<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: November 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(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)
<TABLE>
<S> <C>
DELAWARE 13-3754422
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark 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. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at January 13, 1999: 1,817,453.
<PAGE> 2
FRM Nexus, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -- November 30, 1998 and February 28, 1998.........2
Consolidated Statements of Operations -- Nine months and three months ended
November 30, 1998 and 1997.....................................................4
Consolidated Statements of Stockholders' Equity --
Nine months ended November 30, 1998 ........................................5
Consolidated Statements of Cash Flows --
Nine months ended November 30, 1998 and 1997................................6
Notes to Consolidated Financial Statements.....................................7
-1-
<PAGE> 3
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 860,414 $ 1,434,893
Mortgage and notes receivable 23,820 22,232
Finance receivables, net 2,364,581 1,782,687
Vendor rebate receivable -- 244,477
Inventories 110,260 96,922
Other current assets 236,319 250,663
----------- -----------
Total current assets 3,595,394 3,831,874
----------- -----------
Property and equipment:
Property and equipment, at cost 6,728,519 5,850,404
Less accumulated depreciation and amortization 2,620,773 2,310,626
----------- -----------
4,107,746 3,539,778
----------- -----------
Other assets:
Real estate held for development and sale 1,476,562 1,375,445
Mortgage and notes receivable 3,185,566 3,203,598
Finance receivables, net 85,000 --
Loans receivable 65,727 88,995
Leasehold costs, net of accumulated amortization
of $350,510 at November 30, 1998 and $333,143
at February 28, 1998 477,913 507,145
Technical assistance fees, net of accumulated
amortization of $164,004 at November 30, 1998
and $147,672 at February 28, 1998 235,996 227,238
Other 349,124 240,007
----------- -----------
Total other assets 5,875,888 5,642,428
----------- -----------
Total assets $13,579,028 $13,014,080
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE> 4
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 899,726 $ 960,172
Current portion of notes payable 307,573 228,578
Due to finance customers 1,191,638 975,545
Income taxes payable 3,709 64,202
Other current liabilities 138,971 19,489
------------ ------------
Total current liabilities 2,541,617 2,247,986
------------ ------------
Other liabilities:
Notes payable 2,871,187 2,391,867
Deferred income taxes 20,492 20,729
Deferred Income 2,760,624 2,760,624
------------ ------------
Total other liabilities 5,652,303 5,173,220
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.10 par value;
Authorized - 2,000,000 shares;
Issued and outstanding - 1,817,453 shares 181,745 181,745
Capital in excess of par value 5,826,810 5,827,125
Unrealized loss on mortgage and notes receivable (162,202) (162,202)
Retained earnings (accumulated deficit) (461,245) (253,794)
------------ ------------
Total stockholders' equity 5,385,108 5,592,874
------------ ------------
Total liabilities and stockholders' equity $ 13,579,028 $ 13,014,080
============ ============
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE> 5
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Restaurant food sales $4,317,647 $4,071,335 $12,734,433 $13,010,466
Sale of real estate -- -- 40,678 --
Rental income 33,629 -- 91,959 --
Interest from mortgages 58,826 35,338 177,016 110,412
Income from the purchase of medical receivables 238,298 215,570 765,968 531,153
---------- ---------- ----------- -----------
Total income 4,648,400 4,322,243 13,810,054 13,652,031
---------- ---------- ----------- -----------
COSTS AND EXPENSES
Restaurants 4,112,803 3,863,796 12,103,287 12,156,192
Real estate 84,548 128,730 286,951 352,773
Medical receivables 246,663 222,435 754,067 567,587
Corporate expenses 88,720 42,883 331,604 150,649
Depreciation and amortization 125,491 125,671 364,009 376,334
---------- ---------- ----------- -----------
Total costs and expenses 4,658,225 4,383,515 13,839,918 13,603,535
---------- ---------- ----------- -----------
Income (loss) from operations (9,825) (61,272) (29,864) 48,496
---------- ---------- ----------- -----------
Other income (expense):
Interest income 7,216 9,000 28,507 42,728
Interest expense (70,774) (113,877) (190,277) (352,045)
---------- ---------- ----------- -----------
