<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to________
COMMISSION FILE NUMBER: 0-29346
FRM NEXUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3754422
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
271 NORTH AVENUE, NEW ROCHELLE, NY 10801
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 636-3432
N/A
(Former name, former address and former fiscal year, if changed
since last report)
--------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (x) No( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ( ) No ( )
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at January 14, 2000: 1,816,462.
<PAGE> 2
FRM NEXUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I
Item 1. Financial Statements.............................................. 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................ 20
PART II
Item 5. Other Items....................................................... 21
Item 6. Exhibits and reports on form 8-K.................................. 21
</TABLE>
<PAGE> 3
FRM Nexus, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets - November 30, 1999 (unaudited) and February 28, 1999.........2
Consolidated Statements of Operations (unaudited) -
Nine months and three months ended November 30, 1999 and 1998..........................4
Consolidated Statement of Stockholders' Equity (unaudited) -
Nine months ended November 30, 1999 ...................................................5
Consolidated Statements of Cash Flows (unaudited) -
Nine months ended November 30, 1999 and 1998...........................................6
Notes to Consolidated Financial Statements................................................7
</TABLE>
-1-
<PAGE> 4
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $ 837,580 $ 765,160
Mortgage and notes receivable - current 26,008 24,317
Finance receivables, net 2,539,567 2,980,159
Inventories 65,061 106,671
Other current assets 258,589 367,027
---------------------------------
Total current assets 3,726,805 4,243,334
---------------------------------
Property and equipment:
Property and equipment, at cost 2,592,046 6,895,428
Less accumulated depreciation and amortization 1,600,321 2,758,146
---------------------------------
991,725 4,137,282
---------------------------------
Other assets:
Real estate held for development and sale 1,009,712 1,282,443
Mortgage and notes receivable 3,235,292 3,192,367
Leasehold costs, net of accumulated amortization
of $390,046 at November 30, 1999 and $358,889
at February 28, 1999 434,448 465,605
Technical assistance fees, net of accumulated
amortization of $104,132 at November 30, 1999
and $169,623 at February 28, 1999 83,368 230,377
Accrued interest receivable - related party mortgage 298,650 217,200
Other 244,769 264,665
---------------------------------
Total other assets 5,306,239 5,652,657
---------------------------------
Total assets $10,024,769 $14,033,273
=================================
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE> 5
FRM Nexus, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 617,271 $ 1,189,459
Current portion of notes payable, including $-0- at November 30,
1999 and $85,972 at February 28, 1999 payable to related parties 90,085 291,338
Due to finance customers 1,505,704 1,460,410
Income taxes payable 7,524 7,491
Other current liabilities 18,532 63,671
------------------------------------
Total current liabilities 2,239,116 3,012,369
------------------------------------
Other liabilities:
Notes payable, including $-0- at November 30, 1999 and $755,511
at February 28, 1999 payable to related parties 129,703 3,212,315
Deferred Income 2,569,513 2,569,513
------------------------------------
Total other liabilities 2,699,216 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 (86,468) (149,116)
Accumulated deficit (835,650) (620,363)
------------------------------------
Total stockholders' equity 5,086,437 5,239,076
------------------------------------
Total liabilities and stockholders' equity $ 10,024,769 $ 14,033,273
====================================
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE> 6
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
REVENUES
Restaurant food sales -
Continuing $ 2,702,854 $ 2,482,244 $ 7,927,735 $ 7,435,720
Discontinued - 1,835,403 1,571,965 5,298,713
Sale of real estate 85,000 - 296,000 40,678
Rental income 33,154 33,629 85,339 91,959
Interest from mortgages 58,062 58,826 174,592 177,016
Income from the purchase of medical receivables 197,932 238,298 807,513 765,968
---------------------------------- ----------------------------------
Total income 3,077,002 4,648,400 10,863,144 13,810,054
---------------------------------- ----------------------------------
COSTS AND EXPENSES
Restaurant food sales -
Continuing 2,589,233 2,385,681 7,537,346 7,121,106
Discontinued - 1,727,122 1,441,655 4,982,181
Real estate 153,857 84,548 518,292 286,951
Medical receivables 357,586 246,663 988,402 754,067
Corporate expenses 146,961 88,720 335,660 331,604
Depreciation and amortization 70,770 125,491 266,181 364,009
---------------------------------- ----------------------------------
Total costs and expenses 3,318,407 4,658,225 11,087,536 13,839,918
---------------------------------- ----------------------------------
