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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: February 29, 2000
| | 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)
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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 Codes)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Each Class
Common Stock, $.10 par value
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( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (x)
The aggregate market value of the voting stock held by non-affiliates
of the registrant at May 23, 2000 was $1,318,993.
The number of shares outstanding of the registrant's Common Stock as of
May 23, 2000 was 1,816,462 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information by reference from
the registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the close of the year ended February
29, 2000.
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FRM NEXUS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
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Page No.
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PART I
Item 1. Business .......................................................................................... 1
Item 2. Properties......................................................................................... 4
Item 3. Legal Proceedings.................................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders
and Other Information ........................................................... 4
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................................. 6
Item 6. Selected Financial Data............................................................................ 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 8
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................................................... 13
Item 8. Financial Statements and Supplementary Data........................................................ 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................. 13
PART III
Item 10. Directors and Executive Officers of the Registrant................................................. 14
Item 11. Executive Compensation............................................................................. 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................... 14
Item 13. Certain Relationships and Related Transactions..................................................... 14
PART IV
Item 14. Exhibits, Financial Statements, Schedules
and Reports on Form 8-K ........................................................ 15
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PART I
ITEM 1 BUSINESS
FRM Nexus, Inc. (the "Company" or "Nexus") owns, operates and administers three
divisions primarily through wholly owned subsidiary corporations. The FRM in the
Company's name stands for the three markets in which Nexus is presently engaged
- - Food Services, Real Estate Development and Medical Financing.
THE FOOD SERVICES DIVISION consists of eight restaurants in New York owned by
Wendcello Corp., a wholly owned subsidiary of Nexus. Through May 14, 1999, the
Food Services Division also consisted of nine restaurants located in West
Virginia owned by Wendclark Corp., a wholly owned subsidiary of Nexus. Nexus
sold its interest in Wendclark Corp. on May 14, 1999. The restaurants are
operated by a management company, in which Nexus has no interest, under
franchise agreements with Wendy's International, a public company listed on the
New York Stock Exchange. The management agreement provides for the sharing of
the operating profits of the restaurants and certain proceeds of the sale or
refinancing of the restaurants. Wendcello is actively seeking new locations for
development. This division commenced business in 1990.
THE REAL ESTATE DEVELOPMENT DIVISION of the Company presently conducts its
operations through PSI Capital Corp and Yolo Capital Corp., wholly owned
subsidiaries which own and/or control the fee interests in a variety of parcels
of real estate, in which co-investors also have interests. Nexus is presently
engaged in the development, for residential or commercial use, of real estate
located in the Towns of Goshen and Hunter in New York State.
Goshen, New York This property is to be developed pursuant to a subdivision plan
for 165 single family homes in the Village of Goshen, in Orange County, New
York, a growing suburban community 90 minutes from Manhattan. The plan was
agreed upon in settlement of a lawsuit between the Company and the necessary
officials of the Village of Goshen to enforce a previously approved subdivision
plan for the property. Participating in the settlement was Windemere Pines at
Goshen, Inc., a part of the Windemere Group of construction companies
("Windemere"), in which Jed Schutz is an officer, director and shareholder. Mr.
Schutz, a shareholder of Nexus, was also a director of Nexus until May 1999.
Nexus agreed with Windemere on terms that assured Nexus a specified profit on
its land, which was sold during fiscal 1996 and 1997. The construction financing
is to be provided by Windemere, with Nexus sharing any profits to be realized in
the construction and sale of the homes. Windemere and the Company are seeking
approval from the Planning Board in the Village of Goshen confirming the
sub-division plan to which agreement was obtained when the lawsuit was settled.
Hunter, New York. Nexus controls the fee interest in various properties in
Hunter, New York, in which it owns the principal co-investment interest. The
properties consist of approximately one hundred undeveloped acres in and around
a condominium development known as Hunter Highlands, located adjacent to the
Hunter Mountain Ski Bowl. The undeveloped acreage, which Nexus plans to develop,
is zoned for single family residences, condominium units and a hotel site. There
is already
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constructed on the property a clubhouse with a restaurant, tennis courts and a
swimming pool, as well as a small office building. Nexus owns two built units
and two additional lots on which sixteen two and three bedroom units can be
built. 175 condominium units owned by unrelated persons have already been
purchased from prior sponsors of Hunter Highlands.
Hunter, New York has been depressed economically in recent years, which gave
rise to the Company's acquisition of this property through the mortgage
foreclosure process. After many delays due to controversy arising out of issues
regarding rights of ownership to the property. Nexus was finally free to develop
and/or sell its holdings in Hunter. Management sold six of its eight built units
during 1999-2000, and plans to sell the remaining 16 unbuilt units left in the
condominium plan which are the closest to the slopes of Hunter Mountain.
Concurrently it continues to seek buyers and developers for the remainder of the
property holdings.
Nexus owns a waste-water treatment plant that currently serves the development.
The plant is permitted for the doubling of its capacity. Such capacity to treat
wastewater is difficult to obtain within the Catskill Watershed Region due to
the environmental controls that are in place to ensure the quality of the water
in this region, which supplies the City of New York with drinking water.
Brookfield, Connecticut. In December 1999, Nexus sold its fee interest in two
parcels of undeveloped land in Brookfield, Connecticut with a carrying value of
$490,000 for approximately $538,000.
THE MEDICAL FINANCING DIVISION of the Company conducts its operations through a
wholly-owned subsidiary, Medical Financial Corp. ("MFC"), which commenced
business in the fiscal year ended February 28, 1995. MFC provides practice
management services including the purchase of insurance claims in return for a
negotiated fee, bill coding, collection, bookkeeping, assistance on denied
insurance claims and general practice consulting. MFC delivers to its clients
specialized services and increased liquidity, which are normally unavailable
from traditional lenders.
MFC's services include an organized, efficient collection of the customers'
receivables through a legal collection process that is performed by law firms
that work closely with MFC's collection department. MFC's management information
systems provides detailed reporting on their clients' practices. MFC owns two
websites where more information can be obtained on the services that MFC
provides (See marketing).
MARKETING
The Company's Wendy's Restaurants participate in Wendy's national advertising
campaigns pursuant to the franchise agreements with Wendy's International.
National advertising includes network television radio and print media. The
Company's restaurants supplement the franchisor's national efforts with local
and regional newspapers, TV, radio and outdoor advertising, where appropriate to
the locale.
The Company's marketing in its real estate activities has been limited in the
past, and for the present, to working with real estate brokerage firms in
connection with the sale and leasing of properties. When the development of the
homes in Goshen, NY commences, Nexus will employ a marketing
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firm to assist it in pricing, advertising and selling the one-family homes
during the construction phases of the development.
The Medical Financing Division markets its services to medical groups through
its own employees relying primarily on customer recommendation, direct mail and
personal recruiting. Because of the reputation established by MFC, the majority
of their clientele are now referrals from their existing clients. In fiscal 2000
MFC developed the websites WWW.MEDICALFINANCIAL.COM as well as WWW.MDHELP.COM
where information on MFC's services may be easily obtained.
COMPETITION
The Company's restaurant business is highly competitive with the many stores in
the diverse fast food service field, particularly the McDonalds and Burger King
franchisees which are members of large national restaurant chains.
The Company's presently owned real estate properties are located in communities
that have been depressed in past years, so that competition has not been a
factor. With the expectation of improved demand and financing for purchasers,
the Company will be competing with many owners and developers in the locale to
market their properties.
MFC competes indirectly with: (i) financial service companies, including banks,
and other lending and factoring companies which provide financial assistance,
(ii) billing companies (iii) Management Service Organizations and (iv) attorneys
that provide collection services specifically to medical providers. The
Company's services are designed to serve a niche market and in its focus on
purchasing and collecting medical insurance claims of certain medical groups,
the competition is limited to only a few companies of which it is aware.
TRADEMARKS
The Company's use of the tradename and logo for Wendy's is pursuant to franchise
agreements with Wendy's International for each of its restaurants. These
agreements have terms extending many years and there is no reason to expect that
the franchises will not be renewed whenever they expire. The day to day
operations of the Wendy's subsidiary, Wendcello Corp., is managed by a
management company, whose principals have similar agreements with other Wendy's
franchisees. Their experience and performance as franchise managers have forged
a mutually respected relationship with Wendy's International.
EMPLOYEES
As of May 10, 2000 the Company had 310 employees in its Wendy's operations, 34
employees at MFC which include 13 practice management employees and three
employees in its real estate and parent company operations. None of the
Company's employees are represented by a union and Nexus considers its
relationship with its employees to be good.
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REGULATORY LAWS
The Company is in compliance with all environmental laws relating to hazardous
substances in real property. Future compliance with such environmental laws is
not expected to have a material effect on its business. In addition the Company
must comply with health and occupancy regulatory laws of the federal, state and
municipal governments relating to the Wendy's Restaurants and the regulations of
said governments relating to businesses generally. The cost of such compliance
is important but continued compliance is not expected to have a material effect
on its business.
ITEM 2 PROPERTIES
The Wendy's restaurants are tenants in the various restaurant-operating leases
described in Note nine to the Consolidated Financial Statements herein.
Nexus' lease for its corporate offices in New Rochelle, New York, which also
houses MFC's operations, runs to February 28, 2007. All of the space leased by
the Company is leased from unaffiliated third parties.
