<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: May 31, 1999
|_| 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 July 14, 1999: 1,816,462.
<PAGE> 2
FRM Nexus, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets--May 31, 1999 and February 28, 1999................2
Consolidated Statements of Operations --Three months ended
May 31, 1999 and 1998..........................................................4
Consolidated Statement of Stockholders' Equity--
Three months ended May 31, 1999 ............................................5
Consolidated Statements of Cash Flows--
Three months ended May 31, 1999 and 1998....................................6
Notes to Consolidated Financial Statements.....................................7
-1-
<PAGE> 3
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1999 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 706,161 $ 765,160
Mortgage and notes receivable - current 24,868 24,317
Finance receivables, net 2,474,765 2,980,159
Inventories 60,484 106,671
Other current assets 213,681 367,027
----------- -----------
Total current assets 3,479,959 4,243,334
----------- -----------
Property and equipment:
Property and equipment, at cost 2,488,929 6,895,428
Less accumulated depreciation and amortization 1,486,420 2,758,146
----------- -----------
1,002,509 4,137,282
----------- -----------
Other assets:
Real estate held for development and sale 1,473,554 1,473,554
Mortgage and notes receivable 3,232,590 3,192,367
Leasehold costs, net of accumulated amortization
of $369,274 at May 31, 1999 and $358,889
at February 28, 1999 455,220 465,605
Technical assistance fees, net of accumulated
amortization of $98,192 at May 31, 1999 and
$169,623 at February 28, 1999 89,308 230,377
Other 441,924 481,865
----------- -----------
Total other assets 5,692,596 5,843,768
----------- -----------
Total assets $10,175,064 $14,224,384
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE> 4
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 641,430 $ 1,189,459
Current portion of notes payable, including $96,779 at May 31, 1999
and $85,972 at February 28, 1999 payable to related parties 191,016 291,338
Due to finance customers 1,073,541 1,460,410
Income taxes payable 1,403 7,491
Other current liabilities 19,882 63,671
------------ ------------
Total current liabilities 1,927,272 3,012,369
------------ ------------
Other liabilities:
Notes payable, including $-0- at May 31, 1999 and $755,511
at February 28, 1999 payable to related parties 172,420 3,212,315
Deferred Income 2,760,624 2,760,624
------------ ------------
Total other liabilities 2,933,044 5,972,939
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.10 par value;
Authorized - 2,000,000 shares;
Issued and outstanding - 1,816,462 shares 181,646 181,646
Capital in excess of par value 5,826,909 5,826,909
Unrealized loss on mortgage and notes receivable (102,466) (149,116)
Accumulated deficit (591,341) (620,363)
------------ ------------
Total stockholders' equity 5,314,748 5,239,076
------------ ------------
Total liabilities and stockholders' equity $ 10,175,064 $ 14,224,384
============ ============
</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 MAY 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Restaurant food sales -
Continuing $ 2,280,711 $ 2,274,949
Discontinued 1,571,965 1,665,969
Sale of real estate -- 40,678
Rental income 25,175 23,911
Interest from mortgages 58,332 59,151
Income from the purchase of medical receivables 331,302 286,971
----------- -----------
Total income 4,267,485 4,351,629
----------- -----------
COSTS AND EXPENSES
Restaurant food sales -
Continuing 2,206,227 2,221,705
Discontinued 1,441,655 1,585,786
Real estate 86,338 125,067
Medical receivables 295,550 251,562
Corporate expenses 104,262 115,614
Depreciation and amortization 125,568 119,159
----------- -----------
Total costs and expenses 4,259,600 4,418,893
----------- -----------
Income (loss) from operations 7,885 (67,264)
----------- -----------
Other income (expense):
Gain on sale of subsidiary 96,303 --
Interest income 5,242 11,632
Interest expense (75,418) (62,395)
----------- -----------
26,127 (50,763)
----------- -----------
Income (loss) before provision for income taxes 34,012 (118,027)
Provision for income taxes 4,990 7,103
----------- -----------
Net income (loss) $ 29,022 $ (125,130)
=========== ===========
Basic and diluted earnings (loss) per common share $ 0.02 $ (0.07)
=========== ===========
Number of shares used in computation of basic and
diluted earnings per share 1,816,462 1,816,462
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE> 6
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
February 28, 1999 through May 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN GAINS (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL (LOSSES) DEFICIT) EQUITY
