<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: August 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)
DELAWARE 13-3754422
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
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 October 14, 1999: 1,816,462.
<PAGE> 2
FRM NEXUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1999
Page No.
--------
PART I
Item 1. Financial Statements................................. 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk .................................................. 20
PART II
Item 6. Exhibits and reports on form 8-K..................... 20
<PAGE> 3
FRM Nexus, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - August 31, 1999 (unaudited) and
February 28, 1999 ..........................................................2
Consolidated Statements of Operations (unaudited) -
Six months and three months ended August 31, 1999 ..........................4
Consolidated Statement of Stockholders' Equity (unaudited) -
Six months ended August 31, 1999 ...........................................5
Consolidated Statements of Cash Flows (unaudited) -
Six months ended August 31, 1999 and 1998...................................6
Notes to Consolidated Financial Statements.....................................7
-1-
<PAGE> 4
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
--------------------------------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash & cash equivalents $1,117,641 $ 765,160
Mortgage and notes receivable - current 23,399 24,317
Finance receivables, net 2,477,819 2,980,159
Inventories 63,324 106,671
Other current assets 159,651 367,027
--------------------------------------
Total current assets 3,841,834 4,243,334
--------------------------------------
Property and equipment:
Property and equipment, at cost 2,557,965 6,895,428
Less accumulated depreciation and amortization 1,542,907 2,758,146
--------------------------------------
1,015,058 4,137,282
--------------------------------------
Other assets:
Real estate held for development and sale 1,090,381 1,282,443
Mortgage and notes receivable 3,233,866 3,192,367
Leasehold costs, net of accumulated amortization
of $379,660 at August 31, 1999 and $358,889
at February 28, 1999 444,834 465,605
Technical assistance fees, net of accumulated
amortization of $101,162 at August 31, 1999 and
$169,623 at February 28, 1999 86,338 230,377
Other 439,742 481,865
--------------------------------------
Total other assets 5,295,161 5,652,657
--------------------------------------
Total assets $10,152,053 $14,033,273
======================================
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE> 5
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
--------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 689,244 $1,189,459
Current portion of notes payable, including $-0- at August 31, 1999
and $85,972 at February 28, 1999 payable to related parties 94,237 291,338
Due to finance customers 1,300,067 1,460,410
Income taxes payable 4,039 7,491
Other current liabilities 22,492 63,671
--------------------------------------
Total current liabilities 2,110,079 3,012,369
--------------------------------------
Other liabilities:
Notes payable, including $-0- at August 31, 1999 and $755,511
at February 28, 1999 payable to related parties 149,132 3,212,315
Deferred Income 2,569,513 2,569,513
--------------------------------------
Total other liabilities 2,718,645 5,781,828
--------------------------------------
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 (94,616) (149,116)
Accumulated deficit (590,610) (620,363)
--------------------------------------
Total stockholders' equity 5,323,329 5,239,076
--------------------------------------
Total liabilities and stockholders' equity $ 10,152,053 $ 14,033,273
======================================
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE> 6
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998 1999 1998
-------------------------------- -------------------------------
REVENUES
Restaurant food sales -
<S> <C> <C> <C> <C>
Continuing $2,944,170 $ 2,678,527 $5,224,881 $ 4,953,476
Discontinued - 1,797,341 1,571,965 3,463,310
Sale of real estate 211,000 - 211,000 40,678
Rental income 27,010 34,419 52,185 58,330
Interest from mortgages 58,198 59,039 116,530 118,190
Income from the purchase of medical receivables 278,279 240,699 609,581 527,670
-------------------------------- -------------------------------