Nexus leases a medical office under two separate leases in Brooklyn, NY, where
it provides management services for a medical practice that is also a finance
client. These leases expire March 31, 2001 and October 31, 2002.
Nexus leases an MRI facility in Garden City South, NY, where it provides MRI and
management services for a radiology practice that is also a finance client. This
lease expires February 28, 2005, with a five year renewal option.
ITEM 3 LEGAL PROCEEDINGS
Nexus is not presently a party to any material litigation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND OTHER INFORMATION
None other than the election of directors on July 20, 1999.
OTHER INFORMATION
CAUTIONARY STATEMENT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important risk factors that could
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cause the Company's actual results to differ materially from those projected in
forward looking statements of the Company made by or on behalf of the Company.
Such statements may relate, but are not limited, to projections of revenues,
earnings, capital expenditures, plans for growth and future operations,
competition as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted or quantified.
When the Company uses the words "estimates", "expects", "anticipates",
"believes", "plans", "intends", and variations of such words or similar
expressions, they are intended to identify forward-looking statements that
involve risks and uncertainties. Future events and actual results could differ
materially from those underlying the forward-looking statements. The factors
that could cause actual results to differ materially from those suggested by any
such statements include, but are not limited to, those discussed or identified
from time to time in the Company's public filings, including general economic
and market conditions, changes in domestic laws, regulations and taxes, changes
in competition and pricing environments, regional or general changes in real
estate values.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date they are made. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after that date or to reflect the occurrence
of anticipated events.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
REGISTRATION AND MARKET PRICES OF COMMON STOCK
The Form 10 Registration of the common stock of FRM Nexus, Inc. pursuant to
Section 12(g) of the Securities Exchange Act of 1934 as finally amended on March
12, 1998 and Nexus has been a reporting company, filing annual and quarterly
statements with the SEC since the effective date of said registration.
The Company's stock commenced trading on the NASDAQ Bulletin Board after August
28, 1998 under the symbol FRMO and the following table sets forth the range of
high and low bid quotations of the Company's common stock for the periods set
forth below, as reported by the National Quotation Bureau, Inc. Such quotations
represent inter-dealer quotations, without adjustment for retail markets,
markdowns or commissions, and do not necessarily represent actual transactions.
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FISCAL PERIOD COMMON STOCK
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HIGH BID LOW BID
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1999
3rd Fiscal Quarter (9/1/98-11/30/98) $ 3.75 $ 0.5625
4th Fiscal Quarter (12/1/98-2/28/99) $ 1.875 $ 0.875
2000
1st Fiscal Quarter (3/1-5/31/99) $ 1.375 $ 0.875
2nd Fiscal Quarter (6/1-8/31/99) $ 1.0625 $ 1.75
3rd Fiscal Quarter (9/1/99-11/30/99) $ 1.8125 $ 1.75
4th Fiscal Quarter (12/1/99-2/29/00) $ 1.5625 $ 1.125
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DIVIDENDS
No cash dividend has been paid by the Company since its inception. The Company
has no present intention of paying any cash dividends on its Common Stock. The
Company declared a common stock dividend of one share of common stock for every
two shares of common stock owned of record on June 24, 1998. Holders of record
on that date received the stock dividend on July 14, 1998. The Company accounted
for the stock dividend in the same manner as a 3 for 2 stock split.
HOLDERS
As of May 11, 2000, there were approximately 1,100 holders of record of the
Company's common stock representing about 2,500 beneficial owners of the
Company's shares.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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FRM NEXUS, INC. AND SUBSIDIARIES
Fiscal Year Ended
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February 29, February 28, February 28, February 28, February 29,
2000 1999 1998 1997 1996
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Income Statement Data:
Total Revenue $ 14,341,243 $ 18,550,300 $ 19,885,949 $ 17,299,472 $ 15,082,650
Costs and expenses 15,044,615 18,671,765 18,025,358 18,267,540 15,294,370
------------ ------------ ------------ ------------ ------------
(Loss) income from operations (703,372) (121,465) 1,860,591 (968,068) (211,720)
Gain on sale of subsidiary 96,303 -- -- -- --
Interest (expense) net of interest
income (68,467) (247,501) (395,042) (278,871) 12,996
------------ ------------ ------------ ------------ ------------
(Loss) income before provision for
income taxes and extraordinary
item (675,536) (368,966) 1,465,549 (1,246,939) (198,724)
Provision for income taxes 16,744 (2,397) 149,132 12,070 28,248
------------ ------------ ------------ ------------ ------------
(Loss) income before extraordinary item (692,280) (366,569) 1,316,417 (1,259,009) (226,972)
Extraordinary income net of taxes -- -- 91,674 -- --
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (692,280) $ (366,569) $ 1,408,091 $ (1,259,009) $ (226,972)
============ ============ ============ ============ ============
(Loss) earnings per common share:
(Loss) income before extraordinary item $ (0.38) $ (0.20) $ 0.72 $ (0.69) $ (0.12)
Extraordinary income -- -- 0.05 -- --
------------ ------------ ------------ ------------ ------------
Basic and diluted earnings
(Loss) income per common share $ (0.38) $ (0.20) $ 0.77 $ (0.69) $ (0.12)
============ ============ ============ ============ ============
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 1,816,462
============ ============ ============ ============ ============
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As of
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February 29, February 28, February 28, February 28, February 29,
2000 1999 1998 1997 1996
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Balance Sheet Data:
Working Capital $ 1,374,592 $ 1,230,965 $ 1,583,888 $ 1,412,696 $ (442,940)
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Total Assets $ 9,576,986 $ 14,033,273 $ 12,822,969 $ 13,471,114 $ 9,349,884
============= ============= ============= ============= ===========
Long-term debt $ 24,655 $ 3,212,315 $ 2,391,867 $ 5,198,530 $ 745,925
============= ============= ============= ============= ===========
Common Shareholders' equity $ 4,617,893 $ 5,239,076 $ 5,592,874 $ 4,346,985 $ 5,615,310
============= ============= ============= ============= ===========
Book value per share $ 2.54 $ 2.88 $ 3.08 $ 2.39 $ 3.09
============= ============= ============= ============= ===========
Common shares outstanding 1,816,462 1,816,462 1,816,462 1,816,462 1,816,462
============= ============= ============= ============= ===========
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(a) Common shares outstanding for all periods have been restated to give effect
to a stock dividend declared on May 14, 1998. (b) During the fiscal year ended
February 29, 2000, the Company disposed of its interest in Wendclark Corp.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but not
limited to, statements regarding future operations, financial condition and
liquidity, expenditures to develop real estate owned by the Company, future
borrowing, capital requirements and the Company's future development plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: changes in the business of the Company's medical
provider clients, changes in the real estate, fast food and financial markets,
and other risk factors described in the Company's reports filed and to be filed
from time to time with the Commission. The discussion and analysis below is
based on the Company's Consolidated Financial Statements and related Notes
thereto included herein and incorporated herein by reference.
OVERVIEW
Nexus generates revenues from three business segments: food services, real
estate and medical financing. Revenues in the real estate division vary
substantially from period to period depending on when a particular transaction
closes and depending on whether the closed transaction is recognized for
accounting purposes as a sale or reflected as a financing or is deferred to a
future period.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 29, 2000 COMPARED TO YEAR ENDED FEBRUARY 28, 1999
The Company's revenues decreased by $4,209,000 or 23%, for the year ended
February 29, 2000 ("2000") to $14,341,000 from $18,550,000 for the year ended
February 28, 1999 ("1999"). The decrease was a result of decreased revenues in
the food service and the medical financing divisions, offset by an increase in
the real estate division.
The revenue decrease of $5,034,000 in the food service division for 2000 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
$577,000, or 6%, to $10,486,000. The revenue increase was due to an improved
economic climate and additional traffic related to the growth in population and
business in the areas that these restaurants operate.
Revenue in the real estate division increased by $834,000, to $1,250,000 in
2000. The increase in revenue was attributable to sales of real estate totaling
$941,000, as compared to $41,000 in 1999. The sales in 2000 consisted of six
condominium units at the Hunter, NY property for $403,000 and the two parcels of
vacant land in Brookfield, CT for $538,000.
The $9,000 net decrease in revenues in the medical financing division in 2000
was due to a decrease in medical claims purchased in that period as compared to
1999. The decrease was due to a lesser
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amount of bills purchased due to the Company's decision to be more selective in
the bill purchasing process. The net decrease was offset by fees in the amount
of $20,000 that were generated from the ownership, beginning in February 2000,
of an MRI facility that provides management services to a finance client's
radiology practice.
Costs and expenses decreased $3,627,000, or 19%, for the year ended in 2000, to
$15,044,000 as compared to $18,672,000 for the year ended in 1999. The net
decrease for 2000 was due to decreases of $4,784,000 in the food service
division and $177,000 in depreciation and amortization, which were offset by
increases of $818,000 in the real estate division, $478,000 in the medical
financing division and $38,000 in corporate expenses.
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 $544,000 in 2000 to $10,063,000 as
compared to $9,519,000 in 1999. Increases in food and labor costs are directly
related to the increases in revenues in 2000 as compared with 1999. In addition,
labor costs were higher in 2000 as compared to 1999, due to the hiring of
additional managers in restaurants that were previously understaffed during the
prior periods.
