<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-29346
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, N.Y. 10801
(Address of principal executive offices)
(Zip Code)
(914) 636-3432
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. NOT APPLICABLE.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. AS OF MAY 19, 1998,
1,211,635 SHARES OF COMMON STOCK, $.10 PAR VALUE.
<PAGE> 2
PART I
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - November 30, 1997 and 1996
Consolidated Statements of Income for the Three Months
And Nine Months ended November 30, 1997 and 1996
Consolidated Statements of Cash Flows for the Nine Months
Ended November 30, 1997 and 1996.
Notes to Consolidated Financial Statements
<PAGE> 3
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
November 30, February 28,
1997 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash & cash equivalents $ 1,301,475 $ 1,861,219
Mortgages and notes receivable -- 81,202
Finance receivables, net 2,110,933 1,238,891
Inventories at cost 104,717 97,210
Other current assets 239,965 275,078
----------- -----------
TOTAL CURRENT ASSETS 3,757,090 3,553,600
----------- -----------
FIXED ASSETS
Property, land and equipment 8,076,840 7,119,469
Less: Accumulated depreciation 2,283,492 1,960,709
----------- -----------
NET BOOK VALUE 5,793,348 5,158,760
----------- -----------
OTHER ASSETS
Real estate held for 1,436,883 1,429,369
development and sale
Mortgage and notes receivable 2,347,034 2,422,034
Loans receivable 86,474 92,526
Unamortized leasehold costs 519,690 548,685
Technical assistance fees 232,560 248,490
Deferred tax asset 74,011 63,188
Other 114,881 145,573
----------- -----------
TOTAL OTHER ASSETS 4,811,533 4,949,865
----------- -----------
TOTAL ASSETS $14,361,971 $13,662,225
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
FRM NEXUS, INC.
AND SUBSIDIAIRES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES & STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
November 30, February 28,
1997 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and
Accrued expenses $ 820,953 $ 888,410
Notes payable - current maturities 428,735 244,441
Due to finance customers 1,365,208 957,585
Taxes payable 10,059 14,357
Other current liabilities 27,522 36,111
------------ ------------
Total current liabilities 2,652,477 2,140,904
------------ ------------
Other liabilities
Notes payable - less current
maturities 2,457,363 2,162,064
Deferred taxes payable 5,764 5,764
Deferred Income 1,910,624 1,910,624
Finance obligation 3,182,261 3,036,466
Other 6,083 59,418
------------ ------------
Total other liabilities 7,562,095 7,174,336
------------ ------------
Total liabilities 10,214,572 9,315,240
------------ ------------
Stockholder's equity
Common stock -$.10 par value;
Authorized - 1,000,000 shares;
Issues 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) (1,661,885)
------------ ------------
Total stockholder's equity 4,147,399 4,346,985
------------ ------------
Total liabilities and
Stockholders equity $ 14,361,971 $ 13,662,225
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
November 30, November 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Restaurant food sales $ 4,071,335 $ 4,196,207 $ 13,010,466 $ 12,503,994
Sale of real estate -- (129,336) -- 713,185
Interest from mortgages 35,338 47,480 110,412 71,074
Income from the purchase
of account receivable 215,570 36,330 531,153 77,582
------------ ------------ ------------ ------------
Total income 4,322,243 4,150,681 13,652,031 13,365,835
------------ ------------ ------------ ------------
COST OF SALES
Restaurants 1,372,894 1,472,877 4,369,666 4,400,952
Real estate 11,133 127,819 51,890 820,752
------------ ------------ ------------ ------------
Total cost of sales 1,384,027 1,600,696 4,421,556 5,221,704
------------ ------------ ------------ ------------
Gross profit 2,938,216 2,549,985 9,230,475 8,144,131
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general & administrative -
Restaurants 2,490,902 2,514,325 7,786,526 7,466,884
Other 382,915 88,596 1,019,119 842,421
Interest expense 113,877 117,274 352,045 232,823
Depreciation and amortization 125,671 139,022 376,334 412,827
------------ ------------ ------------ ------------
Total costs and expenses 3,113,365 2,859,217 9,534,024 8,954,955
------------ ------------ ------------ ------------
Income (Loss) from operations before
income taxes and other items (175,149) (309,232) (303,549) (810,824)
Interest income 9,000 24,194 42,728 45,184
------------ ------------ ------------ ------------
Income (Loss) before income
