman
---------------------------------
March 4, 1998 Seth Grossman, President
-21-
23
FRM NEXUS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENT
NOVEMBER 30, 1997
AND
NOVEMBER 30, 1996
24
INDEX TO UNAUDITED
FINANCIAL STATEMENTS AND DATA
OF FRM NEXUS, INC.
Page
----
This Index U-1
Selected Consolidated Financial Data for the Four Fiscal Years Ended February
28, 1997 and the Nine Months Ended November 30, 1997 and November 30, 1996 and
as of February 28, 1994, 1995, 1996 and 1997
and November 30, 1996 and 1997 U-2
Unaudited Selected Quarterly Consolidated Financial Data for the
four quarters of the Fiscal Year Ended February 28, 1997 and
the three quarters ended November 30, 1997 U-3
Consolidated Balance Sheets as of November 30, 1996 and 1997 U-4,5
Consolidated Statements of Stockholders' Equity For the
Nine Months Ended November 30, 1996 and 1997 U-6
Consolidated Income Statements for the Nine Months
Ended November 30, 1996 and 1997 U-7, 8
Consolidated Statements of Cash Flows for the Nine Months Ended
November 30, 1996 and 1997 U-9, 10
Notes 1-3 to Unaudited Financial Statements U-11 to U-15
U-1
25
FRM NEXUS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Unaudited)
Nine Months Ended Fiscal Year Ended
------------------------------ -------------------------------------------------------------------
Nov. 30, Nov. 30, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1997 1996 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Income Statement
Data:
Total Revenue $ 13,652,031 $ 13,365,835 $ 17,299,472 $ 15,082,650 $14,523,900 $ 14,216,221
============ ============ ============ ============ =========== ============
Earnings (loss)
Before Interest
and Taxes $ (303,549) $ (810,824) $ (1,319,016) $ (257,818) $ 447,524 $ (473,764)
============ ============ ============ ============ =========== ============
Net Income
(loss) $ (199,586) $ (802,980) $ (1,259,009) $ (226,972) $ 417,217 $ (582,805)
============ ============ ============ ============ =========== ============
Net income (loss)
per common share
primary and fully
diluted (a) $ (.16) $ (.66) $ 1.04) $ (.18) $ .34 $ (4.81)
============ ============ ============ ============ =========== ============
Number of
shares used
in computation
of primary and
fully diluted
earnings (a) 1,211,635 1,211,635 1,211,635 1,211,635 1,211,635 1,211,635
============ ============ ============ ============ =========== ============
(Unaudited)
As of As of
---------------------------- --------------------------------------------------------------
Nov. 30, Nov. 30, Feb. 28, Feb. 29, Feb. 28, Feb. 28,
1997 1996 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Balance Sheet
Data:
Working
Capital $ 1,104,613 $ 1,909,206 $ 1,412,696 $ (442,940) $ 319,070 $ (222,561)
=========== =========== =========== =========== ========== ===========
Total Assets $14,361,971 $13,998,993 $13,662,225 $ 9,540,955 $5,428,496 $ 5,158,298
=========== =========== =========== =========== ========== ===========
Long-Term
Debt $ 5,639,624 $ 5,191,315 $ 5,198,530 $ 745,925 $ 144,133 $ 125,697
=========== =========== =========== =========== ========== ===========
Stockholders'
Equity $ 4,147,399 $ 4,803,014 $ 4,346,985 $ 5,616,310 $4,304,209 $ 3,886,992
=========== =========== =========== =========== ========== ===========
Common Shares
Outstanding
(a) 1,211,635 1,211,635 1,211,635 1,211,635 1,211,635 1,211,635
=========== =========== =========== =========== ========== ===========
(a) Common shares outstanding at February 28, 1995 have been restated to give
effect to recapitalization.
The year ended February 28, 1994 included the accounts of FRM Nexus, Inc. from
November 15, 1993, (date of inception) and all of the subsidiaries it acquired
from Programming and Systems, Inc. from March 1, 1993 to February 28, 1994 as
discussed in Note 1B to the consolidated financial statements. The subsidiaries
included are PSI Capital Corp., Wendclark Corp. and PSI Food Services, Inc.,
which in turn own all of the stock of Wendcello Corp.
U-2
26
FRM NEXUS, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
Quarter
-------------------------------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
Year Ended
February 28, 1997:
Net sales $4,054,968 $5,160,186 $4,150,681 $3,933,637
========== ========== ========== ==========
Gross profit $2,301,409 $3,292,737 $2,549,985 $2,513,907
========== ========== ========== ==========
Net Income (loss) $ (616,695) $ 73,410 $ (259,695) $ (456,029)
========== ========== ========== ==========
Primary and fully
diluted earnings
per share $ (.51) $ .06 $ (.21) $ (.38)
========== ========== ========== ==========
Number of shares used in
computation of primary
and fully diluted
earnings (a) 1,211,635 1,211,635 1,211,635 1,211,635
========== ========== ========== ==========
(a) Common shares outstanding give effect to recapitalization.
U-3
27
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
November 30, November 30,
1997 1996
---- ----
CURRENT ASSETS
Cash & cash equivalents $ 1,301,475 $ 2,313,751
Mortgage and notes receivable -- 120,402
Finance receivables, net 2,110,933 1,177,251
Inventories at cost 104,717 105,728
Other current assets 239,965 207,903
----------- -----------
TOTAL CURRENT ASSETS 3,757,090 3,925,035
----------- -----------
FIXED ASSETS
Property, land, and equipment 8,076,840 6,938,256
Less: Accumulated depreciation 2,283,492 1,790,858
----------- -----------
NET BOOK VALUE 5,793,348 5,147,398
----------- -----------
OTHER ASSETS
Real estate held for
development and sale 1,436,883 1,418,170
Mortgage and notes receivable 2,347,034 2,422,034
Loans receivable 86,474 90,126
Unamortized leasehold costs 519,690 559,071
Technical assistance fees 232,560 253,502
Deferred tax asset 74,011 62,268
Other 114,881 121,389
----------- -----------
TOTAL OTHER ASSETS 4,811,533 4,926,560
----------- -----------
TOTAL ASSETS $14,361,971 $13,998,993
=========== ===========
U-4
28
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES & STOCKHOLDER'S EQUITY
November 30, November 30,
1997 1996
---- ----
CURRENT LIABILITIES
Accounts payable and
Accrued expenses $ 820,953 $ 838,189
Notes payable - current maturities 428,735 216,923
Due to finance customers 1,365,208 906,198
Taxes payable 10,059 45,761
Other current liabilities 27,522 8,758
------------ ------------
Total current liabilities 2,652,477 2,015,829
------------ ------------
Other liabilities
Notes payable - less current
maturities 2,457,363 2,219,271
Deferred taxes payable 5,764 8,790
Deferred income 1,910,624 1,910,624
Finance obligation 3,182,261 2,972,044
Other 6,083 69,421
------------ ------------
Total other liabilities 7,562,095 7,180,150
------------ ------------
Total liabilities 10,214,572 9,195,979
------------ ------------
Stockholder's equity
Common stock - $.10 par value;
Authorized - 2,000,000 shares;
Issued and outstanding 1,211,635 121,164 121,164
Capital in excess of par value 5,887,706 5,887,706
Retained earnings (1,861,471) (1,205,856)
------------ ------------
Total stockholder's equity 4,147,399 4,803,014
------------ ------------
Total liabilities and
Stockholder's equity $ 14,361,971 $ 13,998,993
============ ============
U-5
29
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
Total
Additional Retained Stock-
Common Paid-In Earnings holder's
Stock Capital (Deficit ) Equity
-------- ----------- ----------- ---------
Balances
March 1, 1997 $121,164 $ 5,887,706 $(1,661,885) $4,346,985
Net income (loss) for the
nine months ended
November 30, 1997 - - (199,586) (199,586)
-------- ----------- ----------- ----------
Balances
November 30, 1997 $121,164 $ 5,887,706 $(1,861,471) $4,147,399
======== =========== =========== ==========
Balances
March 1, 1996 $121,164 $ 5,887,706 $ (392,560) $5,616,310
Net income (loss) for the
nine months ended
November 30, 1996 - - (802,980) (802,980)
Costs incurred on
behalf of PSI - - (10,316) (10,316)
-------- ----------- ----------- ----------
Balances
November 30, 1996 $121,164 $ 5,887,706 $(1,205,856) $4,803,014
======== =========== =========== ==========
U-6
30
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
Nine months ended
November 30,
1997 1996
---- ----
REVENUE
Restaurant food sales $ 13,010,466 $ 12,503,994
Sale of real estate -- 713,185
Interest from mortgages 110,412 71,074
Income from the purchase
of accounts receivable 531,153 77,582
------------ ------------
Total income 13,652,031 13,365,835
------------ ------------
COST OF SALES
Restaurants 4,369,666 4,400,952
Real estate 51,890 820,752
------------ ------------
Total costs of sales 4,421,556 5,221,704
------------ ------------
Gross profit 9,230,475 8,144,131
------------ ------------
OPERATING EXPENSES
Selling, general and administrative -
Restaurants 7,786,526 7,466,884
Other 1,019,119 842,421
Interest expense 352,045 232,823
Depreciation and amortization 376,334 412,827
------------ ------------
Total costs and expenses 9,534,024 8,954,955
------------ ------------
Income (Loss) from operations before
income taxes and other items (303,549) (810,824)
Interest income 42,728 45,184
------------ ------------
Income (Loss) before income
taxes and extraordinary item (260,821) (765,640)
Provision for (benefit from)
income taxes 30,439 37,340
------------ ------------
Net income (loss) before
extraordinary item (291,260) (802,980)
Extraordinary income, net of
applicable taxes of $-0- 91,674 --
------------ ------------
Net income (loss) $ (199,586) $ (802,980)
============ ============
U-7
31
FRM NEXUS, INC. Cont'd.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
Nine months ended
November 30,
1997 1996
---- ----
Primary and fully diluted net income
(loss) per common share and common
share equivalents
Net income (loss) before extra-
ordinary item $ (.24) $ (.66)
Extraordinary income .08 --
------------- -------------
Net income (loss) $ (.16) $ (.66)
============= =============
Number of shares used in computation
of primary and fully diluted earnings 1,211,635 1,211,635
============= =============
U-8
32
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(UNAUDITED)
November 30, November 30,
1997 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ (199,586) $ (802,980)
Adjustments to reconcile net income to net Cash provided by operating
activities:
Depreciation and amortization 376,334 412,827
Gain on sale of assets -- (191,362)
Deferred interest expense of finance
obligation 73,054 10,368
Deferred income tax expense (benefit) (10,823) (60,272)
(Increase) decrease in inventory (7,507) (17,059)
Acquisition and improvements of real estate
held for development and sale (7,514) (38,135)
Proceeds from sale of real estate
held for development and sale -- 410,753
(Increase) decrease in prepaid expenses
misc. receivables, and other assets 65,803 124,675
Increase (decrease) in accounts payable,
accrued expenses and taxes (71,755) (1,217,130)
Increase (decrease) in deferred income -- (171,591)
Increase (decrease) in other liabilities (61,924) (46,804)
----------- -----------
Net cash provided (used) by
operating activities 156,082 (1,586,710)
----------- -----------
Cash flows from investing activities:
Capital expenditures & intangible assets (965,997) (1,606,549)
Loans to officer 6,052 (2,900)
Increase in finance receivables (872,042) (841,626)
Increase in due to finance customers 407,623 638,876
Principal payments on notes receivable 156,202 9,500
----------- -----------
Net cash provided (used) by
investing activities (1,268,162) (1,802,699)
----------- -----------
Cash flows from financing activities:
Proceeds of notes payable, banks 700,000 1,780,000
Principal payments on notes payable (220,407) (98,913)
Proceeds of finance obligation 160,548 3,002,348
Principal payments of finance obligation (87,805) (140,672)
Cost incurred on behalf of PSI -- (10,316)
----------- -----------
Net cash provided (used) by
financing activities 552,336 4,532,447
----------- -----------
U-9
33
Cont'd
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(UNAUDITED)
November 30, November 30,
1997 1996
---- ----
Net increase (decrease) in cash $ (559,744) $1,143,038
Cash, beginning of period 1,861,219 1,170,713
----------- ----------
Cash, end of period $ 1,301,475 $2,313,751
=========== ==========
Additional cash flow information:
Interest expenses paid $ 231,851 $ 228,770
=========== ==========
Income taxes paid $ 42,158 $ 28,728
=========== ==========
Non-cash investing and financing activities:
Notes receivable from purchases on
real estate sold $ -- $2,085,234
=========== ==========
U-10
34
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
NOTE 1: SIGNIFICANT DISCLOSURES
Except for the following, there have not been any significant changes in the
disclosures that were included in the financial statements as of February 28,
1997:
A. EXTRAORDINARY ITEM:
The Company realized a net gain of $91,674 as a result of extinguishing
certain debts. There was no related tax effect since this occurred as a
result of a discharge in bankruptcy (See note 3G).