The increase of $818,000 in costs and expenses in the real estate division is
attributable to cost of sales of the properties that were sold in the amount of
$892,000, offset by a decrease in operating expenses of $74,000. The cost of
sales of the Hunter property, which was $398,000, and the Brookfield property,
which was $494,000, resulted in a total gain of $49,000. The decrease in
operating expenses in 2000 was due to a greater amount of professional fees in
1999, which were incurred during the successful litigation regarding ownership
rights of the Hunter property. In addition, there was a decrease in operating
expenses after the Hunter and Brookfield properties were sold.
The costs and expenses in the medical financing division in 2000 was $1,533,000,
an increase of $478,000 from 1999. The greatest component of the increase in
2000 was attributable to additional expenses incurred that were needed to
properly service the existing and projected client base. These expenses included
an additional $219,000 on staff and related employment costs and $40,000 on
occupancy and office costs. 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. In 2000, to provide additional services to finance clients, three new
subsidiaries were formed to manage the operations of certain medical practices.
These new subsidiaries, also referred to as management companies, incurred
approximately $79,000 of start up costs in 2000. In addition, the reserve for
bad debts was increased by $126,000 in 2000. The increase in reserves is due to
three major insurance companies challenging the corporate structure of a
significant client. Management has commenced additional collection procedures to
mitigate the effect of this challenge. The Company may incur a bad debt loss
when the portion of a medical claim collected does not exceed the advance
(including the fee charged) given to the client. The Company also has other
contractual rights to help minimize its risk of loss. The Company continually
monitors the aging of the uncollected medical claims as it relates to its
advances and establishes a reserve deemed adequate to cover potential losses.
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The $38,000 increase in corporate expenses in 2000 is primarily due to
additional professional fees incurred, offset by 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.
The $96,000 gain on sale of subsidiary in 2000 was a result of the sale of the
Wendclark subsidiary for $975,000.
Interest expense in 2000 was $104,000, a decrease of $179,000 from $283,000 in
1999. The decrease was attributable to the debt that was eliminated upon the
sale of 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 result of which was a
further reduction in interest expense.
For the reasons noted above, most notably, the additional costs of the medical
financing division, the Company experienced a net loss of $692,000 in 2000,
which was $326,000 greater than the net loss of $366,000 in 1999.
YEAR ENDED FEBRUARY 28, 1999 COMPARED TO YEAR ENDED FEBRUARY 28, 1998
The Company's revenues decreased by $1,336,000, or 7%, for the year ended
February 28, 1999 ("1999") to $18,550,000 from $19,886,000 for the year ended
February 28, 1998 ("1998"). The decrease was a result of decreased revenues in
the real estate division offset by increased revenues in the food service and
medical financing divisions.
The revenue increase of $389,000 in the food service division in 1999 was
attributable to the additional revenues that were generated from the seventeenth
restaurant that opened in September 1998. Revenues in the real estate division
decreased by $1,993,000 from $2,409,000 in 1998 to $416,000 in 1999. The
decrease was due to the lack of significant sales of real estate in 1999.
Revenues increased in the medical financing division by $269,000, or 35%, in
1999 from $773,000 in 1998 to $1,042,000 in 1999. The growth 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 $647,000 or 4%, in 1999 to $18,672,000 from
$18,025,000 in 1998. The net increase in 1999 was due to increases of $590,000
in the food service division, $229,000 in the medical financing division and
$231,000 in corporate expenses, which was offset by decreases in the real estate
division of $384,000 and $20,000 in depreciation and amortization.
The increases in the costs and expenses of the food service division are due to
increases in food and labor costs that are directly related to the increase in
revenues in 1999 and additional costs that were incurred in connection with the
opening of the seventeenth restaurant in August 1998. In addition, labor costs
were higher in 1999 as compared to 1998 due to the hiring of additional managers
in restaurants that were previously understaffed during the prior periods. The
decrease in the costs and expenses of the real estate division is attributable
to the elimination of operating costs on the Granby
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property on which the sale was recognized in the fourth quarter of fiscal 1998
and the lack of costs on the sales of property in 1999. The 28% increase in
costs and expenses in the medical financing division in 1999 as compared to 1998
was due to additional expenditures on staff and systems as a result of the 35%
increase in volume in 1999. The increase in corporate expenses from $183,000 in
1998 to $414,000 in 1999 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 the fourth quarter of fiscal 1998. The decrease in
depreciation and amortization is attributable to the elimination of depreciation
on the Granby property, the sale of which was realized in the fourth quarter of
fiscal 1998.
Interest expense decreased by $168,000 from $451,000 in 1998 to $283,000 in
1999. The decrease was a result of a $183,000 decrease in the real estate
division offset by an increase of $15,000 in the food service division. The
increase in the food service division is due to the additional debt that was
used to finance the opening of the seventeenth restaurant in August 1998. The
decrease in the real estate division is attributable to the elimination of the
use of the financing method of accounting for the Granby property, which was
offset by additional borrowings, the proceeds of which were loaned to the
medical financial division. The medical financing division incurred $150,000 of
interest expense, which was paid to the real estate division on inter-division
debt that was used to finance the increase in the purchase of medical claims
receivable. All inter-division interest and the related debt have been
eliminated on the consolidated financial statements.
The provision for income taxes decreased by $151,000 from $149,000 in 1998 to a
credit of $2,000 in 1999. The greater provision for taxes in 1998 was a result
of the recognition of gain on the Granby property during that year. In addition,
the state tax provision on the subsidiaries which operate in the food service
division were less in the current year due to a decrease in taxable income in
1999 as compared to 1998.
For the reasons noted above, most notably being the lack of real estate sales,
the Company sustained a net loss in the amount of $367,000 for the year ended
February 28, 1999 as compared with net income of $1,408,000 for the year ended
February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's three business activities during the year ended February 29, 2000
resulted in an increase of cash in the amount of $155,000, to $920,000 in 2000
from $765,000 in 1999. 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 by an existing $785,000 credit line,
the continued 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 decreased $297,000, from
$178,000 being provided in 1999, to $119,000 being used in 2000. The increase in
the amount of cash used was attributable to reducing the balance in accounts
payable. The Company anticipates that the increases in traffic will continue,
however, they may fluctuate, due to seasonal influences. Repairs and capital
-11-
<PAGE> 14
expenditures, which are currently being evaluated by management, may effect
future cash flows. However, the long-term sales should be sufficient enough to
maintain a positive cash flow. 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 are owned free
and clear of mortgages. Further development of this property, at any significant
cost, is expected to be funded by the sale of the remaining condominium units
and portions of other property 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 in 2000 was $302,000, as compared to $230,000 being
provided in 1999. The $72,000 increase in 2000 was due to proceeds from the sale
of real estate, offset by (i) an increase in the net loss for the year, (ii)
fluctuations in operating assets and liabilities primarily caused by timing
differences and (iii) the collection of a rebate due from a soft drink vendor in
the food service division in 1999.
Cash provided by investing activities was $820,000 in 2000 as compared with
$1,740,000 being used in 1999. The net increase of $2,560,000 was primarily due
to the $975,000 proceeds from the sale of the Wendclark subsidiary and a
reduction in the amount of capital expenditures in the food service division,
due to the opening of a new restaurant in 1999. In the medical financing
division, medical insurance claims receivable decreased by $373,000 in 2000,
compared to a $1,210,000 increase in 1999. The decrease in the medical claims
receivable was attributable to a lesser amount of bills purchased due to the
Company's decision to be more selective in the bill purchasing process and an
increase in collection effectiveness as a result of the additional costs and
expenses in the medical financing division.
Net cash used in financing activities was $968,000 in 2000 as compared with
$841,000 being provided in 1999. The $1,809,000 decrease in 2000 was primarily
due to the repayment of the related party credit line in the amount of $775,000,
and the borrowing in 1999 to finance the opening of a new restaurant in that
period.
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
-12-
<PAGE> 15
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. As of May 10, 2000, the Company has not
experienced any errors or failures related to the Year 2000 problem and all
mission-critical systems are functioning properly.
COSTS
As of May 10, 2000, the Company did not incur 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.
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-13-
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2000. Such information is incorporated herein by
reference and made a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2000. Such information is incorporated herein by
reference and made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2000. Such information is incorporated herein by
reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's definitive
proxy statement, which will be filed with the Securities and Exchange Commission
within 120 days of February 29, 2000. Such information is incorporated herein by
reference and made a part hereof.
-14-
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(1) FINANCIAL STATEMENTS:
<TABLE>
<S> <C>
Index to Consolidated Financial Statements and Schedules............................. F-1
Report of Ernst & Young LLP.......................................................... F-2
Consolidated Balance Sheets - February 29, 2000 and February 28, 1999................ F-3
Consolidated Statements of Operations -
Years ended February 29, 2000, February 28, 1999 and 1998......................... F-5
Consolidated Statements of Stockholders' Equity -
Years ended February 29, 2000, February 28, 1999 and 1998......................... F-6
Consolidated Statements of Cash Flows -
Years ended February 29, 2000, February 28, 1999 and 1998......................... F-7
Notes to Consolidated Financial Statements........................................... F-9
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts.................................. F-30
Schedule III - Real Estate and Accumulated Depreciation........................... F-31
Schedule IV - Mortgage Loans on Real Estate...................................... F-32
</TABLE>
All other schedules are omitted because they are not applicable, not required,
or because the required information is included in the consolidated financial
statements or notes thereto.