Income (loss) from operations (241,405) (9,825) (224,392) (29,864)
---------------------------------- ----------------------------------
Other income (expense):
Gain on sale of subsidiary - - 96,303 -
Interest income 10,378 7,216 23,123 28,507
Interest expense (10,338) (70,774) (95,098) (190,277)
---------------------------------- ----------------------------------
40 (63,558) 24,328 (161,770)
---------------------------------- ----------------------------------
Income (loss) before provision for income taxes (241,365) (73,383) (200,064) (191,634)
Provision for income taxes 3,675 (8,963) 15,223 15,817
---------------------------------- ----------------------------------
Net income (loss) $ (245,040) $ (64,420) $ (215,287) $ (207,451)
================================== ==================================
Basic and diluted earnings (loss) per common share $ (0.13) $ (0.04) $ (0.12) $ (0.11)
================================== ==================================
Number of shares used in computation of basic and
diluted earnings per share 1,816,462 1,816,462 1,816,462 1,816,462
================================== ==================================
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE> 7
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
February 28, 1999 through November 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED TOTAL
COMMON PAID-IN GAINS (ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL (LOSSES) DEFICIT) EQUITY
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1999 $ 181,646 $ 5,826,909 $ (149,116) $ (620,363) $ 5,239,076
Change in unrealized loss on
mortgage and notes receivable - - 62,648 - 62,648
Net income (loss) - - - (215,287) (215,287)
----------------------------------------------------------------------------------------
Balance, November 30, 1999 $ 181,646 $ 5,826,909 $ (86,468) $ (835,650) $ 5,086,437
========================================================================================
</TABLE>
See notes to interim consolidated financial statements.
-5-
<PAGE> 8
FRM Nexus, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
1999 1998
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (215,287) $ (207,451)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 266,181 364,009
Gain on sale of subsidiary (96,303) -
Gain on sale of real estate held for
development and sale (7,903) -
Gain on sale of equipment (1,714) -
Provision for bad debts 21,994 -
Deferred income taxes - (237)
Changes in operating assets and liabilities:
Vendor rebate receivable - 244,477
Inventories (10,181) (13,338)
Collections from sale of real estate held for
development and sale 280,634 -
Additions to real estate held for
development and sale - (101,117)
Prepaid expenses, miscellaneous receivables
and other assets (33,606) (76,002)
Accounts payable, accrued expenses and taxes (314,522) (124,648)
Other current liabilities (45,139) 123,191
---------------------------------
Net cash provided by (used in) operating activities (155,846) 208,884
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures & intangible assets (247,104) (907,006)
Sale of equipment 24,000 -
Finance receivables 418,598 (666,894)
Sale of subsidiary, net of cash disposed of 910,756 -
Due to finance customers 45,294 216,093
Principal payments on notes receivable 18,032 16,444
---------------------------------
Net cash provided by (used in) investing activities 1,169,576 (1,341,363)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of notes payable 96,779 950,000
Principal payments on notes payable (1,038,089) (391,685)
Payment of fractional shares - (315)
---------------------------------
Net cash provided by (used in) financing activities (941,310) 558,000
---------------------------------
Net increase (decrease) in cash and cash equivalents 72,420 (574,479)
Cash and cash equivalents, beginning of period 765,160 1,434,893
---------------------------------
Cash and cash equivalents, end of period $ 837,580 $ 860,414
=================================
ADDITIONAL CASH FLOW INFORMATION
Interest paid $ 85,825 $ 186,211
=================================
Income taxes paid $ 14,123 $ 39,074
=================================
</TABLE>
See notes to interim consolidated financial statements.
-6-
<PAGE> 9
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information in response to the requirements of Article 10 of
Regulation S-X. Accordingly they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring items) necessary to present fairly the financial position as of
November 30, 1999; results of operations for the nine months and three months
ended November 30, 1999 and 1998; cash flows for the nine months ended November
30, 1999 and 1998; and changes in stockholders' equity for the nine months ended
November 30, 1999. For further information, refer to the Company's financial
statements and notes thereto included in the Company's Form 10-K for the year
ended February 28, 1999. The consolidated balance sheet at February 28, 1999 was
derived from the audited financial statements as of that date. Results of
operations for interim periods are not necessarily indicative of annual results
of operations.
Certain prior year amounts were reclassified to conform with the current year
presentation.