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1999 $ 181,646 $5,826,909 $ (149,116) $ (620,363) $5,239,076
Change in unrealized loss on
mortgage and notes receivable -- -- 46,650 -- 46,650
Net income -- -- -- 29,022 29,022
---------- ---------- ---------- ---------- ----------
Balance, May 31, 1999 $ 181,646 $5,826,909 $ (102,466) $ (591,341) $5,314,748
========== ========== ========== ========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-5-
<PAGE> 7
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 29,022 $ (125,130)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 125,568 119,159
Gain on sale of subsidiary (96,303) --
Gain on sale of equipment (1,714) --
Provision (credit) for bad debts (9,234) --
Deferred income taxes -- (91)
Changes in operating assets and liabilities:
Vendor rebate receivable -- 244,477
Inventories (5,604) (17,138)
Additions to real estate held for
development and sale -- (3,143)
Prepaid expenses, miscellaneous receivables
and other assets 112,797 41,940
Accounts payable, accrued expenses and taxes (296,484) (49,085)
Other current liabilities (43,789) (2,707)
----------- -----------
Net cash provided by (used in) operating activities (185,741) 208,282
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (143,987) (83,840)
Sale of equipment 24,000 --
Finance receivables 514,628 (34,089)
Sale of subsidiary, net of cash disposed of 910,756
Due to finance customers (386,869) (141,219)
Principal payments on notes receivable 5,876 5,373
----------- -----------
Net cash provided by (used in) investing activities 924,404 (253,775)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable (797,662) (282,897)
----------- -----------
Net cash used in financing activities (797,662) (282,897)
----------- -----------
Net increase (decrease) in cash and cash equivalents (58,999) (328,390)
Cash and cash equivalents, beginning of period 765,160 1,434,893
----------- -----------
Cash and cash equivalents, end of period $ 706,161 $ 1,106,503
=========== ===========
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 73,789 $ 64,976
=========== ===========
Income taxes paid $ 14,123 $ 39,074
=========== ===========
</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 May 31, 1999; results of operations for the three
months ended May 31, 1999 and 1998; cash flows for the three months ended May
31, 1999 and 1998; and changes in stockholders' equity for the three months
ended May 31, 1999. 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, 1999. The consolidated balance sheet at February 28, 1999
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>
MAY 31, FEBRUARY 28,
1999 1999
---------------------------------------
<S> <C> <C>
Gross finance receivables $2,841,256 $3,409,095
Allowance for credit losses (76,766) (86,000)
Deferred finance income (289,725) (342,936)
---------------------------------------
$2,474,765 $2,980,159
=======================================
</TABLE>
-7-
<PAGE> 9
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1999 1999
-------------------------------------------
<S> <C> <C>
Land $ - $ 740,000
Land improvements 25,506 445,008
Buildings - 826,185
Restaurant equipment 1,588,849 3,175,213
Leasehold improvements 507,357 1,213,279
Computer equipment 158,192 181,669
Equipment under capital leases 191,625 286,174
Other equipment and furniture 17,400 27,900
-------------------------------------------
2,488,929 6,895,428
Less accumulated depreciation and amortization 1,486,420 2,758,146
-------------------------------------------
Property and equipment, net $ 1,002,509 $ 4,137,282
===========================================
</TABLE>
Depreciation expense for the three months ended May 31, 1999 and 1998, which
includes amortization under capital leases was $107,386 and $101,110.
4. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1999 1999
---------------------------------------------
<S> <C> <C>
Mortgage on real estate $ - $ 1,599,043
Bank--term 175,000 918,057
Related party credit line - 781,483
Related party escrow loan 96,779 -
Related party loans - 60,000
Capital lease obligations 91,657 135,187
Purchase money note - 9,883
---------------------------------------------
363,436 3,503,653
Less current maturities 191,016 291,338
---------------------------------------------
Long-term debt $ 172,420 $ 3,212,315
=============================================
</TABLE>
-8-
<PAGE> 10
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
Related Party Credit Line: In December 1997, a $700,000 line of credit was
obtained from a related party, Northwest Management Corp. ("NMC"), a shareholder
of the Company. In January 1999, the line of credit was increased to $785,000.