B. NOTES PAYABLE:
In October 1997, a $700,000 loan was obtained from a finance company.
The loan was used for construction and payment of fees on the leasehold
that Nexus holds in Granby, CT. The note bears interest at 12% over its
term.
In December 1997, after making 2 payments of $15,571, Nexus made a
prepayment of $238,000. After the prepayment the monthly payment was
reduced to $9,863 per month, including principal and interest for the
remaining term of 60 months. The note is secured by lease payments
received from the tenant, all interests in the Granby property and
purchased medical receivables owned by the medical financing
subsidiary. There were no closing costs in connection with this loan.
Annual principal maturities for this note for the years ended February
28, are as follows:
1998 $ 256,829
1999 69,965
2000 78,843
2001 88,837
2002 100,104
2003 96,851
---------
$ 691,429
=========
NOTE 2: INCOME TAXES
The provision for (benefit from) income taxes consist of the following:
November 30, November 30,
1997 1996
---- ----
Current payable:
Federal $ 0 $ 0
State 41,262 97,612
---------- ----------
Total currently payable 41,262 97,612
---------- ----------
Deferred:
Federal 0 0
State (10,823) (60,272)
---------- ----------
Total deferred (10,823) (60,272)
---------- ----------
Total $ 30,439 $ 37,340
========== ==========
U-11
35
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES
A. FRANCHISE AGREEMENT COMMITMENTS:
The food service subsidiaries are the franchisees for the sixteen
Wendy's Restaurants it owns and operates. The franchise agreements
obligates the subsidiaries to pay to Wendy's International a monthly
royalty equal to 4% of the gross sales of each restaurant during the
month, or $250, whichever is greater.
Additionally, the subsidiaries must contribute to Wendy's National
Advertising Program 2.5% of the gross sales and spend not less than
1.5% of the gross sales of each restaurant for local and regional
advertising. These advertising costs are expensed as incurred.
B. MINIMUM OPERATING LEASE COMMITMENTS:
The Wendy's restaurants entered into various leases, with various
clauses relating to real estate taxes, common charges, renewals and
percentage rent with certain minimum payments.
In June, 1996 the division exercised its option to purchase the land
and buildings of the four restaurants it was leasing from Wendy's for
$1,680,000. The purchase option agreement required Wendy's to be given
the right of first refusal, for a period of twenty years, in the event
the properties are resold.
In July, 1994 Nexus moved its executive offices to office facilities
that are leased under a three year and eight month lease expiring on
February 28, 1998.
Subject to annual real estate adjustments, and additional rent in
excess of base sales, the following is a schedule of future minimum
rental payments required under the above operating leases as of
February 28,:
Year Ending
February
--------
1998 $ 739,436
1999 711,230
2000 714,851
2001 710,180
2002 714,346
Thereafter 6,001,419
Total $ 9,591,462
===========
U-12
36
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONT'D)
B. MINIMUM OPERATING LEASE COMMITMENTS (CONT'D)
On March 1, 1996, pursuant to an agreement for the sale of real estate,
Nexus leased back 50% of the building that was sold for a period of ten
years. The Company is obligated to pay for construction and landscaping
costs necessary to complete the building. The lease calls for monthly
rent payable in the period from March 1, 1996 throughout April 1, 1998,
on the first day of each such month in said period, shall be determined
by the following formula: the sum of (i) $10,500, (ii) the monthly
payments due in said month for principal and interest on the first and
purchase money notes, namely $34,833 and (iii) the operating expenses
payable by the landlord for said month pursuant to this lease and an
existing lease on the remainder of the building, less, (iv) the rent
receivable from the existing lease for said month under that lease.
Commencing May 1, 1998 and for the balance of the term, the annual base
rent on a monthly basis is $35,290.33 per month.
On June 20, 1997, the Company sublet the entire space covered under the
lease, with any profit accruing to the Company. The sublease is part of
the Real Estate Division of the Company.
C. CONTRACTS:
1) The Company has a three year employment contract with one of its
executive officers commencing January 1, 1995 through December 31,
1997. The base salary for this executive is $120,000 in 1996, and
$130,000 in 1997 plus an unaccountable expense allowance of $5,000 per
year, plus any other reasonable expenses. In, addition he received a
bonus of $60,000 in 1996.
2) The Food Service Division subsidiaries have three-year consulting
contracts with one of its executives and another consultant renewed in
1993 providing for a total fee of approximately $1,750 per month, plus
reasonable expenses. At expiration, the agreements are automatically
renewable thereafter for as long as these subsidiaries remain in
business at not less than the current fee.
D. SALE OF REAL ESTATE:
1) The sale of real estate in Granby, CT. includes a note receivable from
the buyer. Upon full collection of the second mortgage receivable in
the amount of $1,825,187, an additional liability will be due and
payable to the co-investors of the original mortgage for approximately
$150,000. If the note is not collected in full, an amount substantially
less will be paid. An accrual is not included for this amount because
there is no obligation to pay the co-investors until full payment of
the note is received.
U-13
37
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONT'D)
D. SALE OF REAL ESTATE (CONT'D):
2) The Company received additional consideration for the land sold in
Goshen, N.Y., which is not included among the notes receivable. This
was a purchase money debenture payable to PSI Capital Corp. for
$2,499,750 which matures on February 28, 2002 together with interest at
the rate of 6% per annum payable at maturity, but subject to increase
or decrease, as set forth below, contingent on the sale of the single
family residences to be built on the 165 lots which were sold. There is
no interest income being accrued on this debenture. The collection of
this purchase money debenture is contingent upon the sale of single
family residences at a profit, therefore, none of this amount is
included in income.
Prior to the maturity date, the principal sum of this debenture shall
be prepaid as each of the single family residences constructed on the
real estate are conveyed to the end purchaser, each such prepayment to
be equal to at least 50% of the net profit to the buyer with respect to
said sale. The buyer agrees to take such action as is necessary to
construct and sell the one family residences and the buyer shall not
sell any portion of the real estate except to an end purchaser of said
residences. Upon the sale of the last residence that is built or could
be built on the real estate, the parties shall compute the amount of
the buyer's net profit on all residences constructed on the real estate
(the "final net profit of the buyer"). If 50% of the final net profit
of the buyer is (i) more that $2,499,750, the excess shall be paid to
the seller at the time or (ii) less than $2,499,750, the deficiency
shall not be payable by the buyer and the debenture shall be deemed
fully paid. At that date the interest shall be adjusted to reflect the
actual principal sum of the debenture already paid.
E. FORMATION OF FRM NEXUS (FORMERLY PSI SETTLEMENT CORP):
In 1993, Shareholders of Programming and Systems, Inc. (PSI) brought a
class action against PSI and certain of its officers in the United
States District Court for the Southern District of New York, which was
settled by a Stipulation of Settlement dated as of November 15,
1993(the "Stipulation"), pursuant to which PSI Settlement Corp. (Nexus)
was formed. On January 21, 1994 Judge Robert Sweet signed the Order
confirming the Stipulation. Pursuant to that Stipulation (i) the
eligible shareholders of PSI received a pro-rata distribution of
$1,400,000, after deduction of the fees and expenses of the class
action, which amounted to fifty cents per share, and (ii) all the
shares of Nexus were delivered to Escrow Agents to hold for the benefit
of all shareholders of PSI. Pursuant to the Orders of Judge Sweet, PSI
transferred certain assets to Nexus as specified in the Stipulation and
the Court's Orders. These payments, including the shares of Nexus,
fully settled all of the claims by PSI shareholders that could have
been asserted against PSI and the other defendants in the class action.
On June 12, 1995 Judge Sweet signed an Order approving an amendment of
the Stipulation which permitted Nexus to operate as an ongoing entity
rather than liquidating its assets, provided the escrowed shares of
Nexus were delivered out to PSI shareholders by June 12, 1997 and
listed for trading on NASDAQ.
U-14
38
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
NOTE 3: COMMITMENTS AND CONTINGENCIES (CONT'D)
E. FORMATION OF FRM NEXUS (FORMERLY PSI SETTLEMENT CORP)(CONT'D):
In addition to settling the class action and making payment to
shareholders, PSI has now settled the action by the Securities and
Exchange Commission against it and resolved the material claims and
lawsuits which arose out of its discontinued vocational school
operations. At the present time, PSI is indebted to (i) the United
States for $1,000,000 by reason of the fraudulent conduct of a former
chief executive officer, (ii) to the Internal Revenue Service for
$416,000 representing excess refunds of income taxes made by IRS to PSI
plus interest thereon and (iii) to a former landlord of a PSI school
for $98,621. While PSI may not be able to pay its debts in full, Nexus
is not responsible for their payment, will defend against any claim
that may be instituted and management believes it will be successful.
F. LITIGATION:
The Yolo Capital subsidiary (Yolo) filed an action against the former
management for breach of management agreements and for conversion of
monies resulting from cutting wood on its property in Hunter, NY. The
defendants have counterclaimed against Yolo for breach of contract,
interference with contract, conversion and conspiring to interfere with
their contracts. The defendants are seeking damages amounting to over
$2,000,000. Yolo's legal counsel believes that the counterclaims will
be dismissed.