Total income 3,518,657 4,810,025 7,786,142 9,161,654
-------------------------------- -------------------------------
COSTS AND EXPENSES
Restaurant food sales -
Continuing 2,741,886 2,513,720 4,948,113 4,735,425
Discontinued - 1,669,273 1,441,655 3,255,059
Real estate 278,097 77,336 364,435 202,403
Medical receivables 335,266 255,842 630,816 507,404
Corporate expenses 84,437 127,270 188,699 242,884
Depreciation and amortization 69,843 119,359 195,411 238,518
-------------------------------- -------------------------------
Total costs and expenses 3,509,529 4,762,800 7,769,129 9,181,693
-------------------------------- -------------------------------
Income (loss) from operations 9,128 47,225 17,013 (20,039)
-------------------------------- -------------------------------
Other income (expense):
Gain on sale of subsidiary - - 96,303 -
Interest income 7,503 9,659 12,745 21,291
Interest expense (9,342) (57,108) (84,760) (119,503)
-------------------------------- -------------------------------
(1,839) (47,449) 24,288 (98,212)
-------------------------------- -------------------------------
Income (loss) before provision for income taxes 7,289 (224) 41,301 (118,251)
Provision for income taxes 6,558 17,677 11,548 24,780
-------------------------------- -------------------------------
Net income (loss) $ 731 $ (17,901) $ 29,753 $ (143,031)
================================ ===============================
Basic and diluted earnings (loss) per common share $ 0.00 $ (0.01) $ 0.02 $ (0.08)
================================ ===============================
Number of shares used in computation of basic and
diluted earnings per share 1,816,462 1,816,462 1,816,462 1,816,462
================================ ===============================
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE> 7
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
February 28, 1999 through August 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 - - 54,500 - 54,500
Net income - - - 29,753 29,753
-----------------------------------------------------------------------------------------
Balance, August 31, 1999 $ 181,646 $ 5,826,909 $ (94,616) $ (590,610) $ 5,323,329
=========================================================================================
</TABLE>
See notes to interim consolidated financial statements.
-5-
<PAGE> 8
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1999 1998
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 29,753 $ (143,031)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 195,411 238,518
Gain on sale of subsidiary (96,303) -
Gain on sale of real estate held for
development and sale (7,288) -
Gain on sale of equipment (1,714) -
Provision (credit) for bad debts (9,234) -
Deferred income taxes - (184)
Changes in operating assets and liabilities:
Vendor rebate receivable - 244,477
Inventories (8,444) (3,980)
Collections from sale of real estate held for
development and sale 199,350 -
Additions to real estate held for
development and sale - (98,944)
Prepaid expenses, miscellaneous receivables
and other assets 169,009 34,415
Accounts payable, accrued expenses and taxes (246,034) 73,416
Other current liabilities (41,179) (4,943)
-------------------------------------
Net cash provided by (used in) operating activities 183,327 339,744
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (213,023) (368,966)
Sale of equipment 24,000 -
Finance receivables 511,574 (166,801)
Sale of subsidiary, net of cash disposed of 910,756 -
Due to finance customers (160,343) (55,649)
Principal payments on notes receivable 13,919 10,867
-------------------------------------
Net cash provided by (used in) investing activities 1,086,883 (580,549)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 96,779 250,000
Principal payments on notes payable (1,014,508) (330,918)
Payment of fractional shares - (315)
-------------------------------------
Net cash used in financing activities (917,729) (81,233)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 352,481 (322,038)
Cash and cash equivalents, beginning of period 765,160 1,434,893
-------------------------------------
Cash and cash equivalents, end of period $ 1,117,641 $ 1,112,855
=====================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 76,682 $ 117,772
=====================================
Income taxes paid $ 14,123 $ 39,074
=====================================
</TABLE>
See notes to interim consolidated financial statements.