<TABLE>
<S> <C>
Unaudited Selected Quarterly Financial Data.......................................... F-33
</TABLE>
(3) EXHIBITS:
All exhibits are incorporated herein by reference to Form 10 dated June 27, 1997
except that Exhibit 10.04 is incorporated herein by reference to Amendment No. 1
to Form 10 dated September 19, 1997.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.01 Certificate of Incorporation of the Company.
3.02 Certificate of Amendment of Certificate of Incorporation of the Company.
3.03 Amended By-Laws of the Company.
3.04 Settlement Stipulation dated November 17, 1993.
3.05 Court Order dated November 17, 1993
3.06 Final Judgment and Order Approving Settlement.
</TABLE>
-15-
<PAGE> 18
<TABLE>
<S> <C>
3.07 Amendment to Settlement Stipulation.
3.08 Court Order Amending Final Judgment and Order.
3.09 Stipulation and Order Authorizing Release of Shares From Escrow.
3.10 Opinion re release of shares.
4.01 Specimen Common Stock Certificate
5.01 Opinion re legality of common stock.
10.01 Agreement for sale of lots in Goshen, NY to Windemere in the Pines at Goshen, Inc.
10.03 Management Agreement for Wendy's Restaurants.
10.04 Employment and Consulting Agreement of Peter Barotz.
19.01 Letter to shareholders dated January 5, 1996.
19.02 Letter to shareholders dated July 26, 1996.
</TABLE>
(b) REPORTS ON FORMS 8-K
No current Reports on Form 8K were filed by the Company during the quarterly
period ended February 29, 2000.
-16-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)2 of the Securities Exchange
Act of 1934 as amended, the Registrant has duly cause this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on May 23, 2000.
FRM NEXUS, INC.
By: /S/ VICTOR BRODSKY
--------------------------------
Victor Brodsky
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on May 23, 2000.
Signature Title
- --------- -----
/S/ SETH GROSSMAN President and Director
- --------------------------- (Principal Executive Officer)
Seth Grossman
/S/ ALLAN KORNFELD Chairman of the Board
- ---------------------------
Allan Kornfeld
/S/ LESTER TANNER Director
- ---------------------------
Lester Tanner
<PAGE> 20
FRM Nexus, Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Consolidated Financial Statement Schedules
<TABLE>
<S> <C>
Report of Independent Auditors..................................................................... F- 2
Consolidated Balance Sheets -- February 29, 2000 and February 28, 1999............................. F- 3
Consolidated Statements of Operations -- Years Ended February 29,
2000, February 28, 1999 and 1998................................................................ F- 5
Consolidated Statements of Stockholders' Equity --
Years Ended February 29, 2000, February 28,1999 and 1998........................................ F- 6
Consolidated Statements of Cash Flows -- Years Ended February 29,
2000, February 28, 1999 and 1998................................................................ F- 7
Notes to Consolidated Financial Statements......................................................... F- 9
Consolidated Financial Statement Schedules:
II -- Valuation and Qualifying Accounts......................................................... F-30
III -- Real Estate and Accumulated Depreciation................................................. F-31
IV -- Mortgage Loans on Real Estate............................................................. F-32
</TABLE>
The data required by all other schedules is either included in the financial
statements or is not required.
F-1
<PAGE> 21
Report of Independent Auditors
The Board of Directors and Shareholders
FRM Nexus, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of FRM Nexus, Inc.
and its subsidiaries as of February 29, 2000 and February 28, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the three years ended February 29, 2000. Our audits also included the
consolidated financial statement schedules listed in the Index at Item 14 (a)
for the three years ended February 29, 2000. These financial statements and
consolidated financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and consolidated financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FRM
Nexus, Inc. and its subsidiaries at February 29, 2000 and February 28, 1999, and
the consolidated results of their operations and their cash flows for the three
years ended February 29, 2000 in conformity with accounting principles generally
accepted in the Untied States. Also, in our opinion, the related consolidated
financial statement schedules for the three years ended February 29, 2000, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
May 8, 2000
F-2
<PAGE> 22
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 920,015 $ 765,160
Mortgage and notes receivable - current 26,597 24,317
Finance receivables, net 2,479,999 2,980,159
Inventories 62,360 106,671
Other current assets 250,546 367,027
----------- -----------
Total current assets 3,739,517 4,243,334
----------- -----------
Property and equipment:
Property and equipment, at cost 2,701,421 6,895,428
Less accumulated depreciation and amortization 1,663,799 2,758,146
----------- -----------
1,037,622 4,137,282
----------- -----------
Other assets:
Real estate held for development and sale 510,880 1,282,443
Mortgage and notes receivable 3,236,866 3,192,367
Leasehold costs, net of accumulated amortization of $400,429 in
2000 and $358,889 in 1999 424,065 465,605
Technical assistance fees, net of accumulated amortization of
$107,099 in 2000 and $169,623 in 1999 80,401 230,377
Accrued interest receivable - related party mortgage 321,150 217,200
Loans receivable 98,381 --
Other 128,104 264,665
----------- -----------
Total other assets 4,799,847 5,652,657
----------- -----------
Total assets $ 9,576,986 $14,033,273
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 23
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 768,080 $ 1,189,459
Current portion of notes payable, including $-0- in 2000 and
$85,972 in 1999 payable to related parties 168,932 291,338
Due to finance customers 1,402,546 1,460,410
Income taxes payable 5,367 7,491
Other current liabilities 20,000 63,671
------------ ------------
Total current liabilities 2,364,925 3,012,369
------------ ------------
Other liabilities:
Notes payable, including $-0- in 2000 and $755,511 in 1999 payable 24,655 3,212,315
to related parties
Deferred Income 2,569,513 2,569,513
------------ ------------
Total other liabilities 2,594,168 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 (78,019) (149,116)
Accumulated deficit (1,312,643) (620,363)
------------ ------------
Total stockholders' equity 4,617,893 5,239,076
------------ ------------
Total liabilities and stockholders' equity $ 9,576,986 $ 14,033,273
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 24
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 29, YEAR ENDED FEBRUARY 28,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurant food sales:
Continuing $ 10,486,011 $ 9,908,728 $ 9,798,658
Discontinued 1,571,965 7,183,882 6,905,042
Sale of real estate 941,000 40,678 2,125,696
Rental income 111,264 140,633 115,951
Interest from mortgages 197,864 234,609 167,128
Income from the purchase of medical receivables 1,033,139 1,041,770 773,474
------------ ------------ ------------
Total income 14,341,243 18,550,300 19,885,949
------------ ------------ ------------
Costs and expenses:
Restaurant food sales:
Continuing 10,062,879 9,519,254 9,333,121
Discontinued 1,441,655 6,769,160 6,365,134
Real estate 1,211,711 393,727 777,861
Medical receivables 1,533,127 1,055,439 826,085
Corporate expenses 452,234 414,148 182,729
Depreciation and amortization 343,009 520,037 540,428
------------ ------------ ------------
Total costs and expenses 15,044,615 18,671,765 18,025,358
------------ ------------ ------------
(Loss) income from operations (703,372) (121,465) 1,860,591
------------ ------------ ------------
Other income (expense):
Gain on sale of subsidiary 96,303 -- --
Interest income 35,267 35,872 56,199
Interest expense (103,734) (283,373) (451,241)
------------ ------------ ------------
Total other income (expense) 27,836 (247,501) (395,042)
------------ ------------ ------------
(Loss) income before provision (credit) for income
taxes and extraordinary item (675,536) (368,966) 1,465,549
Provision (credit) for income taxes 16,744 (2,397) 149,132
------------ ------------ ------------
(Loss) income before extraordinary item (692,280) (366,569) 1,316,417
Extraordinary item, net of applicable taxes of $0 -- -- 91,674
------------ ------------ ------------
Net (loss) income $ (692,280) $ (366,569) $ 1,408,091
============ ============ ============
Basic and diluted (loss) earnings per common share:
(Loss) income before extraordinary item $ (0.38) $ (0.20) $ 0.72
Extraordinary income -- -- 0.05
============ ============ ============
Basic and diluted (loss) earnings per common share $ (0.38) $ (0.20) $ 0.77
============ ============ ============
Number of shares used in computation of basic and
diluted earnings per share 1,816,462 1,816,462 1,816,462
============ ============ ============
</TABLE>
See accompanying notes
F-5
<PAGE> 25
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN (LOSS) INCOME (ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL DEFICIT) EQUITY INCOME (LOSS)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1997 $ 181,646 $ 5,827,224 $ - $ (1,661,885) $ 4,346,985 $ -
Unrealized loss on mortgage
and notes receivable - - (162,202) - (162,202) (162,202)
Net income - - - 1,408,091 1,408,091 1,408,091
--------------
Comprehensive income - - - - - $ 1,245,889
----------------------------------------------------------------------------- ==============
Balance, February 28, 1998 181,646 5,827,224 (162,202) (253,794) 5,592,874 $ -
Payment of fractional shares - (315) - - (315) -
Change in unrealized loss on
mortgage and notes receivable - - 13,086 - 13,086 13,086
Net loss - - - (366,569) (366,569) (366,569)
--------------
Comprehensive income - - - - - $ (353,483)
----------------------------------------------------------------------------- ==============
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 - - 71,097 - 71,097 71,097
Net loss - - - (692,280) (692,280) (692,280)
--------------
Comprehensive income - - - - - $ (621,183)
----------------------------------------------------------------------------- ==============
Balance, February 29, 2000 $ 181,646 $ 5,826,909 $ (78,019) $ (1,312,643) $ 4,617,893
=============================================================================
</TABLE>
See accompanying notes
F-6
<PAGE> 26
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 29, YEARS ENDED FEBRUARY 28,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (692,280) $ (366,569) $ 1,408,091
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 343,009 520,037 540,428
Gain on sale of subsidiary (96,303) -- --
Gain on sale of real estate held for development
and sale (48,621) -- (1,932,994)
Gain on sale of equipment (1,714) -- --
Provision for bad debts 126,488 13,134 37,034
Deferred interest expense -- -- 90,919