G. BANKRUPTCY:
On March 25, 1992, PSI Capital Corp. filed for relief under Chapter 11
of the Bankruptcy Code. This filing was done in order to protect second
mortgage positions on two of the properties. This action provided PSI
Capital Corp., with sufficient time to negotiate with the holders of
prior mortgages and secure PSI Capital Corp's interest in the
properties. A plan of reorganization has been filed and PSI Capital
Corp. expects to complete the Chapter 11 proceeding by the fiscal year
ending February 28, 1998.
H. LOAN GUARANTY:
The proceeds from a mortgage loan obtained by the purchaser of the
property in Granby, CT. were received by the Company in connection with
property's sale. As part of the refinancing, Nexus guaranteed payment
of this mortgage. The initial monthly payment of $16,435 includes
interest and principal. The term of the loan is 25 years.
The interest rate was fixed at closing based upon the five-year U.S.
Treasury Note Constant Maturity Yield plus 2.75% and continues at that
rate for the first five years of the loan. Then repricing at the fifth,
tenth, fifteenth and twentieth year anniversaries at a rate equal to
the then 5-year U.S. Treasury Note Constant Maturity Yield rate on said
anniversary date plus 2.75%. The Interest rate will have a ceiling of
12% and a floor of 7% for the first adjustment (year 6) only.
The amount outstanding with respect to this loan guaranty as of
November 30, 1997 and November 30, 1996 was $1,872,985 and $1,893,558,
respectively.
U-15
39
INDEX TO AUDITED
FINANCIAL STATEMENTS AND SCHEDULES
OF FRM NEXUS, INC.
Page
----
This Index F-1
Consents of Independent Certified Public Accountants F-2 to F-6
Independent Auditors' Reports F-7 to F-11
Consolidated Balance Sheets as of February 28, 1997
and February 29, 1996 F-12, 13
Consolidated Statement of Stockholders' Equity For
the Three Years Ended February 28, 1997 F-14
Consolidated Income Statements For the Three Years
Ended February 28, 1997 F-15
Statements of Cash Flows For The Three Years Ended
February 28, 1997 F-16, 17
Notes 1 through 12 to Consolidated Financial Statements
for the Three Years Ended February 28, 1997 F-18 to F-38
Independent Auditors' Report on Supplementary Information F-39
Schedules:
I - Condensed financial information of registrant (N/A) F-40
II - Valuation and qualifying accounts F-40
III - Real Estate and Accumulated Depreciation F-41
IV - Mortgage Loans on Real Estate F-42
The data required by all other schedules is either included in the
financial statements or is not required.
F-1
40
MICHAEL, ADEST & BLUMENKRANTZ
-----------------------------
CERTIFIED PUBLIC ACCOUNTANTS, P.C.
SEVEN PENN PLAZA
NEW YORK, NEW YORK 10001
212-563-2525 FAX 212-563-3549
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We consent to the incorporation by reference in the Registration Statement on
Form 10 (File No. 0-29346) of FRM Nexus, Inc. and Subsidiaries of our report
dated May 9, 1997, on our audits of the financial statements and schedules of
FRM Nexus, Inc. and Subsidiaries as of February 28, 1997, February 29, 1996 and
for the three fiscal years ended February 28, 1997, 1996 and 1995, which report
is included in this Registration Statement on Form 10.
/s/ Michael, Adest & Blumenkrantz
Michael, Adest & Blumenkrantz,
Certified Public Accountants, P.C.
New York, New York
March 3, 1998
F-2
41
- --------------------------------------------------------------------------------
ERIC L. WESTON
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
I consent to the incorporation by reference in the Registration Statement on
Form 10 (File No. 0-29346) of FRM Nexus, Inc. and Subsidiaries of my report
dated March 25, 1997, on my audits of the financial statements of Wendcello
Corp. as of February 23, 1997 and February 25, 1996 and for the fiscal years
then ended, which report is included in this Registration Statement on Form 10.
/s/ Eric L. Weston
----------------------
Eric L. Weston
Certified Public Accountant
Westbury, New York
March 3, 1998
F-3
42
ERIC L. WESTON
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
--------------------------------------------------
I consent to the incorporation by reference in the Registration Statement on
Form 10 (File No. 0-29346) of FRM Nexus, Inc. and Subsidiaries of my report
dated March 25, 1996, on my audits of the financial statements of Wendcello
Corp. as of February 25, 1996 and February 26, 1995 and for the fiscal years
then ended, which report is included in this Registration Statement on Form 10.
/s/ Eric L. Weston
---------------------
Eric L. Weston
Certified Public Accountant
Westbury, New York
March 3, 1998
F-4
43
ERIC L. WESTON
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I consent to the incorporation by reference in the Registration Statement on
Form 10 (File No. 0-29346) of FRM Nexus, Inc. and Subsidiaries of my report
dated March 25, 1997, on my audits of the financial statements of Wendclark
Corp. as of February 23, 1997 and February 25, 1996 and for the fiscal years
then ended, which report is included in this Registration Statement on Form 10.
/s/ Eric L. Weston
-----------------------------------
Eric L. Weston
Certified Public Accountant
Westbury, New York
March 3, 1998
F-5
44
Eric L. Weston
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
I consent to the incorporation by reference in the Registration Statement on
Form 10 (File No. 0-29346) of FRM Nexus, Inc. and Subsidiaries of my report
dated March 25, 1996, on my audits of the financial statements of Wendclark
Corp. as of February 25, 1996 and February 26, 1995 and for the fiscal years
then ended, which report is included in this Registration Statement on Form 10.
/s/ Eric L. Weston
--------------------
Eric L. Weston
Certified Public Accountant
Westbury, New York
March 3, 1998
F-6
45
FRM NEXUS, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENT
FEBRUARY 28, 1997
AND
FEBRUARY 29, 1996
46
[MICHAEL, ADEST & BLUMENKRANTZ LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of FRM Nexus, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of FRM Nexus, Inc.
and Subsidiaries as of February 28, 1997 and February 29, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended February 28, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Wendclark Corporation and Wendcello Corporation, wholly owned subsidiaries,
which statements reflect total assets of $4,998,033 and $3,423,936 as of
February 28, 1997 and February 29, 1996, respectively, and total revenues of
$16,263,323, $14,536,291 and $14,523,900 for each of the three years in the
period ended February 28, 1997. Those statements were audited by another auditor
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Wendclark Corporation and Wendcello Corporation, is
based solely on the report of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditor, the
financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of FRM Nexus, Inc. and Subsidiaries as
of February 28, 1997 and February 29, 1996, and the results of their operations
and their cash flows for the three years then ended, in conformity with
generally accepted accounting principles.
/s/ Michael, Adest & Blumenkrantz
MICHAEL, ADEST & BLUMENKRANTZ
Certified Public Accountants, P.C.
New York, New York
May 9, 1997
(Except for Note 9B, as to which the date is June 20, 1997)
F-7
47
Eric L. Weston
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Wendclark Corp.
27 Central Avenue
Cortland, New York 13045
I have audited the accompanying balance sheet of Wendclark Corp. (a
wholly-owned subsidiary of FRM Nexus, Inc.) as of February 23, 1997 and
February 25, 1996, and the related statements of income, stockholder's equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wendclark Corp. as of
February 23, 1997 and February 25, 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Eric L. Weston
CERTIFIED PUBLIC ACCOUNTANT
Westbury, New York
March 25, 1997
F-8
48
- --------------------------------------------------------------------------------
Eric L. Weston
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Wendclark Corp.
27 Central Avenue
Cortland, New York 13045
I have audited the accompanying balance sheet of Wendclark Corp. (a
wholly-owned subsidiary of FRM Nexus, Inc.) as of February 25, 1996 and
February 26, 1995, and the related statements of income, stockholder's equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wendclark Corp. as of
February 25, 1996 and February 26, 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Eric L. Weston
CERTIFIED PUBLIC ACCOUNTANT
Westbury, New York
March 25, 1996
F-9
49
Eric L. Weston
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Wendcello Corp.
27 Central Avenue
Cortland, New York 13045
I have audited the accompanying balance sheet of Wendcello Corp. (an
indirect wholly-owned subsidiary of FRM Nexus, Inc.) as of February 23, 1997
and February 25, 1996, and the related statements of income, stockholder's
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wendcello Corp. as of
February 23, 1997 and February 25, 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Eric L. Weston
CERTIFIED PUBLIC ACCOUNTANT
Westbury, New York
March 25, 1997
F-10
50
- --------------------------------------------------------------------------------
Eric L. Weston
Certified Public Accountant
999 Brush Hollow Road
Westbury, New York 11590
Phone: (516) 333-1001
Fax: (516) 997-6380
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Wendcello Corp.