taxes and extraordinary item (166,149) (285,038) (260,821) (765,640)
Provision for (benefit from) income taxes 9,326 (25,343) 30,439 37,340
------------ ------------ ------------ ------------
Net income (loss) before extraordinary item (175,475) (259,695) (291,260) (802,980)
Extraordinary income, net of applicable taxes of $-0- 91,674 -- 91,674 --
----------------------------- -----------------------------
Net income (loss) $ (83,801) $ (259,695) $ (199,586) $ (802,980)
============ ============ ============ ============
Primary and fully diluted net income (loss) per common
share and common share equivalents
Net income (loss) before extraordinary item $ (0.15) $ (0.21) $ (0.24) $ (0.66)
Extraordinary income $ 0.08 $ -- $ 0.08 $ --
------------ ------------ ------------ ------------
Net income (loss) $ (0.07) $ (0.21) $ (0.16) $ (0.66)
============ ============ ============ ============
Number of shares used in computation of primary
and fully diluted earnings $ 1,211,635 $ 1,211,635 $ 1,211,635 $ 1,211,635
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
(UNAUDITED)
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
----------- -----------
<S> <C> <C>
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 on 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
----------- -----------
</TABLE>
See notes to consolidated financial statements
<PAGE> 7
FRM NEXUS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
(UNAUDITED)
Cont'd
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
----------- -----------
<S> <C> <C>
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 purchase on real estate sold $ -- $ 2,085,234
=========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE> 8
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 1:
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
results of the Company's financial position as of November 30, 1997 and
the results of its operations and its cash flows for the nine months
ended November 30, 1997 and November 30, 1996, respectively.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements as of February 28, 1997.
The consolidated financial statements should be read in conjunction
with the notes to the financials statements as of February 28, 1997.
NOTE 2:
The results of operations for the three and nine month periods ended
November 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
NOTE 3: 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 6G).
NOTE 4: 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 month. 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 financial
subsidiary. There were no closing costs in connection with this loan.
<PAGE> 9
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 4: NOTES PAYABLE (CONT'D)
Annual principal maturities for this note for the years ended February
28, are as follows:
<TABLE>
<S> <C>
1998 $ 256,829
1999 69,965
2000 78,843
2001 88,837
2002 100,104
2003 96,851
----------
$691,429
==========
</TABLE>
NOTE 5: INCOME TAXES
The provision for (benefit from) income taxes consist of the following:
<TABLE>
<CAPTION>
November 30, November 30,
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
<PAGE> 10
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 6: 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,:
<TABLE>
<CAPTION>
Year Ending
February
-----------
<S> <C>
1998 $ 739,436
1999 711,230
2000 714,851
2001 710,180
2002 714,346
Thereafter 6,001,419
----------
Total $9,591,462
==========
</TABLE>
<PAGE> 11
FRM NEXUS, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 6: 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.
<PAGE> 12
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 6: 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
<PAGE> 13
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONT'D)
E. FORMATION OF FRM NEXUS (FORMERLY PSI SETTLEMENT CORP) (CONT'D):
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.
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. PSI Capital Corp. emerged from bankruptcy and recognized
extinguishment of debt, net fees in the amount of $91,674 (See Note 3).
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
<PAGE> 14
FRM NEXUS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
NOTE 6: COMMITMENTS AND CONTINGENCIES (CONT'D)
H. LOAN GUARANTY (CONT'D)
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.
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
<PAGE> 16
FINANCIAL CONDITION
COMPARISON OF FINANCIAL CONDITION AT NOVEMBER 30, 1997 TO FEBRUARY 28, 1997
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.
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.