The president of NMC, who is also a shareholder of the Company, has the power to
vote NMC shares which are owned by his two children. The line, under which there
was no outstanding balance at May 31, 1999, expires at the earliest of (i)
payment in full of the second mortgage receivable from the sale of the Granby
property, (ii) February 28, 2001 or (iii) on mutual agreement of the Company and
NMC, with final maturity on October 31, 2002. Interest is calculated at a rate
of 12% per annum. Monthly payments, when there is an outstanding balance on the
credit line, are due for interest and principal in the amount of $9,863 with a
final payment of any outstanding balance at the maturity date. There were no
commitment fees paid in connection with this line of credit.
The line has a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The line is collateralized by a second mortgage
receivable on the Granby property and the purchased insurance claims receivable
of Medical Financial Corp. equal to at least 200% of the principal sum
outstanding under the line.
Related party escrow loan: In February 1999, a related partnership, whose
partners are directors, officers and shareholders of the Company, committed to
loan until March 15, 2000 an investment portfolio valued at $240,000 to the
Medical Financial Corp. subsidiary. This investment portfolio is being held in
escrow and is used as collateral for the purpose of obtaining loans. All risks
and rewards of the investment portfolio pass to the related party. The loans
bear interest at a variable rate based on market condition set at the discretion
of the investment brokerage. A fee is payable monthly to the related party at
the rate of 5% per annum on the value of the investment escrow account. This fee
is included in interest expense. Proceeds from the loan may only be used to fund
the purchase of certain medical receivables. The loan is repaid as payment is
received from such receivables.
Related Party Loans: During the year ended February 28, 1999, the Company
borrowed at various times a total of $60,000 from two directors, officers and
shareholders. The loans were repaid in full during the three months ended May
31, 1999. The interest rate on these loans was at 12% per annum. Both interest
and principal were payable on demand.
Interest expense on these related party borrowings was $25,380 and $10,148 for
the three months ended May 31, 1999 and May 31, 1998.
-9-
<PAGE> 11
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
Capital Lease Obligations: The Company has acquired certain equipment under
various capital leases expiring in 2003. The leases provide for monthly payments
of principal and interest of $4,426 and have been capitalized at imputed
interest rates of 9.37% to 16.72%.
Aggregate maturities of the amount of notes payable and capital leases for the
years ending February 28 are as follows:
<TABLE>
<CAPTION>
NOTES CAPITAL LEASE
PAYABLE OBLIGATIONS TOTAL
------------------ ------------------ -----------------
<S> <C> <C> <C>
2000 (nine months) $146,779 $ 39,840 $186,619
2001 125,000 38,314 163,314
2002 - 21,055 21,055
2003 - 6,054 6,054
------------------ ------------------ -----------------
271,779 105,263 377,042
Amount representing interest - 13,606 13,606
------------------ ------------------ -----------------
Total (a) $271,779 $ 91,657 $363,436
================== ================== =================
</TABLE>
(a)--Total capital lease obligations represent present value of minimum lease
payments.
-10-
<PAGE> 12
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES
MINIMUM OPERATING LEASE COMMITMENTS
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 Company's leases for the years ending February 28:
<TABLE>
<S> <C>
2000 (nine months) $ 486,578
2001 656,266
2002 611,000
2003 604,250
2004 530,000
Thereafter 3,920,834
----------
Total $6,808,928
==========
</TABLE>
PSI LITIGATION
In 1993, the shareholders of 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.
-11-
<PAGE> 13
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
In May 1999, PSI settled its indebtedness to, and claims by, the United States
and the Department of Education for an amount which was paid by PSI except for
$140,000 to be paid over a period ending in 2001. PSI is negotiating to settle
its indebtedness to the Internal Revenue Service and a former landlord of PSI
school for a total of $125,000. As a result of the 1993 Stipulation described
above, the Company believes it is not responsible for the obligations of PSI.
6. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
1999 1998
------------------------------------
<S> <C> <C>
Current:
Federal $ 4,353 $ -
State 4,990 7,194
------------------------------------
Total current 9,343 7,194
------------------------------------
Deferred:
Federal (4,353) -
State - (91)
------------------------------------
Total deferred (4,353) (91)
------------------------------------
Total $ 4,990 $ 7,103
====================================
</TABLE>
-12-
<PAGE> 14
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. SALE OF SUBSIDIARY
On May 14, 1999, the Company sold Wendclark, Inc., one of the two subsidiaries
that operate in the food service division. The Company received $975,000 in
cash, resulting in a gain of $96,303. As a result of this sale, $2,342,555 of
debt that was carried on Wendclark was eliminated. The revenues and operating
expenses of Wendclark for the three months ended May 31, 1999 and 1998 have been
reclassified as discontinued.
8. BUSINESS SEGMENT INFORMATION
In the fourth quarter of fiscal 1999, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 establishes standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for disclosures about products and
service and geographic areas. Operating segments are components of an enterprise
for which separate financial information is available and which is evaluated
regularly by the Company's chief operating decision maker, or decision maker
group, in deciding how to allocate resources and assess performance.
Operating segments are managed separately and represent separate business units
that offer different products and serve different markets. The Company's
reportable segments include: (1) food services, (2) real estate, (3) medical
financing and (4) other, which is comprised of corporate overhead. The food
services segment operates in West Virginia (discontinued as of May 14, 1999) and
the Hudson Valley, NY area. The real estate segment operates in New York and
Connecticut. The medical financing segment operates in New York and New Jersey.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment balances have been
eliminated. Inter-segment balances bear interest at the rate of 10% per annum
and are included in net interest expense. Business segment information for the
three months ended May 31, 1999 and 1998 follows. Certain prior year information
has been reclassified to conform with the current year presentation.
-13-
<PAGE> 15
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOOD REAL MEDICAL
SERVICE ESTATE FINANCING OTHER TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1999
Total revenue from external customers $ 3,852,676 $ 83,507 $ 331,302 $ -- $ 4,267,485
Income(loss) from operations 92,632 (4,442) 23,957 (104,262) 7,885
Gain on sale of subsidiary 96,303 -- -- -- 96,303
Interest expense,net 44,495 (29,632) 55,313 -- 70,176
Income(loss) before provision for taxes 144,440 25,190 (31,356) (104,262) 34,012
Total assets 1,888,036 5,367,287 2,919,741 -- 10,175,064
Capital expenditures 105,446 -- 38,541 -- 143,987
Depreciation and amortization 112,162 1,611 11,795 -- 125,568
1998
Total revenue from external customers $ 3,940,918 $ 123,740 $ 286,971 $ -- $ 4,351,629
Income(loss) from operations 20,865 (2,633) 30,118 (115,614) (67,264)
Interest expense,net 46,183 (21,927) 26,507 -- 50,763
Income(loss) before provision for taxes (25,318) 19,294 3,611 (115,614) (118,027)
Total assets 5,007,240 5,057,200 2,348,511 -- 12,412,951
Capital expenditures 72,199 11,641 -- -- 83,840
Depreciation and amortization 112,562 1,306 5,291 -- 119,159
</TABLE>
-14-
<PAGE> 16
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 three months ended May 31, 1999 and 1998. The
following should be read in conjunction with the Management's Discussion and
Analysis of results of operations and financial condition included in the 1999
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
1999 PERIOD COMPARED TO THE 1998 PERIOD
The Company's revenues decreased by $85,000, or 2%, for the three
months ended May 31, 1999 to $4,267,000 from $4,352,000 for the three months
ended May 31, 1998. The decrease was a result of decreased revenues in the food
service and real estate divisions, offset by an increase in the medical
financing division.
The revenue decrease of $88,000 in the food service division for the
three months ended May 31, 1999 was attributable to the sale of the Wendclark
subsidiary on May 14, 1999. This subsidiary operated nine restaurants in West
Virginia. Prior to the date of sale there was a revenue increase due to the
additional revenues that were generated from the seventeenth restaurant that
opened in September 1998. Revenues in the real estate division decreased by
$40,000 from $124,000 for the three months ended May 31, 1998 to $84,000 for the
three months ended May 31, 1999. The decrease in revenue was attributable to the
lack of real estate sales in the 1999 period. Revenues increased in
-15-
<PAGE> 17
the medical financing division by $44,000, or 15%, for the three months ended
May 31, 1999 from $287,000 in 1998 to $331,000 in 1999. The growth in revenue
was due to the additional revenue earned from the increased amount of medical
insurance claims receivable collected as compared to the prior year.