-6-
<PAGE> 9
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
August 31, 1999; results of operations for the six months and three months ended
August 31, 1999 and 1998; cash flows for the six months ended August 31, 1999
and 1998; and changes in stockholders' equity for the six months ended August
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>
AUGUST 31, FEBRUARY 28,
1999 1999
---------------------------------------
<S> <C> <C>
Gross finance receivables $2,831,648 $3,409,095
Allowance for credit losses (76,766) (86,000)
Deferred finance income (277,063) (342,936)
---------------------------------------
$2,477,819 $2,980,159
=======================================
</TABLE>
-7-
<PAGE> 10
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1999 1999
--------------------------------------------
<S> <C> <C>
Land $ - $ 740,000
Land improvements 25,506 445,008
Buildings - 826,185
Restaurant equipment 1,629,020 3,175,213
Leasehold improvements 509,056 1,213,279
Computer equipment 185,159 181,669
Equipment under capital leases 191,625 286,174
Other equipment and furniture 17,599 27,900
--------------------------------------------
2,557,965 6,895,428
Less accumulated depreciation and amortization 1,542,907 2,758,146
--------------------------------------------
Property and equipment, net $ 1,015,058 $ 4,137,282
============================================
</TABLE>
Depreciation expense for the six months ended August 31, 1999 and 1998, which
includes amortization under capital leases was $164,073 and $207,313.
4. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
AUGUST 31, February 28,
1999 1999
---------------------------------------------
<S> <C> <C>
Mortgage on real estate $ - $ 1,599,043
Bank--term 162,500 918,057
Related party credit line - 781,483
Related party escrow loan - -
Related party loans - 60,000
Capital lease obligations 80,869 135,187
Purchase money note - 9,883
---------------------------------------------
243,369 3,503,653
Less current maturities 94,237 291,338
---------------------------------------------
Long-term debt $ 149,132 $ 3,212,315
=============================================
</TABLE>
-8-
<PAGE> 11
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 August 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. As of August 31, 1999 the Company has
repaid all related party loans.
Interest expense on these related party borrowings was $29,669 and $18,526 for
the six months ended August 31, 1999 and August 31, 1998.
-9-
<PAGE> 12
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 (six months) $ 25,000 $ 26,560 $ 51,560
2001 137,500 38,314 175,814
2002 - 21,055 21,055
2003 - 6,054 6,054
----------------------------------------------------
162,500 91,983 254,483
Amount representing interest - 11,114 11,114
====================================================
Total (a) $ 162,500 $ 80,869 $ 243,369
====================================================
</TABLE>
(a)--Total capital lease obligations represent present value of minimum lease
payments.
5. COMPREHENSIVE INCOME
Total comprehensive income (loss) was $8,581 and $84,253 for the three and
six-months ended August 31, 1999 and $(17,901) and $(143,031) for the three and
six-months ended August 31, 1998.
-10-
<PAGE> 13
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. 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 (six months) $ 328,136
2001 661,666
2002 611,000
2003 604,250
2004 530,000
Thereafter 3,920,834
------------------
Total $ 6,655,886
==================
</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> 14
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. 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.
7. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998 1999 1998
----------------------------------------------------------------
Current:
<S> <C> <C> <C> <C>
Federal $ 110 $ - $ 4,463 $ -
State 6,558 17,667 11,548 24,871
----------------------------------------------------------------
Total current 6,668 17,667 16,011 24,871
----------------------------------------------------------------
Deferred:
Federal (110) - (4,463) -
State - - - (91)
----------------------------------------------------------------
Total deferred (110) - (4,353) (91)
----------------------------------------------------------------
Total $ 6,558 $ 17,677 $ 11,548 $ 24,780
================================================================
</TABLE>
-12-
<PAGE> 15
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. 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 six months ended August 31, 1999 and 1998 are
presented separately in the consolidated statement of operations.
9. 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
six months and three months ended August 31, 1999 and 1998 follows. Certain
prior year information has been reclassified to conform with the current year
presentation.