27 Central Avenue
Cortland, New York 13045
I have audited the accompanying balance sheet of Wendcello Corp. (an
indirect wholly-owned subsidiary of FRM Nexus, Inc.) as of February 25, 1996 and
February 26, 1995, and the related statements of income, stockholder's equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require than I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wendcello Corp. as of
February 25, 1996 and February 26, 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Eric L. Weston
CERTIFIED PUBLIC ACCOUNTANT
Westbury, New York
March 25, 1996
F-11
51
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, February 29,
1997 1996
---- ----
ASSETS
CURRENT ASSETS
Cash & cash equivalents $ 1,861,219 $1,170,713
Mortgage and notes receivable 81,202 18,702
Finance receivables, net 1,238,891 484,073
Inventories at cost 97,210 88,669
Other current assets 275,078 344,135
----------- ----------
TOTAL CURRENT ASSETS 3,553,600 2,106,292
----------- ----------
FIXED ASSETS
Property, land, and equipment 7,119,469 5,373,870
Less: Accumulated depreciation 1,960,709 1,429,387
----------- ----------
NET BOOK VALUE 5,158,760 3,944,483
----------- ----------
OTHER ASSETS
Real estate held for
development and sale 1,429,369 2,021,360
Mortgage and notes receivable 2,422,034 448,000
Loans receivable 92,526 87,226
Unamortized leasehold costs 548,685 592,809
Technical assistance fees 248,490 269,747
Deferred tax asset 63,188 1,996
Other 145,573 69,042
----------- ----------
TOTAL OTHER ASSETS 4,949,865 3,490,180
----------- ----------
TOTAL ASSETS $13,662,225 $9,540,955
=========== ==========
See Notes to Consolidated Financial Statements
F-12
52
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, February 29,
1997 1996
---- ----
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and
Accrued expenses $ 888,410 $ 2,086,329
Notes payable - current maturities 244,441 109,182
Due to finance customers 957,585 267,322
Taxes payable - income 14,357 14,751
Other current liabilities 36,111 71,648
------------ -----------
Total current liabilities 2,140,904 2,549,232
------------ -----------
Other liabilities
Notes payable - less current
maturities 2,162,064 645,925
Deferred taxes payable 5,764 8,790
Deferred income 1,910,624 567,363
Finance obligation 3,036,466 100,000
Other 59,418 53,335
------------ -----------
Total other liabilities 7,174,336 1,375,413
------------ -----------
Total liabilities 9,315,240 3,924,645
------------ -----------
Stockholder's equity
Common stock - $.10 par value;
Authorized - 2,000,000 shares;
Issued and outstanding 1,211,635 121,164 121,164
Capital in excess of par value 5,887,706 5,887,706
Retained earnings (1,661,885) (392,560)
------------ -----------
Total stockholder's equity 4,346,985 5,616,310
------------ -----------
Total liabilities and
Stockholder's equity $ 13,662,225 $ 9,540,955
============ ===========
See Notes to Consolidated Financial Statements
F-13
53
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
Total
Additional Retained Stock-
Common Paid-In Earnings holder's
Stock Capital (Deficit) Equity
----- ------- --------- ------
Balances,
February 28, 1994 $ 10,000 $ 4,459,797 $ (582,805) $ 3,886,992
Net income for the
year ended
February 28, 1995 -- -- 417,217 417,217
-------- ----------- ----------- -----------
Balances,
February 28, 1995 10,000 4,459,797 (165,588) 4,304,209
Recapitalization 111,164 (111,164) -- --
Transfer of assets
from then parent -- 1,487,631 -- 1,487,631
Transfer of Yolo
Capital Corp. and Yolo
Equities Corp. -- 51,442 -- 51,442
Net income (loss) for the
year ended
February 29, 1996 -- -- (226,972) (226,972)
-------- ----------- ----------- -----------
Balances
February 29, 1996 121,164 5,887,706 (392,560) 5,616,310
Net income (loss) for the
year ended
February 28, 1997 -- -- (1,259,009) (1,259,009)
Costs incurred on behalf
of PSI -- -- (10,316) (10,316)
-------- ----------- ----------- -----------
Balances
February 28, 1997 $121,164 $ 5,887,706 $(1,661,885) $ 4,346,985
======== =========== =========== ===========
See Notes to Consolidated Financial Statements
F-14
54
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
REVENUE
Restaurant food sales $ 16,263,323 $ 14,536,291 $14,523,900
Sale of real estate 713,185 256,732 --
Rental income -- 21,458 --
Interest from mortgages 106,443 14,312 --
Income from the purchase of
accounts receivable 216,521 253,857 --
------------ ------------ -----------
Total income 17,299,472 15,082,650 14,523,900
------------ ------------ -----------
COST OF SALES
Restaurants 5,687,138 4,973,113 4,854,252
Real estate 954,296 136,805 --
------------ ------------ -----------
Total costs of sales 6,641,434 5,109,918 4,854,252
------------ ------------ -----------
Gross profit 10,658,038 9,972,732 9,669,648
------------ ------------ -----------
OPERATING EXPENSES
Selling, general & administrative -
Restaurants 9,794,793 9,298,403 8,705,224
Other 1,231,115 448,839 136,164
Interest expense 350,948 46,098 16,384
Depreciation and amortization 600,198 437,210 364,352
------------ ------------ -----------
Total costs and expenses 11,977,054 10,230,550 9,222,124
------------ ------------ -----------
Income (loss) from operations before
income taxes and other items (1,319,016) (257,818) 447,524
Interest income 72,077 59,094 39,697
------------ ------------ -----------
Income (loss) before income taxes (1,246,939) (198,724) 487,221
Provision for income taxes 12,070 28,248 70,004
------------ ------------ -----------
Net income (loss) $ (1,259,009) $ (226,972) $ 417,217
============ ============ ===========
Net income per common share and
common share equivalents (a)
Primary and fully diluted $ (1.04) $ (.18) $ .34
============ ============ ===========
Number of shares used in computation
of primary and fully diluted
earnings (a) 1,211,635 1,211,635 1,211,635
============ ============ ===========
(a) Common shares outstanding at
February 28, 1995 have been restated
to give effect to recapitalization.
See Notes to Consolidated Financial Statements
F-15
55
FRM NEXUS, INC.
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(1,259,009) $ (226,972) $ 417,217
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 600,198 437,210 364,352
Gain on sale of assets (191,362) (1,478,263) --
Deferred income tax expense (benefit) (64,218) 13,611 (6,817)
(Increase) decrease in inventory (8,541) (12,231) 97
Acquisition of real estate held
for development and sale (49,334) (22,400) (3,462)
Proceeds from sale of real estate
held for development and sale 410,753 159,000 164,189
(Increase) decrease in prepaid expenses
misc. receivables, and other assets 34,710 477,705 8,145
Increase (decrease) in accounts payable,
accrued expenses and taxes (1,198,313) 1,351,330 (136,601)
Increase (decrease) in deferred income 127,354 -- --
Increase (decrease) in other liabilities (29,454) (6,198) (9,239)
----------- ----------- ---------
Net cash provided (used) by
operating activities (1,627,216) 692,792 797,881
----------- ----------- ---------
Cash flows from investing activities:
Capital expenditures & intangible assets (2,075,117) (797,207) (300,092)
Loans to officer (5,300) (16,886) (14,617)
Increase in finance receivables (882,172) (309,561) (174,512)
Increase in due to finance customers 690,263 210,960 71,678
Principal payments on notes receivable 12,500 75,000 --
Cash received in transfer of Yolo -- 4,190 --
----------- ----------- ---------
Net cash provided (used) by
investing activities (2,259,826) (833,504) (417,543)
----------- ----------- ---------
Cash flows from financing activities:
Proceeds of notes payable, banks 1,780,000 550,000 --
Principal payments on notes payable (128,602) (58,696) (298,473)
Proceeds of finance obligation 3,054,597 100,000 --
Principal payments on finance obligation (118,131) -- --
Increase (Decrease) in due to then Parent -- (71,678) 56,362
Cost incurred on behalf of PSI (10,316) -- --
----------- ----------- ---------
Net cash provided (used) by
financing activities 4,577,548 519,626 (242,111)
----------- ----------- ---------
See Notes to Consolidated Financial Statements
Cont'd
F-16
56
FRM NEXUS, INC.
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Net increase (decrease) in cash 690,506 378,914 138,227
Cash, beginning of year 1,170,713 791,799 653,572
------------ ---------- --------
Cash, end of year $ 1,861,219 $1,170,713 $791,799
============ ========== ========
Additional cash flow information:
Interest expense paid $ 340,625 $ 34,652 $ 16,384
============ ========== ========
Income taxes paid $ 49,322 $ -- $ 68,783
============ ========== ========
Non-cash investing and financing activities:
Assets acquired under capital lease $ -- $ 94,549 $124,254
============ ========== ========
Transfer of assets from then parent $ -- $1,487,631 $ --
============ ========== ========
Transfer of Yolo subsidiaries $ -- $ 51,442 $ --
============ ========== ========
Purchase money note given on realty
acquisition $ -- $ -- $ 45,000
============ ========== ========
Notes receivable from purchasers on
real estate sold $ 2,055,130 $ 541,702 $ --
============ ========== ========
See Notes to Consolidated Financial Statements
F-17
57
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of FRM Nexus,
Inc. (the "Company" or "Nexus") and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
B. BUSINESS ACTIVITIES OF THE COMPANY:
The Company was incorporated in November 1993 under the laws of the State of
Delaware to settle a class action (See Note 9E) against Programming and
Systems, Inc. (PSI), in order to liquidate certain assets in favor of the
shareholder class in settlement of the class action (See Note 11). However,
pursuant to Court Order Nexus is no longer under the obligation to
liquidate. Nexus intends to list its common stock on NASDAQ and operate as
an ongoing entity. The assets transferred to Nexus included PSI Capital
Corp. and PSI Food Services, Inc. which in turn own all of the stock of
Wendcello Corp., and Wendclark Corp. In 1995, an additional subsidiary,
Medical Financial Corp. was formed.
Yolo Capital Corp. and Yolo Equities Corp. held minor interests in the same
property that the Company owns in Hunter, NY (See Note 5A). The shares of
Yolo Capital Corp. and Yolo Equities Corp. were owned by the president of
Nexus. In 1996, 100% of the shares of Yolo Capital Corp. and Yolo Equities
Corp. were given to Nexus with Nexus not paying any consideration for these
shares. The assets and liabilities that were acquired were recorded at
historical cost which is equal to the current fair market value at the time
of transfer. The net assets acquired were recorded as an addition to paid in
capital.
On February 26, 1996, the Company amended its certificate of incorporation
as follows:
1) The Company changed its name from PSI Settlement Corp. to FRM Nexus,
Inc.
2) The Company increased authorized capital stock from 75,000 shares, par
value $1.00 per share, to 2,000,000 shares common stock of the par
value of ten cents (.10) per share.
All of the outstanding shares of stock of the Corporation, consisting
of 10,000 shares of stock of PSI Settlement Corp., of the par value of
$1 per share, registered in the name of one shareholder, be changed
into such number of shares of common stock of FRM Nexus, Inc. of the
par value of .10 per shares as shall be determined by the Board of
Directors of the Corporation, namely 1,211,635 shares of common stock.
These shares had been held in escrow for the benefit of the
shareholders of PSI since the settlement of the class action in January
21, 1994. On August 12, 1996, the shares were released from escrow to
shareholders of PSI.
F-18
58
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
1) The Food Services Companies consist of Wendclark Corp. and Wendcello
Corp.
Wendclark Corp. was incorporated in West Virginia on March 22, 1990.
Wendcello Corp. was incorporated in New York on June 25, 1990. The food
service companies were formed to acquire, own and operate eleven
existing Wendy's Old Fashioned Hamburger Restaurants in West Virginia
and the Hudson Valley, New York area. Six of the restaurants were
acquired from a franchisee of Wendy's International and five were
acquired from a subsidiary of Wendy's International. In addition, the
companies constructed 3 new restaurants which opened between December
1990 and November 1992. During fiscal 1996, two additional restaurants
were opened.
On June 21, 1996, Wendclark Corp. exercised its option to purchase the
land and buildings of the four restaurants it was leasing from Wendy's
International (See Note 7B-4).
The Food Service Companies' day-to-day operations are managed by
Management Corporations, which are affiliated to the extent set forth
in Note 8A.
2) The real estate business is conducted by PSI Capital Corp, Yolo Capital
Corp. and Yolo Equities Corp. PSI Capital Corp. was incorporated in
April, 1989 for the purpose of extending first and subordinate real
estate mortgages. These mortgages were subsequently foreclosed and the
properties were sold except for two parcels in Brookfield, Connecticut
(See Note 5). Yolo Capital Corp. and Yolo Equities Corp. hold
beneficial interest in trusts, own real estate and hold mortgages on
real estate parcels in Hunter, New York. The properties in Hunter, New
York and Brookfield, Connecticut are currently held for development and
sale.
3) Medical Financial Corp was incorporated in New York on January 12,
1995. The Company purchases the insurance claims receivable of medical
practices.