(63,558) (104,877) (161,770) (309,317)
---------- ---------- ----------- -----------
Income (loss) before provision for income
taxes and extraordinary item (73,383) (166,149) (191,634) (260,821)
Provision (credit) for income taxes (8,963) 9,326 15,817 30,439
---------- ---------- ----------- -----------
Income(loss) before extraordinary item (64,420) (175,475) (207,451) (291,260)
Extraordinary item, net of applicable taxes of $0 -- 91,674 -- 91,674
---------- ---------- ----------- -----------
Net income(loss) $ (64,420) $ (83,801) $ (207,451) $ (199,586)
========== ========== =========== ===========
Basic and diluted earnings (loss) per common share:
Income(loss) before extraordinary item $ (0.04) $ (0.10) $ (0.11) $ (0.16)
Extraordinary income -- 0.05 -- 0.05
---------- ---------- ----------- -----------
Basic and diluted earnings (loss) per common share $ (0.04) $ (0.05) $ (0.11) $ (0.11)
========== ========== =========== ===========
Number of shares used in computation of basic and
diluted earnings per share 1,817,453 1,817,453 1,817,453 1,817,453
========== ========== =========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE> 6
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
February 28, 1998 through November 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL UNREALIZED EARNINGS TOTAL
COMMON PAID-IN GAINS (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL (LOSSES) DEFICIT) EQUITY
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1998 $ 181,745 $ 5,827,125 $ (162,202) $ (253,794) $ 5,592,874
Payment of fractional shares -- (315) -- -- (315)
Net loss -- -- -- (207,451) (207,451)
----------- ----------- ----------- ----------- -----------
Balance, November 30, 1998 $ 181,745 $ 5,826,810 $ (162,202) $ (461,245) $ 5,385,108
=========== =========== =========== =========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-5-
<PAGE> 7
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (207,451) $ (199,586)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 364,009 376,334
Deferred interest expense -- 73,054
Deferred income tax expense(benefit) (237) (10,823)
Changes in operating assets and liabilities:
Vendor rebate receivable 244,477 --
Inventories (13,338) (7,507)
Additions to real estate held for
development and sale (101,117) (7,514)
Prepaid expenses, miscellaneous receivables
and other assets (99,270) 65,803
Accounts payable, accrued expenses and taxes (124,648) (71,755)
Other current liabilities 123,191 (61,924)
----------- -----------
Net cash provided by operating activities 185,616 156,082
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (907,006) (965,997)
Repayment of loans receivable 23,268 6,052
Increase in finance receivables (666,894) (872,042)
Due to finance customers 216,093 407,623
Principal payments on notes receivable 16,444 156,202
----------- -----------
Net cash used in investing activities (1,318,095) (1,268,162)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 950,000 700,000
Principal payments on notes payable (391,685) (220,407)
Proceeds of finance obligation -- 160,548
Principal payments of finance obligation -- (87,805)
Payment of fractional shares (315) --
----------- -----------
Net cash provided by financing activities 558,000 552,336
----------- -----------
Net decrease in cash and cash equivalents (574,479) (559,744)
Cash and cash equivalents, beginning of period 1,434,893 1,861,219
----------- -----------
Cash and cash equivalents, end of period $ 860,414 $ 1,301,475
=========== ===========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 186,211 $ 231,851
=========== ===========
Income taxes paid $ 39,074 $ 42,158
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-6-
<PAGE> 8
FRM NEXUS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring items) necessary to present fairly the financial position as of
November 30, 1998; results of operations for the nine months and three months
ended November 30, 1998 and 1997; cash flows for the nine months ended November
30, 1998 and 1997; and changes in stockholders' equity for the nine months ended
November 30, 1998. For further information, refer to the Company's financial
statements and notes thereto included in the Company's Form 10-K for the year
ended February 28, 1998. The consolidated balance sheet at February 28, 1998 was
derived from the audited financial statements as of that date. Results of
operations for interim periods are not necessarily indicative of annual results
of operations.
Certain prior year amounts were reclassified to conform with the current year
presentation.