Deferred income taxes -- (20,729) 78,153
Changes in operating assets and liabilities:
Vendor rebate receivable -- 244,477 (244,477)
Inventories (7,480) (9,749) 288
Collections from sale of real estate held for
development and sale, net of payment to
participant 845,304 -- --
Additions to real estate held for development and
sale -- (98,109) (16,076)
Prepaid expenses, miscellaneous receivables and
other assets 43,482 (269,452) (66,488)
Accounts payable, accrued expenses and taxes (165,870) 172,576 121,607
Other current liabilities (43,671) 44,182 (76,040)
----------- ----------- -----------
Net cash provided by (used in) operating activities 302,344 229,798 (59,555)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from capital expenditures & intangible
assets (356,479) (1,036,681) (1,044,619)
Proceeds from sale of equipment 24,000 -- --
Finance receivables 373,672 (1,210,606) (543,796)
Sale of subsidiary, net of cash disposed of 910,756 -- --
Due to finance customers (57,864) 484,865 17,960
Principal payments on notes receivable 24,318 22,232 159,717
Loan receivable (100,000) -- --
Principal payments on loan receivable 1,619 -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities 820,022 (1,740,190) (1,410,738)
----------- ----------- -----------
</TABLE>
F-7
<PAGE> 27
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 29, YEARS ENDED FEBRUARY 28,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable $ 96,779 $ 1,285,100 $ 700,000
Principal payments on notes payable (1,064,290) (444,126) (511,197)
Proceeds of finance obligation -- -- 926,602
Principal payments on finance obligation -- -- (71,438)
Payment of fractional shares -- (315) --
----------- ----------- -----------
Net cash (used in) provided by financing activities (967,511) 840,659 1,043,967
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents $ 154,855 $ (669,733) $ (426,326)
Cash and cash equivalents, beginning of period 765,160 1,434,893 1,861,219
----------- ----------- -----------
Cash and cash equivalents, end of period $ 920,015 $ 765,1600 $ 1,434,893
=========== ========== ===========
Additional cash flow information
Interest paid $ 120,935 $ 275,176 $ 441,403
=========== =========== ===========
Income taxes paid $ 19,011 $ 39,074 $ 61,497
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired under capital leases $ -- $ 42,234 $ 25,137
=========== =========== ===========
Notes receivable from purchasers of real estate sold $ -- $ -- $ 1,081,547
=========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 28
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
February 29, 2000
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION OF THE COMPANY
The consolidated financial statements consist of FRM Nexus, Inc. (the "Company"
or "Nexus") and its wholly-owned subsidiaries which include PSI Capital Corp.,
Medical Financial Corp., Nexus Garden City LLC, FRM Court Street LLC, Nexus
Borough Park LLC, PSI Food Services, Inc. which in turn owns all of the
outstanding stock of Wendcello Corp. ("Wendcello"), and Wendclark Corp.
("Wendclark"). Wendclark was sold May 14, 1999 (see Note 13).
The Company was incorporated in November 1993 under the laws of the State of
Delaware as PSI Settlement Corp. (subsequently changed to Nexus) to settle a
class action against Programming and Systems, Inc. ("PSI"). Under the
settlement, certain assets were transferred to Nexus.
BUSINESS ACTIVITIES OF THE COMPANY
The Company operates in three distinct industries consisting of food services,
real estate and medical financing.
The food services companies consist of Wendclark and Wendcello. The food service
companies own and operate nine Wendy's fast food restaurants in West Virginia
(sold on May 14, 1999) and eight restaurants in the Hudson Valley, New York
area. The food service companies' day-to-day operations are managed by
management corporations.
The real estate business is conducted by the Company through various
subsidiaries. It owns real estate and holds mortgages on real estate parcels in
New York and Connecticut which are currently held for development and sale.
The medical financing business is conducted through Medical Financial Corp.,
which purchases insurance claims receivable of medical practices and provides
certain services to those practices. During fiscal 2000, three subsidiaries were
formed to provide additional management services to certain medical practices.
F-9
<PAGE> 29
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries (hereinafter also referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Food Service Companies: The accrual method of accounting is used to record all
income.
Real Estate: The full accrual method is used on the sale of real estate if the
profit is determinable, the Company is not obligated to perform significant
activities after the sale to earn the profit and there is no continuing
involvement with the property. If the buyer's initial and continuing investments
are inadequate to demonstrate a commitment to pay for the property, the
installment method is used, resulting in the deferral of income. If there is
continuing involvement with the property by the Company, the financing method is
used.
Purchase of Medical Insurance Claims Receivable: A fee is charged to medical
providers upon the purchase of their accounts receivable by the Company. This
fee income is deferred and recognized on a pro-rata basis as the related
receivables are collected. The deferred fee income is netted against finance
receivables (see Note 4). Management fees are billed monthly in amounts that are
relative to the expenses and services provided for that month.
RECEIVABLES
Real Estate: The Company evaluates the credit positions on its notes receivable
and the value of the related collateral on an ongoing basis. The Company
estimates that all of its notes receivable are fully collectible and the
collateral is in excess of the related receivables.
The Company continually evaluates its notes receivable that are past due as to
the collectibility of principal and interest. The Company considers the
financial condition of the debtor, the outlook of the debtor's industry,
decrease in the ratio of collateral values to loans and any prior write downs on
loans. The above considerations are all used in determining whether the Company
should suspend recording interest income on any notes receivable or provide for
any loss reserves.
F-10
<PAGE> 30
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES (CONTINUED)
Purchases of Medical Insurance Claims: The Company purchases the net collectible
value of medical insurance claims on a limited recourse basis. The recourse
basis is limited to the extent any receivables purchased by the Company are
disputed and/or referred to arbitration proceedings. Such receivables are deemed
to be invalid and are immediately substituted. The Company is still entitled to
the collection of its fees from customers regardless of whether or not the
underlying accounts receivable are collectible. Performance of these receivables
is personally guaranteed by the owner of the practice and principals of the
related management companies.
Upon full collection of the advance paid in connection with the purchased
medical insurance claims and the related fee, the contracts allow for accounts
receivable that are determined to be invalid or remain unpaid for a specified
period of time to be returned (charged back) to the customer. The charge back
will also reduce the amount due to the customer.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the customer's
ability to repay, the estimated value of any underlying collateral and current
economic conditions.
INVENTORIES
Inventories, consisting of food and supplies, are stated at the lower of cost or
market. Amounts are relieved from inventory using the first in, first out
("FIFO") basis.
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided by application of the
straight-line method over estimated useful lives as follows:
Land improvements 15 years
Restaurant equipment and furniture 7 years
Computer, medical and transportation equipment 5 years
F-11
<PAGE> 31
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION (CONTINUED)
Amortization of leasehold improvements is provided by the application of the
straight-line method over the shorter of their estimated useful lives or the
terms of the related leases and range from 3 to 22 years.
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
Properties are carried at the lower of acquisition cost or market, less the
costs to sell. The methods for valuing property and mortgages where current
appraisals are unobtainable are based on management's best judgments regarding
the economy and market trends. As a result, estimates may change based on
ongoing evaluation of future economic and market trends. Such judgments are
based on management's knowledge of real estate markets in general and of sale or
rental prices of comparable properties in particular.
LEASES AND LEASEHOLD COSTS
Leases which transfer substantially all of the risk and benefits of ownership
are classified as capital leases, and assets and liabilities are recorded at
amounts equal to the lesser of the present value of the minimum lease payments
or the fair value of the leased properties at the beginning of the respective
lease terms. Such assets are amortized in the same manner as owned assets are
depreciated. Interest expenses relating to the lease liabilities are recorded to
effect constant rates of interest over the terms of the leases. Leases which do
not meet such criteria are classified as operating leases and the related
rentals are charged to expense as incurred.
The Company has capitalized the applicable leasehold costs related to acquiring
the leases for its various restaurants and is amortizing them over the terms of
the applicable leases ranging from 10 to 20 years.
TECHNICAL ASSISTANCE FEES
Technical assistance fees represent initial franchise fees paid to Wendy's
International at the inception of each franchised location and are amortized on
a straight-line basis over the term of the related franchises, ranging from 15
to 20 years.
F-12
<PAGE> 32
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for all temporary differences between the
tax and financial reporting bases of the Company's assets and liabilities based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid, short-term investments with an original maturity of three
months or less to be cash equivalents.
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, money market mutual funds, commercial
paper and trade and notes receivable.
As of February 29, 2000, the Company had an investment in seven day commercial
paper in the amount $400,000.
Finance receivables arise from the purchase from medical providers in the New
York City area of their insurance claims from various insurance companies. For
the year ended February 29, 2000, fees earned from four medical providers were
23%, 14%, 13% and 12% of earned fees. For the year ended February 28, 1999, fees
earned from four medical providers were 26%, 18%, 12% and 11% of earned fees.