C. REVENUE RECOGNITION:
1) Food Service Companies:
The accrual method of accounting is used to record all income.
2) Real Estate:
The full accrual method is used on the sale of real estate if the
profit is determinable, the Company is not obligated to perform
significant activities after the sale to earn the profit and there is
no continuing involvement with the property. If the buyers initial and
continuing investments are inadequate to demonstrate a commitment to
pay for the property, the installment method is used, resulting in the
deferral of income. If there is continuing involvement with the
property, the financing method is used.
The minimum initial investment is as follows:
Primary residential property 5%
Secondary residential property 10%
Land and buildings held for commercial or residential development 20%
F-19
59
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
3) Purchase of Accounts Receivable:
A fee is charged to customers upon the purchase of its accounts
receivable by the company. This income is recognized over the period in
which the accounts receivables are collected. The portion of fee income
that is recognized is proportionate to the portion that the receivable
collected bears to the total receivable purchased. The unrecognized fee
is shown as deferred fee income. The deferred fee income is netted
against finance receivables (See Note 3).
D. RECEIVABLES:
1) Real Estate:
The Company evaluates the credit positions on its notes receivable and
the value of the related collateral on an on going basis. The Company
estimates that all of its notes receivable are fully collectible and
the collateral is in excess of the related receivables.
2) Purchase of Accounts Receivable:
The Company purchases the net collectible value of accounts receivable,
on a limited recourse basis. The recourse basis is limited to the
extent any receivables purchased by the Company are disputed and/or
referred to arbitration proceedings. Such receivables are deemed to be
invalid and are immediately substituted. The Company is still entitled
to the collection of its fees from customers regardless of whether the
underlying accounts receivable are collectible or invalid.
Upon full collection of the advance paid in connection with the
purchased accounts receivable and the related fee, the contracts allow
for accounts receivable that are determined to be invalid and remain
unpaid for a specified period of time to be returned (charged back) to
the customer. The charge back will also reduce the amount due to the
customer.
Allowance for loan losses is increased by charges to income and
decreased by charge off (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the customer's ability to repay, the
estimated value of any underlying collateral and current economic
conditions.
E. INVENTORIES:
Inventories of food and supplies are stated at the lower of cost or market.
Amounts are relieved from inventory using the FIFO basis.
F-20
60
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
F. PROPERTY, LAND, EQUIPMENT AND DEPRECIATION:
Property, Land and equipment are stated at cost. Depreciation is provided by
application of the straight-line method over estimated useful lives as
follows:
Buildings 39 years
Land improvements 15 years
Leasehold improvements 10-22 years
Restaurant equipment 7 years
Computer equipment 5 years
Transportation equipment 5 years
G. REAL ESTATE HELD FOR DEVELOPMENT AND SALE:
Property and mortgages are carried at the lower of cost or market, less the
costs to sell. The methods for valuing property and mortgages where current
appraisals are unobtainable, is based on management's best judgements
regarding the economy and market trends. These factors cannot be precisely
quantified and verified. As a result, estimates may change based on ongoing
evaluation of future economic and market trends. Such judgements are based
on management's knowledge of real estate markets in general and of sale or
rental prices of comparable properties in particular.
H. LEASES:
Leases which transfer substantially all of the risks and benefits of
ownership are classified as capital leases, and assets and liabilities are
recorded at amounts equal to the lesser of the present value of the minimum
lease payments or the fair value of the leased properties at the beginning
of the respective lease terms. Such assets are depreciated in the same
manner as owned assets. Interest expense relating to the lease liabilities
is recorded to effect constant rates of interest over the terms of the
leases. Leases which do not meet such criteria are classified as operating
leases and the related rentals are charged to expense as incurred.
I. LEASEHOLD COSTS:
The Company has capitalized the applicable costs and related expenses of
acquiring the leases for its various restaurants and is amortizing them over
the terms of the applicable leases, ten to twenty years.
J. TECHNICAL ASSISTANCE FEES:
Technical Assistance Fees, represented initial franchise fees paid to
Wendy's International at the inception of each franchised location, are
capitalized and amortized on a straight-line basis over fifteen to twenty
years, the term of the franchise.
K. INCOME TAXES:
Deferred income taxes are recognized for all temporary differences between
the tax and financial reporting bases of the Company's assets and
liabilities based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
The Company accounts for such deferred taxes pursuant to Financial
Accounting Standards Board Statement No. 109.
F-21
61
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
L. CASH AND CASH EQUIVALENTS:
For purposes of the statement of cash flows, the company considers all
highly-liquid, short-term investments with an original maturity of three
months or less to be cash equivalents.
M. CONCENTRATION OF RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, commercial paper
maturing in less than 90 days and trade and notes receivables.
As of February 28, 1997, the Company had concentrations of cash in bank
balances totaling approximately $463,000 located at one bank, under two
different accounts which exposes the Company to concentrations of credit
risk.
All trade receivables arise from the purchase of insurance claims receivable
from several medical groups in the New York City area. The insurance claims
are from various insurance companies.
All note receivables are from the sale of real estate in New York and
Connecticut. One purchaser accounts for approximately 92% of the total notes
receivable (See Note 2).
The Company's restaurant operations are all located in West Virginia and the
Hudson Valley area of New York.
N. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
O. FINANCE OBLIGATION:
The Company entered into a sales-leaseback transaction that contained
continuing involvement with the property that was sold. The Company
guaranteed the mortgage of the buyer-lessor and sublet the property that was
included in the lease-back (See Note 9B). The continuing involvement in the
property precludes the use of sales-leaseback accounting, therefor no sale
is recognized.
The Company is using the financing method to report this transaction. The
historical cost of the asset remains on the books of the Company and is
currently being depreciated. The proceeds from the sale is reported as an
interest bearing finance obligation at the rate of 8.25%. Rental payments to
the buyer-lessor are applied against the finance obligation. The Company
will continue to defer the sale of this property until such time that all
continuing involvement ceases.
F-22
62
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 2: NOTES RECEIVABLE
The Company has notes and mortgages receivable arising from the sale of real
estate (See Notes 5 and 8C). These notes have various terms for payments of
principal and interest and are collateralized by the underlying real estate.
These notes bear interest ranging from 6% to 14%. The Company recognizes
interest income on these notes on the accrual basis. These notes mature as
follows:
1998 $ 81,202
1999 2,403,900
2000 18,134
-----------
$ 2,503,236
===========
The Company continually evaluates its notes receivable that are 90 days past
due as to the collectibility of principal and interest. The Company
considers the financial condition of the debtor, the outlook of the debtor's
industry, decrease in the ratio of collateral values to loans and any prior
write downs on loans. The above considerations are all used in the
determination as to whether the accrual method should be suspended on any
notes receivable.
As of February 28, 1997 and February 29, 1996, all notes receivable were
performing. There is no allowance for loss because the market value of the
collateral, less costs to sell is greater than the related notes receivable.
There is no known information about possible credit problems of debtors
which would cause management to have serious doubts as to the ability of
such debtors to comply with the present note repayment terms.
The notes receivable consist of the following:
Goshen, NY (Construction Company) $ 2,310,000
Pound Ridge, NY (Individual) 150,000
Middletown, CT (Individual) 43,236
-----------
$ 2,503,236
===========
In addition to the above notes, an additional second mortgage receivable in
the amount of $1,854,834 is due from the sale of a building in Granby, CT.
The Company is precluded from recognizing the sale from this transaction
because of continuing involvement with the property (See Note 1-O). This
transaction is being reported as a financing. All payments received under
this note are added to the finance obligation. This note was performing as
of February 28, 1997.
F-23
63
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 2: NOTES RECEIVABLE
An analysis of the allowance for loan losses is as follows:
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Balance at the beginning
of period $-- $ -- $--
Charge-offs:
Real estate-construction -- -- --
Real estate-individual mortgages -- -- --
--- ------ ---
-- -- --
--- ------ ---
Recoveries:
Real estate-construction -- -- --
Real estate-individual mortgages -- -- --
--- ------ ---
-- -- --
--- ------ ---
Net charge-offs -- -- --
-- ------ --
Additions charged to operations -- -- --
-- ------ --
Balance at end of period $-- $ -- $--
=== ====== ===
Ratio of net charge-off during
the period to average loans
outstanding during the period 0% 0% 0%
=== ====== ==
There were no changes in the allowance for loan losses because all loans
were performing.
An analysis of the allocation of the allowance for loan losses is as
follows:
February 28, February 29, February 28,
1997 1996 1995
----------------------- ---------------------- ---------------------
Percent of Percent of Percent of
loans in loans in loans in
each each each
category category category
Balance at end of period to total to total to total
Applicable to: Amount loans Amount loans Amount loans
- -------------- ------ ----- ------ ----- ------ -----
Domestic
Real estate-
construction $ -- 92% $ -- 39% $ -- --
Real estate-
individual
mortgages -- 8% -- 61% -- --
Foreign -- -- -- -- -- --
Unallocated -- -- -- -- -- --
---- -- ------- --- ------- --
100% 100% --
===== ==== ==
F-24
64
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 3: FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
Finance receivables consists of the following:
February 28, February 29,
1997 1996
---- ----
Purchase of accounts receivable $ 1,511,463 $ 629,291
Allowance for credit losses (145,218) (145,218)
Deferred finance income (127,354) --
----------- ---------
Finance receivables, net $ 1,238,891 $ 484,073
=========== =========
NOTE 4: PROPERTY, LAND AND EQUIPMENT
Property, Land and equipment consists of the following assets:
February 28, February 29,
1997 1996
---- ----
Land $ 920,000 $ 230,000
Land improvements 296,600 90,100
Buildings 2,377,790 1,877,725
Restaurant equipment 2,571,281 2,336,106
Leasehold improvements 683,210 588,204
Computer equipment 47,985 29,132
Register systems under capital leases 218,803 218,803
Transportation 3,800 3,800
---------- ----------
Total 7,119,469 5,373,870
Less: Accumulated depreciation 1,960,709 1,429,387
---------- ----------
Property and equipment, net $5,158,760 $3,944,483
========== ==========
NOTE 5: REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The borrowers on several mortgages defaulted on their loan payments and the
Real Estate Division (the division) successfully foreclosed on the
underlying properties. These properties have been capitalized at the value
of the mortgage debt. Some of the properties have been written down to fair
market value where the capitalized value exceeded the fair market value.
The foreclosed properties are shown net of co-investors. Co-investors were
used to finance the original mortgages receivable. Upon foreclosure, when
the recovery is for a lesser amount than the principal amount of the
mortgage, the division agreed that the first 10-15% of the losses, if any,
upon the liquidation of the collateral, shall be borne by it.