Costs and expenses decreased $159,000, or 4%, for the three months
ended May 31, 1999, to $4,260,000 from $4,419,000 for the three months ended May
31, 1998. The net decrease for the three months ended May 31, 1999 was due to
decreases of $159,000 in the food service division, $39,000 in the real estate
division and $12,000 in corporate expenses, which were offset by an increase in
the medical financing division of $44,000 and $7,000 in depreciation and
amortization.
The decrease in the costs and expenses of the food service division
are due to decreases in food and labor costs that are directly related to the
decreases in revenues for the three month period ended May 31, 1999 as compared
with the same period in the prior year. Prior to the sale of the Wendclark
subsidiary on May 14, 1999, there was an increase in costs and expenses due to
the opening of the seventeenth restaurant in September 1998. In addition, labor
costs were higher for the three months ended May 31, 1999 compared to the same
period in 1998 due to the hiring of additional managers in restaurants that were
previously understaffed during the prior periods. The decrease in the real
estate division is attributable to a reduction in operating costs. The decrease
in corporate expenses is primarily due to the reduction and stabilization of new
costs in 1999 related to the initial registration of the Company's common stock
pursuant to the Securities and Exchange Act of 1934 in 1998. The 17% increase in
costs and expenses in the medical financing division in 1999 as compared to the
same period in 1998 were attributable to additional expenditures on staff as a
result of the increase in volume. The increase in depreciation and amortization
is attributable to increased capital expenditures in the medical financing
division.
Interest expense increased by $13,000 from $62,000 in 1998 to $75,000
in 1999. The increase was attributable to additional borrowings to finance the
increase in medical claims receivable.
The gain on sale of subsidiary in 1999 was a result of the sale of the
Wendclark subsidiary for $975,000, which had a carrying value of $878,697.
For the reasons noted above, the Company experienced net income in the
amount of $29,000 for the three months ended May 31, 1999 as compared with a net
loss of $125,000 for the three months ended May 31, 1998.
-16-
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's three business activities during the three month period
ended May 31, 1999 resulted in the use of cash in the amount of $59,000. 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 for by the $975,000 in proceeds from the sale of the Wendclark
subsidiary. Additional funds may 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 $329,000
from $181,000 in 1998 to cash being used in the amount of $148,000 in 1999. The
Company anticipates that seasonal increases in revenues and new menu items will
improve cash flow for the remainder of the current fiscal year. The loss of
revenues from the Wendclark subsidiary, which operated nine restaurants, will
not impact future liquidity due to the insignificant amount of cash flows that
were generated from them during the prior two fiscal years. As a result of the
sale of Wendclark, $2,342,555 of debt that was carried on their books was
eliminated, improving the Company's working capital and debt-equity ratio.
The real estate division is not expected to be a significant user of
cash flow from operations. 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 the sale
of condominium units in Hunter or 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 used by operations during the three months ended May 31, 1999 was
$186,000 as compared to $208,000 being provided during the same period in the
prior year. The decrease in 1999 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 in 1998.
Cash provided by investing activities was $924,000 for the three
months ended May 31, 1999 as compared with $254,000 being used in the prior
year. The net increase of $1,243,000 was primarily due to the $975,000 proceeds
from the sale of the Wendclark subsidiary. In the medical financing division,
medical insurance claims receivable decreased by $515,000 during the three
months ended May 31, 1999.
Net cash used in financing activities was $798,000 during the three
months ended May 31, 1999 as compared with $283,000 being used in the prior
year. The increase in 1999 was primarily due to the repayment of the related
party credit line in the amount of $775,000, which used a portion of the
proceeds from the sale of the Wendclark subsidiary.
-17-
<PAGE> 19
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 eight
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.
-18-
<PAGE> 20
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.
-19-
<PAGE> 21
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.
-20-
<PAGE> 22
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: July 14, 1999
-21-
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