For the year ended February 28, 1998, two medical providers generated 46% and
30% of total earned fees. As of February 29, 2000, claims receivable from one
insurance company comprised 26% of total finance receivables, As of February 28,
1999, claims receivable from three insurance companies comprised 23%, 13% and
10% of total finance receivables
All note receivables are from the sale of real estate in New York and
Connecticut (see Note 3).
F-13
<PAGE> 33
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses the cost of advertising as incurred. For the years ended
February 29, 2000, February 28 1999 and 1998 advertising expense totaled
approximately $705,000, $981,000, and $1,094,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The
estimated fair values of financial instruments have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a sale.
The carrying amounts and estimated fair values of financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 920,015 $ 920,015 $ 765,160 $ 765,160
Mortgage and notes receivable 3,263,463 3,263,463 3,216,684 3,216,684
Finance receivables 2,479,999 2,479,999 2,980,159 2,980,159
LIABILITIES
Accounts payable and accrued
expenses, income taxes payable,
due to finance customers and
other current liabilities
2,195,993 2,195,993 2,721,031 2,721,031
Notes payable 193,587 193,587 3,503,653 3,503,653
</TABLE>
F-14
<PAGE> 34
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. REAL ESTATE ACTIVITIES
SALE OF REAL ESTATE
GOSHEN, NEW YORK
The Company acquired its property in Goshen, New York through the foreclosure of
two mortgages it held. During fiscal years 1997 and 1996, the Company sold all
of the 165 lots of the property for $2,499,350. This transaction and the related
note receivable was with Windemere Pines at Goshen, Inc., a part of the
Windemere Group of construction companies, in which Jed Schutz is an officer,
director and shareholder. Mr. Schutz is also a shareholder of Nexus and was a
director of Nexus until May 1999. It is management's opinion that this
transaction would be at the same terms had the parties not been related.
The consideration received on this sale did not satisfy the initial investment
criteria to use the full accrual method of profit recognition. The sale was
accounted for using the installment method, resulting in the deferral of income
until the initial and continuing investment criteria is sufficient (see Note 2).
The installment method was used since recovery of the cost of the property is
reasonably assured if the buyer defaults on the mortgage receivable. A balance
of $1,719,513 of deferred profit remains at February 29, 2000 and February 28,
1999.
Interest income from this transaction (principal amount of note receivable is
$2,310,000) was $103,950, $138,600 and $138,600 for the years ended February 29,
2000, February 28, 1999 and 1998. The terms of the note call for an annual
payment of interest of $30,000. The payment for fiscal 2000 has not been paid,
which resulted in the suspension of accruing interest as of November 30, 1999.
There is no allowance for loss because the
F-15
<PAGE> 35
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GOSHEN, NEW YORK (CONTINUED)
market value of the collateral, less costs to sell, is greater than the carrying
amounts of the related notes receivable and accrued interest receivable. The
balance of accrued interest receivable is as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
2000 1999
------------------ ------------------
<S> <C> <C>
Current $ - $ 30,000
Long-term 321,150 217,200
================== ==================
$ 321,150 $ 247,200
================== ==================
</TABLE>
In addition, the Company received additional contingent consideration on the
sale in the form of a purchase money debenture in the amount of $2,499,750,
contingent on the sale of the single family residences to be built on the 165
lots which were sold. This purchase money debenture matures on February 28, 2002
and bears interest at a rate of 6% per annum. The Company has not included any
amounts in its consolidated financial statements relating to this purchase money
debenture or its related interest since its collectibility is contingent on the
profitable sale of the single family residences to be built.
GRANBY, CONNECTICUT
The Company acquired this partially built office building in Granby, Connecticut
as a result of the foreclosure of the first mortgage on the property of
approximately $1,000,000. In fiscal year 1994, the Company wrote down its
investment in the property to $900,000 to reflect the then market value of the
property.
This property was sold to a limited liability company, of which certain members
are shareholders in the Company, in fiscal year 1996 for $4,800,000. The terms
of the sale provided that the Company complete construction of the building and
provide a tenant for the unoccupied portion of the building. To provide the
tenant, the Company entered into a sales-leaseback transaction with the buyer.
The Company also guaranteed the first mortgage of the buyer-lessor and sublet
the unoccupied space it leased from the buyer. The Company's continuing
involvement with the property precluded the use of full accrual accounting and,
accordingly, no sale was recognized at that time.
F-16
<PAGE> 36
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REAL ESTATE ACTIVITIES (CONTINUED)
SALE OF REAL ESTATE (CONTINUED)
GRANBY, CONNECTICUT (CONTINUED)
During fiscal year 1997 and a portion of 1998, the Company used the financing
method to report this transaction. The historical cost of the asset remained on
the Company's books and was being depreciated. The proceeds of the sale were
recorded as a finance obligation at a rate of 8.25%. Rental payments to the
buyer-lessor were treated as a reduction in the finance obligation.
In December 1997, the buyer of the property refinanced the first mortgage,
eliminating the Company's guarantee. In addition, in January 1998, the Company
sold for $120,000 the term of its lease on the property to the buyer and was
released of all obligations on its lease through August 31, 2002. The Company
has a lease for the period September 1, 2002 through February 28, 2006 which
specifies rental payments aggregating $1,482,194, of which the present value was
provided for at February 29, 2000 as a reduction of the gain recognized.
In January 1998, the Company recorded the sale under the accrual method of
accounting since its continuing involvement with the property was terminated.
The Company recorded a gain on the sale of the property of $1,932,994, net of
the above mentioned lease liability.
The sale of this property includes a second mortgage receivable from the buyer.
Upon full collection of the receivable, an additional liability will be payable
to the co-investors of the original mortgage for approximately $70,000. If the
second mortgage is not collected in full, an amount substantially less will be
paid. An accrual has been provided for this amount.
OTHER REAL ESTATE SALES
The Company sold various other properties, including the property in Brookfield,
Connecticut and six condominium units in Hunter, New York, during the three
years ended February 29, 2000 for various amounts as part of the operations of
the real estate division.
F-17
<PAGE> 37
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REAL ESTATE ACTIVITIES (CONTINUED)
MORTGAGES AND NOTES RECEIVABLE
Mortgages and notes receivable, arising from the sale of real estate, consist of
the following:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
------------------ ------------------
<S> <C> <C>
Goshen, New York (Construction Company) $ 2,310,000 $ 2,310,000
Granby, Connecticut (Real Estate Operator) 1,031,482 1,055,800
------------------ ------------------
3,341,482 3,365,800
Less current portion (26,597) (24,317)
Less unrealized loss on mortgage and
notes receivable (78,019) (149,116)
------------------ ------------------
$ 3,236,866 $ 3,192,367
================== ==================
</TABLE>
These mortgages and notes have various terms for payments of principal and
interest and are collateralized by the underlying real estate. These mortgages
and notes bear interest ranging from 6% to 9%, and mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
2001 $ 26,597
2002 2,339,093
2003 31,822
2004 34,807
2005 38,072
Thereafter 871,091
------------------
$ 3,341,482
==================
</TABLE>
As of February 29, 2000 and February 28, 1999, except for the Goshen interest
payment mentioned above, all notes receivable were performing. There is no
allowance for loss because the market value of the collateral, less costs to
sell, is greater than the carrying amounts of the related notes receivable.
The Granby note receivable is being used as collateral for a line of credit (see
Note 7).
F-18
<PAGE> 38
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. REAL ESTATE ACTIVITIES (CONTINUED)
REAL ESTATE HELD FOR DEVELOPMENT AND SALE
The following properties are included in real estate held for development and
sale:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
-------------------------------------
<S> <C> <C>
Hunter, New York $ 655,880 $ 1,007,030
Brookfield, Connecticut - 490,413
-------------------------------------
655,880 1,497,443
Less due to co-investors (145,000) (215,000)
-------------------------------------
$ 510,880 $ 1,282,443
=====================================
</TABLE>
The Hunter property is located at the base of Hunter Mountain in Greene County,
New York. This property includes approximately 80 acres of undeveloped land, two
remaining condominium units available for sale or rental, two building sites, a
hotel site, a clubhouse with a recreational facility, an office building and a
sewage treatment plant that serves the development. This property was acquired
through foreclosure and was written down to its fair market value.
4. FINANCE RECEIVABLES, NET
Net finance receivables consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
------------------------------------
<S> <C> <C>
Gross finance receivables $ 2,958,825 $ 3,409,095
Allowance for credit losses (212,488) (86,000)
Deferred finance income (266,338) (342,936)
------------------------------------
$ 2,479,999 $ 2,980,159
====================================
</TABLE>
These receivables are collateral for a line of credit (see Note 7).
F-19
<PAGE> 39
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
------------------------------------
<S> <C> <C>
Land $ - $ 740,000
Land improvements 25,506 445,008
Buildings - 826,185
Restaurant equipment 1,643,370 3,175,213
Leasehold improvements 575,639 1,213,279
Computer equipment 208,893 181,669
Medical equipment 32,500 -
Equipment under capital leases 191,625 286,174
Other equipment and furniture 23,888 27,900
------------------------------------
2,701,421 6,895,428
Less accumulated depreciation and amortization 1,663,799 2,758,146
------------------------------------
Property and equipment, net $ 1,037,622 $ 4,137,282
====================================
</TABLE>
As of February 29, 2000 and February 28 1999, accumulated amortization of
equipment under capital leases was $110,452 and $126,521.