F-25
65
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 5: REAL ESTATE HELD FOR DEVELOPMENT AND SALE (CONT'D)
The following properties are included in real estate held for development
and sale:
February 28, February 29,
1997 1996
---- ----
A. Hunter, NY $ 1,097,897 $ 1,072,897
B. Brookfield, CT 476,472 455,559
C. Goshen, NY -- 306,304
D. Pound Ridge, NY -- 225,000
E. Middletown, CT -- 186,600
F. Granby, CT -- --
----------- -----------
1,574,369 2,246,360
Less: Due to co-investors (145,000) (225,000)
----------- -----------
$ 1,429,369 $ 2,021,360
=========== ===========
There has been no allowance for losses since February 28, 1994, when all of
the real estate was written down to the lower of cost or market, less costs
to sell.
A. HUNTER, NY
These are condominium units and land held for development and sale at the
base of Hunter Mountain in Greene County, New York (See Note 9F).
B. BROOKFIELD, CT
These are two parcels of land in Brookfield, Connecticut. The original
mortgage of $430,000 was held, less $70,000 due to co-investors. The Company
foreclosed upon the property. Current appraisals for the two parcels of land
are for $290,000 and $225,000. The property is valued at the face value of
the mortgage plus foreclosure costs and capitalized costs on the balance
sheet because this amount is less than its fair market value.
C. GOSHEN, NY
A first mortgage was held on 90% of a parcel of land in Goshen, New York,
and a second mortgage on 10% of this same property. The property had been
foreclosed upon and was owned by the division. An action was instituted
against the village of Goshen to enforce a subdivision plan for the
property. During fiscal year 1994 this property had been written down to
$380,000 which represented its fair market value as vacant land. During
fiscal year 1996, 32 lots of the 165 lots were sold for $484,800, reducing
the $380,000 to $306,304 representing the amount at which the remaining 133
lots are included above. During fiscal 1997, the remaining lots were sold
for $2,014,950 (See Notes 2 and 9D).
The consideration received did not satisfy the initial investment criteria
which would be required in order to use the full accrual method of profit
recognition. The sale was accounted for using the installment method,
resulting in a deferral of income until the initial and continuing
investment criteria is sufficient (See Note 1D and 8C). The balance of
long-term deferred income at February 28, 1997 and February 29, 1996 was
$2,317,248 and $567,363, respectively. For the years ended February 28, 1997
and February 29, 1996, $152,950 and $36,200 was collected which resulted in
the recognition of income in the amounts of $110,385 and $30,372,
respectively.
F-26
66
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
D. POUND RIDGE, NY
The division held the first mortgage on four acres of residential land in
Pound Ridge, New York. During fiscal 1994 this property had been written
down to $225,000 based upon an appraisal. This property was sold during
fiscal 1997 for $225,000 (See Note 2).
E. MIDDLETOWN, CT
The division held the first mortgage on seven parcels of land in Middletown,
Connecticut, and the third mortgage on the home of the borrower. The amount
of the mortgages were for $550,000, less $40,000 due to participants. Based
upon appraisals this property had been written down to $300,000. It was then
owned by the division as a result of the foreclosure of the mortgages.
During fiscal year 1996, two properties were sold, leaving a balance of
$186,600. During fiscal 1997, the remaining property was sold.
F. GRANBY, CT
This was a partially built office building in Granby, Connecticut, which FRM
owned as a result of the foreclosure of the first mortgage on the property
which was acquired for approximately $1,000,000. Based on a current
appraisal the property had been written down to $900,000 during fiscal 1994.
This property was sold during fiscal 1996 for $4,800,000 (See Notes 2, 9D-1,
and 9H). Due to continuing involvement with this property as discussed in
Note 1-O, the sale of the property was not recognized and is being accounted
for using the financing method.
NOTE 6: LOANS RECEIVABLE
Wendcello Corp. has made certain loans to its President who is not an
officer or director of Nexus. At February 28, 1997 and February 29, 1996
$92,526 and $87,226 were outstanding. Included in this amount was $5,300 of
interest accrued at 9% per annum. The loans have no specific repayment terms
and are accordingly reported as non-current.
NOTE 7: NOTES PAYABLE
The Food Service Companies entered into the following notes and capital
leases payable:
A. CAPITAL LEASES PAYABLE:
1) In January 1995, they entered into a lease for new cash register
systems. Sixty payments of $2,442 commenced April 1995. At the
conclusion of the lease, the equipment may be purchased for
$12,150. This lease was capitalized including the purchase option
utilizing an imputed interest rate of 9.37%.
2) In May 1995, additional new cash register systems were leased.
Sixty payments of $1,936 commenced June 1995. At the conclusion of
the lease, the equipment may be purchased for $8,797. This lease
was capitalized including the purchase option utilizing an imputed
interest rate of 10.8%.
F-27
67
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 7: NOTES PAYABLE (CONT'D)
A. CAPITAL LEASES PAYABLE (CONT'D):
Minimum lease payments including imputed interest and principal through
maturity are as follows:
Year-Ending Minimum Amounts Representing
February Lease-Payments Interest Principal
-------- -------------- -------- ---------
1998 $ 52,535 $ 13,977 $ 38,558
1999 52,535 9,944 42,591
2000 52,535 5,486 47,049
2001 27,798 451 27,347
--------- -------- ---------
Total $ 185,403 $ 29,858 $ 155,545
========= ======== =========
B. NOTES PAYABLE:
1) Bank:
A loan for $350,000 was used to finance the renovations and equipment
of a restaurant in Chester, New York. This loan is for a term of five
years and is payable in monthly principal payments of $4,167 plus
interest at 1% above prime through September 29, 2000 at which time a
balloon payment of $100,000 plus accrued interest is due. The loan is
secured by all the inventory, furniture, fixtures and equipment of
Wendcello and is guaranteed by the three executive officers.
2) Bank:
On May 1, 1995, a loan for $200,000 from a local bank pursuant to a
promissory note and term loan agreement. The note is for a term of ten
years, bearing interest at one percent above the prime rate. Monthly
principal payments of $2,755 including interest commenced June 1, 1995.
The note is secured by all the personal property at the new
Martinsville, West Virginia restaurant and is guaranteed by the
Wendclark's Chairman, President and Vice President.
3) Purchase Money Note Payable:
The consideration for the land purchased to extend a Wendy's parking
lot was $50,000, of which $5,000 was paid in cash and the balance by
delivery of five-year, 5%, $45,000 purchase money note secured by a
deed of trust. The note is payable in five annual installments of
$10,394 on April 1, 1995 through 1999.
F-28
68
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 7: NOTES PAYABLE (CONT'D)
B. NOTES PAYABLE (CONT'D):
4) Mortgage Payable:
In June 1996, a loan was obtained for new financing in the aggregate
amount of $1,680,000. The loan was used to exercise the option to
purchase the land and buildings of the four restaurants leased from
Wendy's (See Note 9B). The loan bears interest at 9.25% over its term
and requires 60 monthly payments of $15,387 including principal and
interest calculated on a 20 year amortization basis. A balloon payment
will be required after five years. The loan, which required an $8,400
origination fee in addition to other closing costs aggregating $41,913,
is secured by a first deed of trust on the realty of and the equipment
at the four restaurants and is guaranteed by Wendclark's three
executive officers. The loan agreement imposes various affirmative and
negative covenants upon Wendclark relating to the conduct of business,
maintenance of insurance, submission of financial statements of
Wendclark and its guarantors, compliance with certain financial ratios,
restrictions on dividends, management fees and the sale of Wendclark's
outstanding capital stock.
5) Medical Financial Corp., Bank:
A $300,000 line of credit was obtained from a bank. The line expires on
August 30, 1997 and bears interest at the rate of prime plus 1.5%. The
line is collateralized by a blanket lien on all of Medical Financial
Corp's assets and is guaranteed by FRM. The bank may withdraw this
line, if at any time the bank determines the collateral to be
inadequate, deems itself insecure or at any time after the occurrence
of an event of default. There were no commitment fees paid in
connection with this line of credit.
The amounts outstanding on all of the capital leases and notes payable were as
follows:
February 28, February 29,
1997 1996
---- ----
Capital leases $ 155,545 $191,852
Bank loans-term 460,570 526,539
Bank loan-Credit line 100,000 --
Purchase money note 28,219 36,716
Mortgaged real estate 1,662,171 --
--------- --------
2,406,505 755,107
Less current maturities 244,441 109,182
--------- --------
Long-term debt $2,162,064 $645,925
========== ========
Annual principal maturities for all of these notes as referred to above for the
years ended February 28, are as follows:
1998 $ 205,883
1999 111,159
2000 116,956
2001 200,434
2002 1,536,370
Thereafter 80,158
----------
$2,250,960
==========
F-29
69
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 8: RELATED PARTY TRANSACTIONS
A. MANAGEMENT AGREEMENT:
The day-to-day operations of the Food Service Division are managed by
Cello and Clark Management Corps., respectively. The management
companies are affiliated with the subsidiaries in that certain of its
officers and/or directors (none of whom are officers or directors of
Nexus) are also officers and/or directors of the subsidiaries. The
management agreement took effect upon the purchase of the restaurants
and is to remain in effect as long as the subsidiaries continue to own
the restaurants.
The management agreement grants the management company complete
authority with respect to day-to-day operations, all of which is
carried out under the subsidiaries' name. Any non-routine matters such
as the purchase or sale of real property or fixed assets, assignment or
sublease of a lease, any proposed borrowing or financing or
participation in a joint venture including the exercise of the purchase
option granted by the seller or Wendy's requires the joint approval of
the subsidiaries' and the management company.
The management agreement provides for a basic fee equal to thirty
percent in Wendcello and forty percent in Wendclark of pre-tax cash
flow determined annually and paid on an estimated basis quarterly to be
adjusted when annual results are known. The management fees were $
68,600 in 1997, $117,500 in 1996 and $178,000 in 1995. The agreement
further provides for an incentive fee equal to thirty and forty percent
of the pre-tax proceeds of the sale or refinancing of any assets owned
or later acquired by the subsidiaries less any amounts used to buy
replacement assets or to pay off any refinanced obligations. Whenever
basic or incentive fees are paid, the subsidiaries must pay a dividend
to its parent equal to two and one-third times and one and one-half
times the amount of the fee paid to Cello and Clark Management Corps.,
respectively.
The agreement further provides that in the event the subsidiaries
exercise the purchase option for the real property granted by Wendy's
International, the parent Company and the management company shall
share in the capital funding thereof (that is, for the portion which
cannot be financed through third parties). For any period in which cash
flow is negative, working capital advances shall be made to the
subsidiaries by its parent and management company in the ratio of 7 to
3 and 3 to 2 for Wendcello and Wendclark, respectively.
F-30
70
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 8: RELATED PARTY TRANSACTIONS (CONT'D)
B. CONSULTING AGREEMENT:
Wendclark has a three-year consulting contract with its Chairman (who
is not an officer or director of Nexus) renewed in 1996 through March
31, 1999 providing for a monthly fee of $1,150 plus reasonable
expenses. For fiscal 1997, 1996 and 1995, $13,650, $12,600 and $12,550
were incurred pursuant to this contract. At expiration, the agreement
is automatically renewable for as long as Wendclark remains in business
at not less than the current fee.