2. FINANCE RECEIVABLES, NET
Net finance receivables consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
----------- -----------
<S> <C> <C>
Gross finance receivables $ 2,806,042 $ 2,083,043
Allowance for credit losses (72,866) (72,866)
Deferred finance income (283,595) (227,490)
----------- -----------
2,449,581 1,782,687
Less long-term portion 85,000 --
----------- -----------
Finance receivables, net - current $ 2,364,581 $ 1,782,687
=========== ===========
</TABLE>
-7-
<PAGE> 9
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CONTINGENCIES
LITIGATION
On August 26, 1998 the litigation as discussed in Note 8 of the February 28,
1998 financial statements involving the Yolo Capital subsidiary ("Yolo") was
settled. All counterclaims against Yolo were dismissed. As a result, the
company's property at Hunter is no longer under lien.
PSI LITIGATION
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 $.50 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 (such shares were delivered on August 12,
1996) 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
-8-
<PAGE> 10
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. CONTINGENCIES (CONTINUED)
At the present time, PSI is indebted to (i) the United States Department of
Education 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. As a result
of the Stipulation described above, the Company believes it is not responsible
for the obligations of PSI.
4. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ --
State (8,910) 13,957 16,054 41,262
-------- -------- -------- --------
Total current (8,910) 13,957 16,054 41,262
-------- -------- -------- --------
Deferred:
Federal -- -- -- --
State (53) (4,631) (237) (10,823)
-------- -------- -------- --------
Total deferred (53) (4,631) (237) (10,823)
-------- -------- -------- --------
Total $ (8,963) $ 9,326 $ 15,817 $ 30,439
======== ======== ======== ========
</TABLE>
Nexus filed consolidated federal tax returns 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 are not filing
consolidated tax returns with PSI. Nexus and its subsidiaries are filing
individual federal tax returns for the period beginning August 13, 1996 and
ending February 28, 1997. Subsequent to February 28, 1997, Nexus and its
subsidiaries are filing consolidated federal tax returns.
5.STOCK SPLIT
On May 14, 1998, the Company declared a common stock dividend of one common
share for every two common shares owned of record on June 14, 1998. The
accompanying financial statements give retroactive effect to this stock
dividend.
-9-
<PAGE> 11
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. NOTES PAYABLE
In September 1998 the food service division entered into a term loan agreement
with a bank which was used to finance the opening of the seventeenth restaurant.
The loan is for $600,000 and bears interest at the rate of 8.75%. The first four
payments are for interest only, followed by 56 monthly payments of principal and
interest in the amount of $5,998. On June 22, 2003 a balloon payment will be due
in the amount of $498,319. The loan is secured by a first deed of trust on the
leasehold estate and a first lien on all equipment and furnishings of the
restaurant. As additional collateral for the loan, a second deed of trust was
pledged on a restaurant in another location.
-10-
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF INTERIM 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 herein and 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 unaudited consolidated
financial statements for the nine months and three months ended November 30,
1998 and 1997. The following should be read in conjunction with the Management's
Discussion and Analysis of results of operations and financial condition
included in the 1998 10-K.
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.
RESULTS OF OPERATIONS
1998 PERIODS COMPARED TO THE 1997 PERIODS
The Company's revenues increased by $326,000, or 8%, for the three
months ended November 30, 1998 to $4,648,000 from $4,322,000 for the three
months ended November 30, 1997. The increase was a result of increased revenues
in all three divisions. Revenues increased by $158,000, or 1%, for the nine
months ended November 30, 1998 to $13,810,000 from $13,652,000 for the nine
months ended November 30, 1997. The increase was a result of increased revenues
in the real estate and medical financing divisions offset by decreased revenues
in the food service division.
The revenue increase in the food service division for the three months
ended November 30, 1998 was $246,000 as compared to the three months ended
November 30, 1997. The increase was due to the additional revenues that were
generated from the seventeenth restaurant that opened in September 1998 and
favorable weather conditions which increased traffic at most store locations.
Due
-11-
<PAGE> 13
to the fact that the seventeenth restaurant and the additional revenue that it
provided, did not open until the third quarter of 1998, there was an overall
revenue decrease in the food service division for the nine months ended November
30, 1998 of $276,000 as compared to the same period in 1997. The decrease was
attributable primarily to the higher revenue in the 1997 period resulting from
special national advertising, which was used to implement new menu and
promotional items. In addition, the opening of a competing restaurant at one of
the locations adversely affected revenues. Revenue in the real estate division
increased by $57,000 for the three months ended November 30, 1998 as compared to
the three months ended November 30, 1997. Revenues in the real estate division
for the nine months ended November 30, 1998 increased by $199,000 as compared to
the same period in 1997. The additional revenue in the real estate division was
attributable to the sale of real estate in the 1998 period and increases in
interest and rental income. Growth in revenues in the medical financing division
for the three months and nine months ended November 30, 1998 was $23,000 and
$235,000 as compared to the same periods in 1997. The increase in revenues was
due to the increase in the medical insurance claims receivables that were
purchased in the current period from existing and new customers.