-13-
<PAGE> 16
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOOD REAL MEDICAL
SERVICE ESTATE FINANCING OTHER TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED AUGUST 31,
1999
Total revenue from external customers $ 2,944,170 $ 296,208 $ 278,279 $ -- $ 3,518,657
Income(loss) from operations 147,290 16,501 (70,226) (84,437) 9,128
Gain on sale of subsidiary -- -- -- -- --
Interest expense, net (1,798) (48,786) 52,423 -- 1,839
Income(loss) before provision for taxes 149,088 65,287 (122,649) (84,437) 7,289
Capital expenditures 40,171 -- 28,865 -- 69,036
Depreciation and amortization 54,994 1,610 13,239 -- 69,843
1998
Total revenue from external customers $ 4,475,868 $ 93,458 $ 240,699 $ -- $ 4,810,025
Income(loss) from operations 180,114 14,816 (20,435) (127,270) 47,225
Interest expense, net 41,385 (26,951) 33,015 -- 47,449
Income(loss) before provision for taxes 138,729 41,767 (53,450) (127,270) (224)
Capital expenditures 285,126 -- -- -- 285,126
Depreciation and amortization 112,761 1,306 5,292 -- 119,359
SIX MONTHS ENDED AUGUST 31,
1999
Total revenue from external customers $ 6,796,846 $ 379,715 $ 609,581 $ -- $ 7,786,142
Income(loss) from operations 239,922 12,059 (46,269) (188,699) 17,013
Gain on sale of subsidiary 96,303 -- -- -- 96,303
Interest expense, net 42,697 (78,418) 107,736 -- 72,015
Income(loss) before provision for taxes 293,528 90,477 (154,005) (188,699) 41,301
Total assets 2,104,398 5,078,430 2,969,225 10,152,053
Capital expenditures 145,617 -- 67,406 -- 213,023
Depreciation and amortization 167,156 3,221 25,034 -- 195,411
1998
Total revenue from external customers $ 8,416,786 $ 217,198 $ 527,670 $ -- $ 9,161,654
Income(loss) from operations 200,979 12,183 9,683 (242,884) (20,039)
Interest expense, net 87,568 (48,878) 59,522 -- 98,212
Income(loss) before provision for taxes 113,411 61,061 (49,839) (242,884) (118,251)
Total assets 5,197,067 4,921,791 2,492,487 12,611,345
Capital expenditures 357,325 11,641 -- -- 368,966
Depreciation and amortization 225,323 2,612 10,583 -- 238,518
</TABLE>
-14-
<PAGE> 17
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 six months and three months ended August 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 $1,291,000, or 27%, for the three months
ended August 31, 1999 to $3,519,000 from $4,810,000 for the three months ended
August 31, 1998. The decrease was a result of decreased revenues in the food
service offset by increases in the real estate and medical financing divisions.
Revenues decreased by $1,376,000, or 15%, for the six months ended August 31,
1999 to $7,786,000 from $9,162,000 for the six months ended August 31, 1998. The
decrease was a result of decreased revenues in the food service division offset
by increases in the real estate and medical financing divisions.
The revenue decrease in the food service division for the six months and three
months ended August 31, 1999 of $1,532,000 and $1,620,000 was attributable to
the sale of the Wendclark subsidiary on May 14, 1999. This subsidiary operated
nine restaurants in West Virginia. The remaining eight restaurants in the food
service division had an increase in revenues of $265,000, or 10%, from
$2,679,000 for the three months ended August 31, 1998 to $2,944,000 for the
three months ended August 31, 1999. For the six
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<PAGE> 18
months ended August 31, 1999, revenue from the remaining eight restaurants
increased by $272,000 to $5,225,000 as compared to $4,953,000 for the same
period in 1998. The revenue increase was due to an improved economic climate and
additional traffic in the areas that these restaurants operate.
Revenue in the real estate division increased by $203,000 from $93,000 for the
three months ended August 31, 1998 to $296,000 for the three months ended August
31, 1999. Revenue in the real estate division for the six months ended August
31, 1999 increased by $163,000 as compared to the same period in 1998. The
increase in revenue was attributable to the sale of three condominium units at
the Hunter, NY property.
Growth in revenues in the medical financing division for the three months and
six months ended August 31, 1999 was $38,000 and $82,000 as compared to the same
periods in 1998. 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 $1,253,000, or 26%, for the three months ended
August 31, 1999, to $3,510,000 from $4,763,000 for the three months ended August
31, 1998. Costs and expenses decreased $1,413,000, or 15%, for the six months
ended August 31, 1999, to $7,769,000 from $9,182,000 for the six months ended
August 31, 1998. The net decrease for the three months ended August 31, 1999 was
due to decreases of $1,441,000 in the food service division, $43,000 in
corporate expenses and $49,000 in depreciation and amortization, which were
offset by increases of $201,000 in the real estate division and $79,000 in the
medical financing division. The net decrease for the six months ended August 31,
1999 was due to decreases of $1,601,000 in the food service division, $54,000 in
corporate expenses and $43,000 in depreciation and amortization, which were
offset by increases of $162,000 in the real estate division and $123,000 in the
medical financing division.