C. NOTES RECEIVABLE:
The transaction involving the sale of land in Goshen, NY (See Notes 1C
and 5C) and the related note receivable (See Note 2) was with Windemere
in the Pines at Goshen, Inc., a part of the Windemere Group of
construction companies, in which Jed Schutz, a director of Nexus, is an
officer, director and shareholder. This sale was accounted for using
the installment method since recovery of the cost of the property is
reasonably assured if the buyer defaults on the notes receivable (See
Note 1C-2). The selling price of this land was $2,014,950 in fiscal
1997 and $484,200 in fiscal 1996, resulting in a deferred profit of
$1,453,646 in fiscal 1997 and $406,624 in fiscal 1996 (See Note 9D-2).
$110,385 of the deferred profit was recognized in fiscal 1997 and
$30,372 was recognized in fiscal 1996. The balance of the notes
receivable at February 28, 1997 and February 29, 1996 were $2,310,000
and $448,000, respectively. It is management's opinion that this
transaction would be at the same terms had the parties not been
related.
NOTE 9: COMMITMENTS AND CONTINGENCIES
A. FRANCHISE AGREEMENT COMMITMENTS:
The food service subsidiaries are the franchisees for the sixteen
Wendy's Restaurants it owns and operates. The franchise agreements
obligates the subsidiaries to pay to Wendy's International a monthly
royalty equal to 4% of the gross sales of each restaurant during the
month, or $250, whichever is greater.
Additionally, the subsidiaries must contribute to Wendy's National
Advertising Program 2.5% of the gross sales and spend not less than
1.5% of the gross sales of each restaurant for local and regional
advertising. These advertising costs are expensed as incurred.
B. MINIMUM OPERATING LEASE COMMITMENTS:
The Wendy's restaurants entered into various leases, with various
clauses relating to real estate taxes, common charges, renewals and
percentage rent with certain minimum payments.
Rent expense for these restaurants, were as follows:
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Base rentals $ 729,000 $665,750 $638,750
Contingent rentals 277,607 324,717 347,900
---------- -------- --------
Total $1,006,607 $990,467 $986,650
========== ======== ========
F-31
71
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONT'D)
B. MINIMUM OPERATING LEASE COMMITMENTS (Cont'd):
In June, 1996 the division exercised its option to purchase the land
and buildings of the four restaurants it was leasing from Wendy's for
$1,680,000 (See Note 7B-4). The purchase option agreement required
Wendy's to be given the right of first refusal, for a period of twenty
years, in the event the properties are resold.
In July, 1994 Nexus moved its executive offices to office facilities
that are leased under a three year and eight month lease expiring on
February 28, 1998.
Subject to annual real estate adjustments, and additional rent in
excess of base sales, the following is a schedule of future minimum
rental payments required under the above operating leases as of
February 28,:
Year Ending
February
--------
1998 $ 739,436
1999 711,230
2000 714,851
2001 710,180
2002 714,346
Thereafter 6,001,419
-----------
Total $ 9,591,462
===========
On March 1, 1996, pursuant to an agreement for the sale of real estate,
Nexus leased back 50% of the building that was sold for a period of ten
years. The Company is obligated to pay for construction and landscaping
costs necessary to complete the building. The lease calls for monthly
rent payable in the period from March 1, 1996 throughout April 1, 1998,
on the first day of each such month in said period, shall be determined
by the following formula: the sum of (i) $10,500, (ii) the monthly
payments due in said month for principal and interest on the first and
purchase money notes, namely $34,833 (See Note 2) and (iii) the
operating expenses payable by the landlord for said month pursuant to
this lease and an existing lease on the remainder of the building,
less, (iv) the rent receivable from the existing lease for said month
under that lease. Commencing May 1, 1998 and for the balance of the
term, the annual base rent on a monthly basis is $35,290.33 per month.
On June 20, 1997, the Company sublet the entire space covered under the
lease, with any profit accruing to the Company. The sublease is part of
the Real Estate Division of the Company (See Note 1-O).
C. CONTRACTS:
1) The Company has a three year employment contract with one of its
executive officers commencing January 1, 1995 through December 31,
1997. The base salary for this executive is $120,000 in 1996, and
$130,000 in 1997 plus an unaccountable expense allowance of $5,000
per year, plus any other reasonable expenses. In, addition he
received a bonus of $60,000 in 1996.
F-32
72
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONT'D)
C. CONTRACTS (Cont'd):
2) The Food Service Division subsidiaries have three-year consulting
contracts with one of its executives and another consultant renewed
in 1993 providing for a total fee of approximately $1,750 per
month, plus reasonable expenses. At expiration, the agreements are
automatically renewable thereafter for as long as these
subsidiaries remain in business at not less than the current fee.
For fiscal 1997, 1996 and 1995 $29,500, $27,000 and $27,000 was
incurred pursuant to this contract.
D. SALE OF REAL ESTATE:
1) The sale of real estate referred to in (Note 5F) includes a note
receivable from the buyer. Upon full collection of the second
mortgage receivable as referred to in Note 2 for Granby in the
amount of $1,854,834, an additional liability will be due and
payable to the co-investors of the original mortgage for
approximately $150,000. If the note is not collected in full, an
amount substantially less will be paid. An accrual is not included
for this amount because there is no obligation to pay the
co-investors until full payment of the note is received.
2) The Company received additional consideration for the land sold in
Goshen, N.Y., which is not included among the notes receivable (See
Notes 2, 5C and 8C). This was a purchase money debenture payable to
PSI Capital Corp. for $2,499,750 which matures on February 28, 2002
together with interest at the rate of 6% per annum payable at
maturity, but subject to increase or decrease, as set forth below,
contingent on the sale of the single family residences to be built
on the 165 lots which were sold. There is no interest income being
accrued on this debenture. The collection of this purchase money
debenture is contingent upon the sale of single family residences
at a profit, therefore, none of this amount is included in income.
Prior to the maturity date, the principal sum of this debenture
shall be prepaid as each of the single family residences
constructed on the real estate are conveyed to the end purchaser,
each such prepayment to be equal to at least 50% of the net profit
to the buyer with respect to said sale. The buyer agrees to take
such action as is necessary to construct and sell the one family
residences and the buyer shall not sell any portion of the real
estate except to an end purchaser of said residences. Upon the sale
of the last residence that is built or could be built on the real
estate, the parties shall compute the amount of the buyer's net
profit on all residences constructed on the real estate (the "final
net profit of the buyer"). If 50% of the final net profit of the
buyer is (i) more that $2,499,750, the excess shall be paid to the
seller at the time or (ii) less than $2,499,750, the deficiency
shall not be payable by the buyer and the debenture shall be deemed
fully paid. At that date the interest shall be adjusted to reflect
the actual principal sum of the debenture already paid.
F-33
73
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONT'D)
E. FORMATION OF FRM NEXUS (FORMERLY PSI SETTLEMENT CORP):
In 1993, Shareholders of Programming and Systems, Inc. (PSI) brought a
class action against PSI and certain of its officers in the United
States District Court for the Southern District of New York, which was
settled by a Stipulation of Settlement dated as of November 15, 1993
(the "Stipulation"), pursuant to which PSI Settlement Corp. (Nexus) was
formed. On January 21, 1994 Judge Robert Sweet signed the Order
confirming the Stipulation. Pursuant to that Stipulation (i) the
eligible shareholders of PSI received a pro-rata distribution of
$1,400,000, after deduction of the fees and expenses of the class
action, which amounted to fifty cents per share, and (ii) all the
shares of Nexus were delivered to Escrow Agents to hold for the benefit
of all shareholders of PSI. Pursuant to the Orders of Judge Sweet, PSI
transferred certain assets to Nexus as specified in the Stipulation and
the Court's Orders. These payments, including the shares of Nexus,
fully settled all of the claims by PSI shareholders that could have
been asserted against PSI and the other defendants in the class action.
On June 12, 1995 Judge Sweet signed an Order approving an amendment of
the Stipulation which permitted Nexus to operate as an ongoing entity
rather than liquidating its assets, provided the escrowed shares of
Nexus were delivered out to PSI shareholders by June 12, 1997 and
listed for trading on NASDAQ.
In addition to settling the class action and making payment to
shareholders, PSI has now settled the action by the Securities and
Exchange Commission against it and resolved the material claims and
lawsuits which arose out of its discontinued vocational school
operations. At the present time, PSI is indebted to (i) the United
States for $1,000,000 by reason of the fraudulent conduct of a former
chief executive officer, (ii) to the Internal Revenue Service for
$416,000 representing excess refunds of income taxes made by IRS to PSI
plus interest thereon and (iii) to a former landlord of a PSI school
for $98,621. While PSI may not be able to pay its debts in full, Nexus
is not responsible for their payment, will defend against any claim
that may be instituted and management believes it will be successful.
F. LITIGATION:
The Yolo Capital subsidiary (Yolo) filed an action against the former
management for breach of management agreements and for conversion of
monies resulting from cutting wood on its property in Hunter, NY. The
defendants have counterclaimed against Yolo for breach of contract,
interference with contract, conversion and conspiring to interfere with
their contracts. The defendants are seeking damages amounting to over
$2,000,000. Yolo's legal counsel believes that the counterclaims will
be dismissed.
F-34
74
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONT'D)
G. BANKRUPTCY:
On March 25, 1992, PSI Capital Corp. filed for relief under Chapter 11
of the Bankruptcy Code. This filing was done in order to protect second
mortgage positions on two of the properties. This action provided PSI
Capital Corp., with sufficient time to negotiate with the holders of
prior mortgages and secure PSI Capital Corp's interest in the
properties. A plan of reorganization has been filed and PSI Capital
Corp. expects to complete the Chapter 11 proceeding by the fiscal year
ending February 28, 1998.
H. LOAN GUARANTY:
The proceeds from a mortgage loan obtained by the purchaser of the
property in Granby, CT. were received by the Company in connection with
property's sale. As part of the refinancing, Nexus guaranteed payment
of this mortgage. The initial monthly payment of $16,435 includes
interest and principal. The term of the loan is 25 years.
The interest rate was fixed at closing based upon the five-year U.S.
Treasury Note Constant Maturity Yield plus 2.75% and continues at that
rate for the first five years of the loan. Then repricing at the fifth,
tenth, fifteenth and twentieth year anniversaries at a rate equal to
the then 5-year U.S. Treasury Note Constant Maturity Yield rate on said
anniversary date plus 2.75%. The Interest rate will have a ceiling of
12% and a floor of 7% for the first adjustment (year 6) only.
The amount outstanding with respect to this loan guaranty as of
February 28, 1997 and February 29, 1996 was $1,898,408 and $ -0-,
respectively.