Costs and expenses increased $274,000, or 6%, for the three months
ended November 30, 1998, to $4,658,000 from $4,384,000 for the three months
ended November 30, 1997. Costs and expenses increased $236,000, or 2% for the
nine months ended November 30, 1998, to $13,840,000 from $13,604,000 for the
nine months ended November 30, 1997. The net increase for the three months ended
November 30, 1998 was due to increases of $249,000 in the food service division,
$24,000 in the medical financing division and $45,000 in corporate expenses,
which was offset by a decrease in the real estate division of $44,000. The net
increase for the nine months ended November 30, 1998 was due to increases of
$186,000 in the medical financing division and $181,000 in corporate expenses,
which was offset by decreases in the food service division of $53,000, $66,000
in the real estate division and $12,000 in depreciation and amortization.
The fluctuations in the costs and expenses of the food service
division are due to changes in food and labor costs that are directly related to
the increases and decreases in revenues for both the nine month and three month
periods ended November 30, 1998 as compared with the same periods in the prior
year. In addition, labor costs were higher for the nine months ended November
30, 1998 compared to the same period in 1997 due to an increase in the minimum
wage and the hiring of additional managers in restaurants that were previously
understaffed during the prior periods. The decreases in the real estate division
is attributable to a reduction in operating costs. The increases in corporate
expenses is primarily due to the additional costs related to the initial
registration of the Company's common stock pursuant to the Securities and
Exchange Act of 1934 in 1998. The increase of the costs and expenses of the
medical financing division was attributable to additional expenditures on staff
and systems as a result of the increase in volume.
For the reasons noted above, the amount of loss from operations
decreased $51,000 from a loss of $61,000 for the three months ended November 30,
1997 to a loss of $10,000 for the three months ended November 30, 1998. Income
from operations decreased $78,000 from a profit of $48,000 for the nine months
ended November 30, 1997 to a loss of $30,000 for the nine months ended November
30, 1998. Net interest costs decreased $41,000 and the provision for tax
decreased
-12-
<PAGE> 14
$18,000 producing a net loss of $64,000 for the three months ended November 30,
1998 as compared to a net loss of $84,000 for the three months ended November
30, 1997. Net interest costs decreased $148,000 and the provision for tax
decreased $15,000 producing an increase in net loss of $8,000, from a loss of
$199,000 for the nine months ended November 30, 1997 to a loss of $207,000 for
the nine months ended November 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's three business activities during the nine month period
ended November 30, 1998 resulted in the use of cash in the amount of $574,000.
The Company expects growth of its medical financing division to increase which
will result in the continued use of cash. 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. Cash flow provided from the food
service division decreased by $25,000 to $97,000 for the nine months ended
November 30, 1998 as compared with $122,000 for the same period in 1997. The
Company's anticipated reduction in the amount of capital expenditures should
result in cash continuing to be provided from the food service division for the
balance of the current fiscal year. Management believes the effects of
competition at one of its locations will diminish, the addition of the
seventeenth restaurant and new menu items will have a positive effect on cash
flow during fiscal 1999. The real estate division is not expected to be a
significant user of cash flow from operations by reason of the disposition as of
January 1, 1998 of the formerly vacant space in the Granby, CT property. The
Company's real estate assets in Hunter, NY and Brookfield, 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 internally and from its financing activities.