The decrease in the costs and expenses of the food service division are due to
the sale of the Wendclark subsidiary on May 14, 1999. Costs and expenses from
the remaining eight restaurants increased by $228,000 for the three months ended
August 31, 1999 to $2,742,000 as compared to $2,514,000 for the three months
ended August 31, 1998. The remaining eight restaurants had an increase in costs
and expenses for the six months ended August 31, 1999 of $213,000 from
$4,735,000 in 1998 to $4,948,000 in 1999. Increases in food and labor costs are
directly related to the increases in revenues for the three months and six
months ended August 31, 1999 as compared with the same periods in the prior
year. In addition, labor costs were higher for the six months ended August 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 increase in costs and expenses in the real estate division is attributable
to the cost of sales of three condominiums units. The increase in costs and
expenses in the medical financing division in 1999 as compared to the same
periods in 1998 were attributable to additional expenditures on staff needed to
properly service the existing and projected client base. The infrastructure of
the company as established, can now service a greater number of clients than
currently exists. This is necessary to efficiently service expected new clients
with properly trained employees.
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<PAGE> 19
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 net decrease in depreciation and amortization is attributable to the
sale of the Wendclark subsidiary on May 14, 1999, offset by additional
depreciation as a result of increased capital expenditures in the medical
financing division.
Interest expense decreased by $48,000 from $57,000 for the three months ended
August 31, 1998 to $9,000 for the same period in 1999. Interest expense for the
six months ended August 31, 1999 was $85,000, a decrease of $35,000 from
$120,000 in 1998. The decrease was attributable to the debt that was included in
the Wendclark subsidiary. A portion of the proceeds from the sale of the
Wendclark subsidiary were used to repay amounts that had been borrowed to
finance the purchase of 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
$1,000 for the three months ended August 31, 1999 as compared with a net loss of
$18,000 for the three months ended August 31, 1998. The net income of the six
months ended August 31, 1999 was $30,000 as compared to a net loss of $143,000
for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's three business activities during the six month period ended August
31, 1999 resulted in the increase of cash in the amount of $352,000. The Company
expects growth of its medical financing division to increase which will result
in the use of cash. The funds for those needs are expected to be provided for by
the $785,000 credit line that was repaid from the proceeds of the sale of the
Wendclark subsidiary, the sale of real estate and available cash. Additional
funds may be provided from financing activities such as additional asset-based
borrowing facilities on the Company's mortgages and accounts receivable.
Cash flow provided from the food service division increased $8,000 from $359,000
in 1998 to $367,000 in 1999. The Company anticipates that the seasonal increases
in traffic will continue, maintaining a positive 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
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.
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<PAGE> 20
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 provided by operations during the six months ended August 31, 1999 was
$183,000 as compared to $340,000 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 $1,087,000 for the six months ended
August 31, 1999 as compared with $581,000 being used in the prior year. The net
increase of $1,668,000 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 $511,000 during the six months ended
August 31, 1999.
Net cash used in financing activities was $918,000 during the six months ended
August 31, 1999 as compared with $81,000 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.
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" and concluded that its own
internal mission-critical systems will not be affected by 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.
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.
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<PAGE> 21
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.
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.
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<PAGE> 22
ITEM 3. QUANTITATIVE 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 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.
The Company is not subject to interest rate risk on the fixed interest rate of
its long term mortgage debt and capital leases in its Food Division in that its
interest and principal payments are not affected, nor is the amount due at
maturity. However, it is anticipated that 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
27. Financial Data Schedule
b) REPORTS ON FORM 8K.
None.
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<PAGE> 23
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: October 14, 1999
-21-
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