NOTE 10: INCOME TAXES
The provision for (benefit from) income taxes consist of the following:
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Currently payable:
Federal $ 0 $ 0 $ 0
State 76,288 14,637 76,821
-------- ------- --------
Total currently payable 76,288 14,637 76,821
-------- ------- --------
Deferred:
Federal $ 0 $ 0 $ 0
State (64,218) 13,611 (6,817)
-------- ------- --------
Total deferred (64,218) 13,611 (6,817)
-------- ------- --------
Total $ 12,070 $28,248 $ 70,004
======== ======= ========
Nexus filed consolidated federal tax return with PSI through August 12,
1996, which has no federal tax liability due to current and prior year
net operating losses. After August 12, 1996, Nexus and its subsidiaries
will file a consolidated tax return without PSI (See Note 1B).
F-35
75
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 10: INCOME TAXES (CONT'D)
Significant components of deferred tax assets (liabilities) were as
follows:
February 28, February 29, February 28,
1997 1996 1995
---- ---- ----
Tax loss carryforwards $ 218,743 $ 1,889,126 $ 1,817,195
Property, plant and
equipment -- -- 6,817
Installment sale of
real estate 63,188 1,996 --
----------- ----------- -----------
281,931 1,891,122 1,824,012
Less: Valuation
allowance (218,743) (1,889,126) (1,817,195)
----------- ----------- -----------
Deferred tax assets $ 63,188 $ 1,996 $ 6,817
=========== =========== ===========
Property, plant and
equipment $ (5,764) $ (8,790) $ --
----------- ----------- -----------
Deferred tax
liabilities $ (5,764) $ (8,790) $ --
=========== =========== ===========
The following is a reconciliation of the statutory federal and
effective income tax rates for the years ended:
February 28, February 29, February 28,
1997 1996 1995
------------ ------------ ------------
% of % of % of
Pretax Income Pretax
Income Income
------ ------ ------
Statutory federal income
tax expense rate (34.0)% (34.0)% 34.0%
Valuation allowance against
NOL carryforwards 34.0 34.0 0.0
State taxes, less federal
tax effect 1.0 14.2 14.4
Permanent differences 0.0 0.0 5.4
Utilization of prior net
operating losses 0.0 0.0 (39.4)
------ ----- -----
1.0% 14.2% 14.4%
====== ===== =====
As required under SFAS 109, the Company must provide for the future
benefits of its net operating loss (NOL) carryforwards. The Company,
however, has taken a 100% valuation allowance against all NOL
carryforwards. A 100% valuation allowance was taken due to a history of
operating losses and the uncertainty of generating profits in the
foreseeable future.
F-36
76
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 10: INCOME TAXES (CONT'D)
The Company has a pre-tax loss of approximately $518,000 from
August 12, 1996 to February 28, 1997 (See Note 1B). These losses
will be available for future years, expiring February 28, 2012. The
Company has taken a 100% valuation allowance against this NOL
carryforward, for the same reasons as stated above.
NOTE 11: TRANSFER OF ASSETS FROM PARENT
Pursuant to Court Order as discussed in Note 1B, the following assets
and subsidiaries were transferred from PSI To Nexus during the year
ended February 29, 1996:
Shares of PSI Subsidiaries $ 534,419
Cash value of Officers' Life Insurance 58,875
Real estate held for development and sale 869,413
Misc. receivables 24,924
----------
Total $1,487,631
==========
These assets were transferred at historical cost. The fair market value
at the time of transfer was greater than or equal to the historical
cost.
F-37
77
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
NOTE 12: BUSINESS SEGMENT INFORMATION
The following analysis provides segment information for the three industries in
which the Company operates:
Food Medical
1 9 9 7 Service Real Estate Financing Total
------- ------- ----------- --------- -----
Net Sales $ 16,263,323 $ 819,628 $ 216,521 $ 17,299,472
============ =========== =========== ============
Operating Profit (Loss) $ 99,075 $(1,423,852) $ 77,838 $ (1,246,939)
============ =========== =========== ============
Identifiable Assets $ 4,965,638 $ 7,226,689 $ 1,469,898 $ 13,662,225
============ =========== =========== ============
Capital Expenditures $ 2,056,264 $ -- $ 18,853 $ 2,075,117
============ =========== =========== ============
Depreciation and
Amortization $ 532,909 $ 63,512 $ 3,777 $ 600,198
============ =========== =========== ============
Food Medical
1 9 9 6 Service Real Estate Financing Total
------- ------- ----------- --------- -----
Net Sales $ 14,536,291 $ 292,502 $ 253,857 $ 15,082,650
=========== ============ ============ ============
Operating Profit (Loss) $ (60,083) $ (277,185) $ 138,544 $ (198,724)
=========== ============ ============ ============
Identifiable Assets $ 3,491,533 $ 5,462,935 $ 586,487 $ 9,540,955
=========== ============ ============ ============
Capital Expenditures $ 797,207 $ -- $ -- $ 797,207
=========== ============ ============ ============
Depreciation and
Amortization $ 437,210 $ -- $ -- $ 437,210
=========== ============ ============ ============
Food Medical
1 9 9 5 Service Real Estate Financing Total
------- ------- ----------- --------- -----
Net Sales $ 14,523,900 $ -- $ -- $14,523,900
============ ============ ============ ===========
Operating Profit (Loss) $ 621,746 $ (123,030) $ (11,495) $ 487,221
============ ============ ============ ===========
Identifiable Assets $ 3,104,880 $ 2,121,898 $ 201,718 $ 5,428,496
============ ============ ============ ===========
Capital Expenditures $ 300,092 $ -- $ -- $ 300,092
============ ============ ============ ===========
Depreciation and
Amortization $ 364,352 $ -- $ -- $ 364,352
============ ============ ============ ===========
All revenue is generated in the eastern portion of the United States.
F-38
78
[Michael, Adest & Blumenkrantz letter head]
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
REQUIRED BY RULE 5-04 OF REGULATION S-X OF THE SECURITIES AND
EXCHANGE COMMISSION
FRM Nexus, Inc. and Subsidiaries
Board of Directors and Stockholders
We have audited the financial statements of FRM Nexus, Inc. and Subsidiaries as
of February 28, 1997 and February 29, 1996 and for each of the three years in
the period ended February 28, 1997 and have issued our report thereon dated May
9, 1997. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedules
II, III and IV on the following pages are presented for purposes of additional
analysis and is not a required part of the basic financial statements, but is
supplementary information required by rule 5-04 of Regulation S-X of the
Securities and Exchange Commission. Such information has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
/s/ Michael, Adest & Blumenkrantz
Michael, Adest & Blumenkrantz
Certified Public Accountants, P.C.
May 9, 1997
F-39
79
FRM NEXUS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FEBRUARY 28, 1997
Schedule I - Condensed financial information of registrant
DOES NOT APPLY
Schedule II - Valuation and qualifying accounts
Column A Column B Column C Column D Column E
Additions
Description Balance ------------------------- Deductions Balance
at Charged Charged at
beginning to to end of
of costs and other period
period expenses accounts
describe
February 28, 1995:
Allowance for
credit losses $ - $145,218 $ - $ - $145,218
======== ======== ========= ========= ========
February 29, 1996:
Allowance for
credit losses $145,218 $ - $ - $ - $145,218
======== ======== ========= ========= ========
February 28, 1997:
Allowance for
credit losses $145,218 $ - $ - $ - $145,218
======== ======== ========= ========= ========
F-40
80
FRM NEXUS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FEBRUARY 28, 1997
Schedule III - Real Estate and Accumulated Depreciation
Column Column Column Column Column
A B C D E
Initial cost Cost capita- Gross amount at
to Company lized subsequent which carried at
to close of period
acquisition
------------------------- ----------------------- --------------------------------------
Buildings and Carrying Buildings and
Descriptions(2) Encumbrances Land improvements Improvements costs Land improvements Total
Partial
invest-
ment in
condo-
minimum
deve-
lopment;
Hunter,
NY $ - $ - $1,097,897 $ - $ - $ - $1,097,897 $1,097,897
Unimpro-
ved land;
Brook-
field,
CT - 426,579 - - 49,893 476,472 - 476,472
----- -------- ---------- ------- ------- -------- ---------- ----------
Total $ - $426,579 $1,097,897 $ - $49,893 $476,472 $1,097,897 $1,574,369
===== ======== ========== ======= ======= ======== ========== ==========
Column Column Column Column Column
A F G H I
Life on which
depreciation
in latest
Descriptions(2) Accumulated Date of Date income statements
depreciation construction acquired is computed
Partial
invest-
ment in
condo-
minimum
deve-
lopment;
Hunter,
NY $ - $ - 2/29/96 N/A
Unimpro-
ved land;
Brook-
field,
CT - - 5/11/92 N/A
------ ------
Total $ - $ -
====== ======
The following is a reconciliation of the total amount at which real estate was
carried for the years ended:
February 28, February 29, February 28,
1997 1996 1995
-------------------------- ---------------------------- ----------------------------
Balance at beginning
of period $2,246,360 $2,287,975 $2,484,513
Additions during period:
Acquisitions through
foreclosure $ - $ - $ -
Other acquisitions 25,000 1,072,897 -
Improvements, etc. - - -
Capitalized carrying
costs 24,334 49,334 22,400 1,095,297 3,462 3,462
------ ------ ------ --------- ----- -----
2,295,694 3,383,272 2,487,975
Deductions during period:
Cost of real
estate sold 721,325 1,136,912 200,000
Other (Describe) - - -
------ ------ -----
721,325 1,136,912 200,000
------- --------- -------
Balance at close of period $ 1,574,369 $2,246,360 $2,287,975
=========== ========== ==========
F-41
81
FRM NEXUS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
FEBRUARY 28, 1997
Schedule IV - Mortgage Loans on Real Estate
Column Column Column Column Column Column Column Column
A B C D E F G H
Description Interest Final maturity Periodic Prior Face Carrying Principal
rate date payment liens amount amount amount of
term of of loans subject
mortgages mortgages to delinquent
principal
or interest
First Mortgages:
Interest
Unimproved land; only to
Goshen, NY 6% 2/28/99 maturity None $2,310,000 $2,310,000 $ -
$75,000
Unimproved land; per
Pound Ridge, NY 8% 6/19/98 annum None 150,000 150,000 -
Single family 12% through - - 130,736 43,236 -
residential; to 8/8/99
three mortgages 14%
under $20,000
each
---------- ---------- ----------
$2,590,736 $2,503,236 $ -
========== ========== ==========
The following is a reconciliation of the total amount at which mortgage loans
were carried for the years ended:
February 28, February 29, February 28,
1997 1996 1995
--------------------------- ----------------------------- ------------------------
Balance at beginning
of period $ 466,702 $ - $ -
Additions during period:
New Mortgage loans $2,049,034 $ 541,702 $ -
Other (describe) 2,049,034 - 541,702 - -
---------- ---------- ---------- ---------- ------- ------
2,515,736 541,702 -
Deductions during period:
Collection of
principal 12,500 75,000 -
Foreclosures -
Cost of mortgage sold -
Amortization of premium -
Other (Describe) - 12,500 - 75,000 - -
---------- ---------- ---------- ---------- ------- ------
Balance at close of period $2,503,236 $ 466,702 $ -
========== ========== ======
F-42