Cash provided by operations during the nine months ended November 30,
1998 was $186,000 compared to $156,000 provided during the same period in the
prior year. The increase in 1998 was due to fluctuations in operating assets and
liabilities primarily caused by timing differences and the collection of a
rebate due from a soft drink vendor in the food service division, offset by
additions to real estate held for development and sale. Cash used in investing
activities was $1,318,000 for the nine months ended November 30, 1998 as
compared with $1,268,000 used in the prior year. The net increase in the use of
cash in 1998 was primarily due to a lower amount that was due and collected from
notes receivable. Net cash provided from financing activities was $558,000
during the nine months ended November 30, 1998 as compared with $552,000
provided in the prior year. The increase in 1998 was due to fluctuations in
borrowing and repayment of debt offset by a decrease in the proceeds and
repayment of the finance obligation.
-13-
<PAGE> 15
YEAR 2000 COMPLIANCE
The company has completed a review of its computer systems and
operations to determine the extent to which its systems will be vulnerable to
potential errors and failures as a result of the "Year 2000 problem". That
problem is the result of prior computer programs being written using two digits
rather than four digits to define the applicable year. Any computer programs
that have time sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. The Company has completed its assessment of the
state of its own year 2000 preparedness and concluded that its own internal
mission-critical systems will not be affected by the Year 2000 problem.
STATE OF READINESS
Food Services Division: This division presently consists of seventeen
Wendy's restaurants. The revenues of this division are received at the
restaurants in cash and do not depend on Information Technology (IT) Systems.
The in-house computer systems and cash registers from which the operating data
from each restaurant is transmitted to the Company's headquarters and to Wendy's
International are in compliance with the year 2000. The payment of the employees
and creditors of this division will not be affected by the Year 2000 problem.
Real Estate Division: Neither the revenues nor the expenses of this
division are dependent on computer systems for their receipt or disbursement.
Medical Financing Division: This division purchases insurance company
receivables from medical providers and transmits the purchased receivables to
the insurance company for payment without the use of electronic equipment. The
Company receives hard copy bills from the medical providers and forwards hard
copy bills for collection to the insurance company. The Company's in-house
computer systems that record the transactions and prepare reports for management
and medical providers are compliant with the Year 2000.
Suppliers, Customers and Third Party Providers: The revenues in the
Medical Financing Division are received entirely from insurance companies which
have been accepted by the Company as responsible and are licensees of the New
York State Insurance Department (the "Insurance Department"). In October 1998
the Insurance Department announced that it has stepped up its efforts to ensure
that its licensees are properly addressing the Year 2000 problem. In addition to
reviewing responses received to its compliance requests, the Insurance
Department has conducted on-site investigations which are already substantially
underway and it is now engaged in testing, certifying and completing compliance
by the licensees with which the Company does business.
Except for providers of electricity and phone service the Company is
not dependent on any single third party provider or group of providers other
than said insurance companies.
-14-
<PAGE> 16
COSTS
The Company does not anticipate any significant additional costs to
address its Year 2000 issues. The new in-house computer systems and equipment
which the Company has purchased, and continues to purchase, are related to the
growth of its business and not to the Year 2000 problem. The new equipment is
Year 2000 compliant.
RISKS/CONTINGENCY PLANS
The Company has no control over services, functions and data provided
by third party vendors or payors which may affect dealings with its customers.
As to the insurance companies which make payment of the receivables purchased by
the Company, management is relying on the Insurance Department to assure that
they become Year 2000 compliant. The company is following the public statements
and reports from the Insurance Department as to the readiness of the companies
with which it does business because a sustained interruption in the receipts
from several state licensees may adversely impact the ability of the Medical
Financing Division to do business. The Company is in the early phase of
developing contingency plans to meet this risk which include obtaining
additional financing for the carrying of increased receivables and the prompt
enforcement of the statutory periods by which the insurance companies must
respond to the requests for payment of the receivables.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997 the FASB issued SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 131 requires the reporting of
profit and loss, specific revenue and expense items, and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit and loss, total segment assets and other amounts disclosed for
segments to the corresponding amounts in the general purpose financial
statements. This statement is effective for financial statements issued for
periods beginning after December 15, 1997. The Company will adopt this statement
in the fiscal year ending February 28, 1999. SFAS No. 131 is not required to be
applied to interim financial statements in the initial year of its application.
-15-
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS.
27. Financial Data Schedule
b) REPORTS ON FORM 8K.
None.
-16-
<PAGE> 18
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.
FRM NEXUS, INC.
By: /s/ VICTOR BRODSKY
----------------------------------------
Victor Brodsky
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 13, 1999
-17-
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<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
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