For the years ended February 29, 2000, February 28, 1999 and 1998, depreciation
expense, which includes amortization under capital leases was $284,965, $447,520
and $469,016.
6. LOANS RECEIVABLE
In February 2000, one of the Company's subsidiaries entered into a participation
agreement to share 50% of the profits of an MRI facility that provides
management services to a radiology practice. The participant was already
providing these services from this location. In consideration for the 50%
interest in this facility, the Company has assumed operating responsibility and
agreed to administer the repayment of certain debts of the participant from
various sources of funds that are due to the participant. The Company may, in
its discretion advance cash to meet the schedule of payments if the source of
funds is insufficient to do so. These advances bear interest at the rate of
prime plus 2%, with a minimum rate of 12%. The outstanding balance on this loan
was $98,381 at February 29,2000.
F-20
<PAGE> 40
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
------------------------------------
<S> <C> <C>
Mortgage on real estate $ - $ 1,599,043
Bank -- term 137,500 918,057
Related party credit line - 781,483
Related party escrow loan - -
Related party loans - 60,000
Capital lease obligations 56,087 135,187
Purchase money note - 9,883
------------------------------------
193,587 3,503,653
Less current maturities 168,932 291,338
------------------------------------
Long-term debt $ 24,655 $ 3,212,315
====================================
</TABLE>
Bank-term: In 1995, the Company borrowed $350,000, which bears interest at the
bank's prime rate plus 1% bears and has an outstanding balance of $137,500 at
February 29, 2000. The loan is payable in monthly principal payments of $4,167
plus interest. A balloon payment of $100,000 is due on September 29, 2000.
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 2000, 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 February 29, 2000, 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 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 in Granby, Connecticut (see Note 3) and the purchased insurance
claims receivable of Medical Financial Corp. (see Note 4) equal to at least 200%
of the principal sum outstanding under the line.
F-21
<PAGE> 41
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE (CONTINUED)
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, 2001 an investment portfolio, which at the time was 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 margin loans. At February 29, 2000, the value of this portfolio was
$309,353. All risks and rewards of the investment portfolio pass to the related
party. The margin loans bear interest at a variable rate based on market
condition set at the discretion of the investment brokerage firm. 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 medical
receivables. The loan is repaid as payment is received from such receivables and
may be re-borrowed at any time until maturity.
Related Party Loans: During the year ended February 28, 1999, the Company
borrowed at various times a total of $60,000 from two individuals, who were both
directors, officers and shareholders. These loans were repaid during the year
ended February 29, 2000. Interest on these loans was at the rate of 12% per
annum.
Interest expense on these related party borrowings for the years ended February
29, 2000 and February 28, 1999 was $36,184 and $52,748.
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 8.75% to 16.72%.
F-22
<PAGE> 42
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE (CONTINUED)
Aggregate maturities of the amount of notes payable and capital leases at
February 29, 2000 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASE
NOTES PAYABLE OBLIGATIONS TOTAL
------------------ ------------------ -----------------
<S> <C> <C> <C>
2001 $ 137,500 $ 38,314 $ 175,814
2002 - 21,055 21,055
2003 - 6,054 6,054
------------------ ------------------ -----------------
137,500 65,423 202,923
Amount representing interest 9,336 9,336
------------------ ------------------ -----------------
Total (a) $ 137,500 $ 56,087 $ 193,587
================== ================== =================
</TABLE>
(a) -- Total capital lease obligations represent present value of minimum lease
payments.
8. MANAGEMENT AGREEMENTS
The day-to-day operations of Wendcello and Wendclark (sold May 14, 1999) are
managed under management agreements with Cello and Clark Management Corps.,
respectively. The management companies are affiliated with the Company in that
certain of its officers and/or directors (none of whom are officers or directors
of Nexus) are also officers and/or directors of Wendcello and Wendclark. The
management agreements took effect upon the purchase of the restaurants and are
to remain in effect as long as Wendcello and Wendclark continue to own the
restaurants.
The management agreements provide for a basic fee based on a percentage of
pre-tax cash flow, as defined (30% for Wendcello and 40% for Wendclark). The
management fees were $80,550 in 2000, $90,500 in 1999 and $136,000 in 1998. The
management agreements further provide for incentive fees equal to 30% for
Wendcello and 40% for Wendclark of the pre-tax proceeds of the sale or
refinancing of any assets owned or later acquired by Wendcello and Wendclark,
less any amounts used to buy replacement assets or to pay off any refinanced
obligations. No incentive fees were paid during the three years ended February
29, 2000. The management agreements provide for the management companies to
participate with the Company in financing the subsidiaries under certain
circumstances.
F-23
<PAGE> 43
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES
FRANCHISE AGREEMENT COMMITMENTS
The food service subsidiaries are the franchisees for the 8 Wendy's Restaurants
it currently owns and operates. The franchise agreements obligate the
subsidiaries to pay to Wendy's International a monthly royalty equal to 4% of
the gross sales of each restaurant during the month, or $250, whichever is
greater.
MINIMUM OPERATING LEASE COMMITMENTS
The remaining food service subsidiary entered into various leases for its
restaurants containing clauses relating to real estate taxes, common charges,
renewal and percentage rent with certain minimum payments.
Rent expense for all restaurants was as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED
FEBRUARY 29 FEBRUARY 28
2000 1999 1998
-----------------------------------------------------
<S> <C> <C> <C>
Base rentals $ 613,000 $ 861,659 $ 763,423
Contingent rentals 255,000 232,305 261,961
-----------------------------------------------------
Total $ 868,000 $ 1,093,964 $ 1,025,384
=====================================================
</TABLE>
In December 1997, Nexus signed a lease extension for its executive offices under
a three year lease expiring on February 28, 2001.
In October 1999, one of the Company's subsidiaries in the medical financing
division signed a lease for premises that will be used to provide management
services for medical practices that provide physical therapy and pain treatment.
F-24
<PAGE> 44
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
MINIMUM OPERATING LEASE COMMITMENTS (CONTINUED)
Subject to annual real estate adjustments and additional rent in excess of base
sales, the following is a schedule of future minimum rental payments required
under the above operating leases as of February 28:
<TABLE>
<CAPTION>
Year ending February:
<S> <C>
2001 $ 725,566
2002 622,200
2003 604,250
2004 530,000
2005 530,000
Thereafter 3,390,834
------------------
Total $ 6,402,850
==================
</TABLE>
There are various commitments and contingencies relating to the sale of real
estate (see Note 3).
10. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED
FEBRUARY 29 FEBRUARY 28
2000 1999 1998
-----------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 16,744 18,332 70,979
-----------------------------------------
Total current 16,744 18,332 70,979
-----------------------------------------
Deferred:
Federal -- -- --
State -- (20,729) 78,153
-----------------------------------------
Total deferred -- (20,729) 78,153
-----------------------------------------
Total $ 16,744 $ (2,397) $149,132
=========================================
</TABLE>
Nexus and its subsidiaries file consolidated federal tax returns and individual
state tax returns.
F-25
<PAGE> 45
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Significant components of deferred tax assets (liabilities) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEARS ENDED
FEBRUARY 29 FEBRUARY 28
2000 1999 1998
----------------------------------------------
<S> <C> <C> <C>
Tax loss carryforwards $ 728,169 $ 558,228 $ 314,773
Less valuation allowance (728,169) (558,228) (314,773)
----------------------------------------------
Deferred tax assets $ -- $ -- $ --
==============================================
Installment sale of real estate $ -- $ -- $ (12,656)
Property, plant and equipment -- -- (8,073)
----------------------------------------------
Deferred tax liabilities $ -- $ -- $ (20,729)
==============================================
</TABLE>
The following is a reconciliation of the statutory federal and effective income
tax rates for the years ended:
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28,
2000 1999 1998
------------------------------------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
INCOME INCOME INCOME
------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax expense rate (34.0)% (34.0)% 34.0%
Valuation allowance against NOL
carryforwards 34.0 34.0 (34.0)
State taxes, less federal tax effect 2.5 (.6) 10.2
------------------------------------------------
2.5% (.6)% 10.2%
================================================
</TABLE>
The Company has net operating loss carryforwards for federal purposes of
approximately $2,142,000. These losses will be available for future years,
expiring through February 29, 2020. The Company, however, has taken a 100%
valuation allowance against federal NOL carryforwards due to a history of
operating tax losses and the uncertainty of generating taxable income in the
foreseeable future.
11. EXTRAORDINARY ITEM
During fiscal year 1998, the Company realized an extraordinary gain, net of fees
of $91,674, as a result of the extinguishment of certain debts. There was no
related tax effect since this occurred as a result of a discharge in bankruptcy
of a subsidiary of the Company.
F-26
<PAGE> 46
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. 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 assumed by the buyer. The revenues and
operating expenses of Wendclark for the three years ended February 29, 2000 are
presented separately in the consolidated statement of operations.
A portion of the proceeds from the sale were used on May 14, 1999 to repay the
outstanding balance of $775,000 of the related party credit line.
13. BUSINESS SEGMENT INFORMATION
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 (sold 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 follows.
Certain prior year information has been reclassified to conform with the current
year presentation.