ITEM 3. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises principally from the interest rate
risk related to its receivables. Interest rate risk is a consequence of having
fixed interest rate receivables in the
<PAGE> 17
Company's Real Estate and Medical Financing Divisions. The Company is exposed to
interest rate risk arising from changes in the level of interest rates and
principal payment speeds.
The Company is subject to interest rate risk on the fixed interest rate
of its long term mortgage debt and capital leases in its Food Division.
Generally, the fair market value of debt with a fixed interest rate will
increase as interest rates fall and the fair market value will decrease as
interest rates rise.
PART II - OTHER INFORMATION
ITEM 1. 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 the value of the property carried on the books 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 reached for trial in the
fiscal year ending February 28, 1999. 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
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 for less than the outstanding principal
amount and thereby protected PSI Capital's second mortgage position in the real
estate. The two properties were subsequently sold, after which a Plan of
Reorganization filed in the Chapter 11 proceeding was confirmed and PSI Capital
Corp emerged from Chapter 11 in October 1997.
ITEM 5. OTHER INFORMATION - CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
In compliance with a representation made to the staff of the Securities
and Exchange Commission on February 19, 1998 that the Registrant would have its
principal accountant audit over 50% of the assets, revenues and operations for
the fiscal year ended February 28, 1998, the Registrant's Audit Committee
considered a possible change in the Registrant's Certifying Accountant.
<PAGE> 18
Ernst & Young LLP was approved on April 18, 1998 as the principal
accountant to audit the Registrant's financial statements for the fiscal year
ended February 28, 1998. Ernst & Young LLP, the newly engaged accountant,
replaces Michael, Adest & Blumenkrantz Certified Public Accountants, P.C., the
former principal accountant which audited the Registrant's financial statements
for the fiscal years ended February 28, 1997, 1996, 1995 and 1994, expressing
reliance in its reports for said fiscal years on the reports of Eric L. Weston
the independent accountant who audited the financial statements of Wendclark
Corporation and Wendcello Corporation, wholly-owned subsidiaries of the
Registrant.
A. During the Registrant's two most recent fiscal years ended February
28, 1998 and the subsequent interim period prior to engaging Ernst & Young, LLP
neither the Registrant nor anyone on its behalf, consulted Ernst & Young, LLP
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Registrant's financial statements.
B. Ernst & Young, LLP agreed to be the principal auditor of the
Registrant and to conduct its audit of all of the assets, revenues and
operations of the Registrant without reliance on the audit of any other
independent accountant.
C. The former principal accountant was aware of the Registrant's
representation and was willing to conduct an audit of the Registrant's financial
statements for the fiscal year ended February 28, 1998 in compliance with said
undertaking. The Registrant's Audit Committee recommended that Ernst & Young LLP
be chosen to conduct the audit and the recommendation was approved by the Board
of Directors.
D. On May 27, 1998, the Registrant requested Ernst & Young LLP to
review this Item 5 and has given Ernst & Young LLP the opportunity to furnish
the Registrant with a letter addressed to the Commission containing any new
information, clarification of the Registrant's expression of its views, or the
respects in which it does not agree with the statements herein.
E. On May 27, 1998 The Registrant provided Michael, Adest &
Blumenkrantz, P.C. with a copy of this Item 5 and requested a letter addressed
to the Commission stating whether it agrees with the statements herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (SECTION 249.308 OF THIS CHAPTER).
(a) Exhibits
The following exhibits are incorporated herein by reference to Form 10
dated June 27, 1997 except that Exhibit 10.04 is incorporated herein by
reference to Amendment No. 1 to Form 10 dated September 19, 1997.
<PAGE> 19
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.
(b) No report on Form 8-K has been filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 28, 1998 FRM NEXUS, INC.
By /s/ SETH GROSSMAN
----------------------------------------
Seth Grossman, President
(Chief Executive Officer)
May 28, 1998 By /s/ VICTOR BRODSKY
----------------------------------------
Victor Brodsky, Vice President
(Chief Accountant and Financial Officer)