F-27
<PAGE> 47
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOOD REAL MEDICAL
SERVICE ESTATE FINANCING OTHER TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Total revenue from external
customers $ 12,057,976 $ 1,250,128 $ 1,033,139 $ -- $ 14,341,243
Income(loss) from operations 272,159 30,887 (554,184) (452,234) (703,372)
Gain on sale of subsidiary 96,303 -- -- -- 96,303
Interest expense,net 40,831 (151,228) 178,864 -- 68,467
Income(loss) before provision for
taxes and extraordinary items 327,631 182,115 (733,048) (452,234) (675,536)
Total assets 1,879,794 4,699,627 2,996,317 1,248 9,576,986
Capital expenditures 220,013 4,185 131,033 -- 355,231
Depreciation and amortization 281,283 7,280 54,196 250 343,009
1999
Total revenue from external
customers $ 17,092,610 $ 415,920 $ 1,041,770 $ -- $ 18,550,300
Income(loss) from operations 314,068 16,282 (37,667) (414,148) (121,465)
Gain on sale of subsidiary -- -- -- -- --
Interest expense,net 202,627 (101,414) 146,288 -- 247,501
Income(loss) before provision for
taxes and extraordinary items 111,441 117,696 (183,955) (414,148) (368,966)
Total assets 5,612,938 5,116,969 3,494,477 -- 14,224,384
Capital expenditures 970,494 17,420 91,001 -- 1,078,915
Depreciation and amortization 490,128 5,911 23,998 -- 520,037
1998
Total revenue from external
customers $ 16,703,700 $ 2,408,775 $ 773,474 $ -- $ 19,885,949
Income(loss) from operations 538,326 1,576,029 (71,035) (182,729) 1,860,591
Gain on sale of subsidiary -- -- -- -- --
Interest expense, net 184,263 140,372 70,407 -- 395,042
Income(loss) before provision for
taxes and extraordinary items 354,063 1,435,657 (141,442) (182,729) 1,465,549
Total assets 5,079,084 5,805,306 2,129,690 -- 13,014,080
Capital expenditures 425,170 570,653 73,933 -- 1,069,756
Depreciation and amortization 467,119 54,885 18,424 -- 540,428
</TABLE>
F-28
<PAGE> 48
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. BUSINESS SEGMENT INFORMATION (CONTINUED)
For the year ended February 28, 1998, net sales of the real estate division
included $1,932,994 of income due to changing from the financing method to the
full accrual method of accounting for the sale of real estate in Granby,
Connecticut.
14. SUBSEQUENT EVENTS
In May 2000, the Company borrowed $170,000 on margin against the investment
portfolio of the related party escrow loan (see Note 7).
F-29
<PAGE> 49
FRM Nexus, Inc. and Subsidiaries
Consolidated Financial Statement Schedules
February 29, 2000
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------
BALANCE CHARGED TO CHARGED TO OTHER BALANCE
AT BEGINNING COSTS AND ACCOUNTS DESCRIBED AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 28, 1998
Allowance for credit losses $145,218 $ - $ - $ 72,352 $ 72,866
========================================================================
FEBRUARY 28, 1999
Allowance for credit losses $ 72,866 $ 13,134 $ - $ - $ 86,000
========================================================================
FEBRUARY 29, 2000
Allowance for credit losses $ 86,000 $126,488 $ - $ - $212,488
========================================================================
</TABLE>
F-30
<PAGE> 50
FRM Nexus, Inc. and Subsidiaries
Consolidated Financial Statement Schedules
Year ended February 29, 2000
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------------------
COST CAPITALIZED SUBSEQUENT GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY TO ACQUISITION AT CLOSE OF PERIOD
---------------------------------------------------------------------------------------
BUILDINGS BUILDINGS
AND AND
ENCUM- IMPROVE- IMPROVE- CARRYING IMPROVE-
DESCRIPTIONS BRANCES LAND MENTS MENTS COST LAND MENTS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partial investment in
condominium
development, Hunter,
NY $ - $ - $ 569,179 $ 8,246 $ 78,455 $ - $ 655,880 $ 655,880
--------------------------------------------------------------------------------------------------
Total $ - $ - $ 569,179 $ 8,246 $ 78,455 $ - $ 655,880 $ 655,880
--------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ---------------------------------------------------------------------------------
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
ACCUMULATED DATE OF DATE STATEMENTS
DESCRIPTIONS DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Partial investment in
condominium
development, Hunter,
NY $ - - 2/29/96 N/A
----------------
Total $ -
================
</TABLE>
The following is a reconciliation of the total amount at which real estate was
carried for the years ended:
<TABLE>
<CAPTION>
FEBRUARY 29, February 28, February 28,
2000 1999 1998
---------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $1,497,443 $1,399,334 $1,383,258
Additions during period:
Other acquisitions $ - $ - $ -
Improvements, etc. - 2,246 6,000
Capitalized carrying costs 3,278 3,278 95,863 98,109 10,076 16,076
---------------------- --------------------- -----------------------
1,500,721 1,497,443 1,399,334
Deductions during period:
Cost of real estate sold 844,841 - -
--------- -------- ---------
844,841 - -
---------- ---------- ----------
Balance at close of period $ 655,880 $1,497,443 $1,399,334
========== ========== ==========
</TABLE>
The Federal Income Tax Basis of the Hunter property is $945,880.
F-31
<PAGE> 51
FRM Nexus, Inc. and Subsidiaries
Consolidated Financial Statement Schedules
Year ended February 29, 2000
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT OF LOANS
SUBJECT TO
FINAL PERIODIC FACE CARRYING DELINQUENT
INTEREST MATURITY PAYMENT PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTIONS RATE DATE TERM LIENS MORTGAGES MORTGAGES INTEREST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First Mortgages:
Unimproved land, Goshen, NY 6% 2/28/02 Interest only to - $ 500,000 $ 485,639 $ 500,000
maturity
Unimproved land, Goshen, NY 6 2/28/02 None - 1,810,000 1,746,342 -
Office building, Granby, CT 9 3/08/17 9,863 per month $2,600,000 1,031,482 1,031,482 -
---------------------------------------------
$ 3,341,482 $ 3,263,463 $ 500,000
=============================================
</TABLE>
The following is a reconciliation of the total amount at which mortgage loans
were carried for the years ended:
<TABLE>
<CAPTION>
FEBRUARY 29, February 28, February 28,
2000 1999 1998
------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 3,216,684 $ 3,225,830 $ 2,503,236
Additions during period:
New mortgage loans $ - $ - $ 1,081,547
---------- ---------- -----------
- - 1,081,547
------------ ----------- -----------
3,216,684 3,225,830 3,584,783
Deductions during period:
Collection of principal 24,318 22,232 159,717
Change in unrealized loss on mortgage and
notes receivable (71,097) (13,086) 162,202
Other -- bad debts - - 37,034
---------- ---------- -----------
(46,779) 9,146 358,953
------------ ----------- -----------
Balance at close of period $ 3,263,463 $ 3,216,684 $ 3,225,830
============ =========== ===========
</TABLE>
F-32
<PAGE> 52
FRM Nexus, Inc. and Subsidiaries
Supplemental Financial Information
Unaudited Selected Quarterly Financial Data
<TABLE>
<CAPTION>
Quarter
---------------------------------------------------------
First Second Third Fourth
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended February 29, 2000:
Total revenue $ 4,267,485 $ 3,518,657 $ 3,077,002 $ 3,478,099
============ ============ ============ ============
Income (loss) from operations $ 7,885 $ 9,128 $ (241,405) $ (478,980)
============ ============ ============ ============
Net income (loss) $ 29,022 $ 731 $ (245,040) $ (476,993)
============ ============ ============ ============
Basic and diluted earnings (loss)
per common share $ 0.02 $ 0.00 $ (0.13) $ (0.26)
============ ============ ============ ============
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
============ ============ ============ ============
Year ended February 28, 1999:
Total revenue $ 4,351,629 $ 4,810,025 $ 4,648,400 $ 4,740,246
============ ============ ============ ============
Income (loss) from operations $ (67,264) $ 47,225 $ (9,825) $ (91,601)
============ ============ ============ ============
Net income (loss) $ (125,130) $ (17,901) $ (64,420) $ (159,118)
============ ============ ============ ============
Basic and diluted earnings (loss)
per common share $ (0.07) $ (0.01) $ (0.04) $ (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>
F-33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 920,015
<SECURITIES> 0
<RECEIVABLES> 2,719,084
<ALLOWANCES> 212,488
<INVENTORY> 62,360
<CURRENT-ASSETS> 3,739,517
<PP&E> 2,701,421
<DEPRECIATION> 1,663,799
<TOTAL-ASSETS> 9,576,986
<CURRENT-LIABILITIES> 2,364,925
<BONDS> 24,655
0
0
<COMMON> 181,646
<OTHER-SE> 4,436,247
<TOTAL-LIABILITY-AND-EQUITY> 9,576,986
<SALES> 12,057,976
<TOTAL-REVENUES> 14,341,243
<CGS> 11,504,534
<TOTAL-COSTS> 14,918,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 126,488
<INTEREST-EXPENSE> 68,467
<INCOME-PRETAX> (675,536)
<INCOME-TAX> 16,744
<INCOME-CONTINUING> (692,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (692,280)
<EPS-BASIC> (.38)
<EPS-DILUTED> (.38)
</TABLE>