2. FINANCE RECEIVABLES, NET
Net finance receivables consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
---------------------------------------
<S> <C> <C>
Gross finance receivables $2,937,301 $3,409,095
Allowance for credit losses (107,994) (86,000)
Deferred finance income (289,740) (342,936)
---------------------------------------
$2,539,567 $2,980,159
=======================================
</TABLE>
-7-
<PAGE> 10
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
--------------------------------------------
<S> <C> <C>
Land $ - $ 740,000
Land improvements 25,506 445,008
Buildings - 826,185
Restaurant equipment 1,645,439 3,175,213
Leasehold improvements 509,056 1,213,279
Computer equipment 196,532 181,669
Equipment under capital leases 191,625 286,174
Other equipment and furniture 23,888 27,900
--------------------------------------------
2,592,046 6,895,428
Less accumulated depreciation and amortization 1,600,321 2,758,146
--------------------------------------------
Property and equipment, net $ 991,725 $ 4,137,282
============================================
</TABLE>
Depreciation expense for the nine months ended November 30, 1999 and 1998, which
includes amortization under capital leases was $221,487 and $309,621.
4. NOTES PAYABLE
Notes payable include the following:
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
---------------------------------------------
<S> <C> <C>
Mortgage on real estate $ - $ 1,599,043
Bank--term 150,000 918,057
Related party credit line - 781,483
Related party escrow loan - -
Related party loans - 60,000
Capital lease obligations 69,788 135,187
Purchase money note - 9,883
---------------------------------------------
219,788 3,503,653
Less current maturities 90,085 291,338
---------------------------------------------
Long-term debt $ 129,703 $ 3,212,315
=============================================
</TABLE>
-8-
<PAGE> 11
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
Related Party Credit Line: In December 1997, a $700,000 line of credit was
obtained from a related party, Northwest Management Corp. ("NMC"), a shareholder
of the Company. In January 1999, the line of credit was increased to $785,000.
The president of NMC, who is also a shareholder of the Company, has the power to
vote NMC shares which are owned by his two children. The line, under which there
was no outstanding balance at November 30, 1999, expires at the earliest of (i)
payment in full of the second mortgage receivable from the sale of the Granby
property, (ii) February 28, 2001 or (iii) on mutual agreement of the Company and
NMC, with final maturity on October 31, 2002. Interest is calculated at a rate
of 12% per annum. Monthly payments, when there is an outstanding balance on the
credit line, are due for interest and principal in the amount of $9,863 with a
final payment of any outstanding balance at the maturity date. There were no
commitment fees paid in connection with this line of credit.
The line has a joint and several obligation of the Company and its subsidiary,
Medical Financial Corp. The line is collateralized by a second mortgage
receivable on the Granby property and the purchased insurance claims receivable
of Medical Financial Corp. equal to at least 200% of the principal sum
outstanding under the line.
Related party escrow loan: In February 1999, a related partnership, whose
partners are directors, officers and shareholders of the Company, committed to
loan until March 15, 2000 an investment portfolio valued at $240,000 to the
Medical Financial Corp. subsidiary. This investment portfolio is being held in
escrow and is used as collateral for the purpose of obtaining loans. All risks
and rewards of the investment portfolio pass to the related party. The loans
bear interest at a variable rate based on market condition set at the discretion
of the investment brokerage. A fee is payable monthly to the related party at
the rate of 5% per annum on the value of the investment escrow account. This fee
is included in interest expense. Proceeds from the loan may only be used to fund
the purchase of certain medical receivables. The loan is repaid as payment is
received from such receivables.
Related Party Loans: During the year ended February 28, 1999, the Company
borrowed at various times a total of $60,000 from two directors, officers and
shareholders. The loans were repaid in full during the three months ended May
31, 1999. The interest rate on these loans was at 12% per annum. Both interest
and principal were payable on demand. As of November 30, 1999 there were no
related party loans outstanding.
Interest expense on these related party borrowings was $33,738 and $32,068 for
the nine months ended November 30, 1999 and 1998.
-9-
<PAGE> 12
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. NOTES PAYABLE (CONTINUED)
Capital Lease Obligations: The Company has acquired certain equipment under
various capital leases expiring in 2003. The leases provide for monthly payments
of principal and interest of $4,426 and have been capitalized at imputed
interest rates of 9.37% to 16.72%.
Aggregate maturities of the amount of notes payable and capital leases for the
years ending February 28 are as follows:
<TABLE>
<CAPTION>
NOTES CAPITAL LEASE
PAYABLE OBLIGATIONS TOTAL
--------------------------------------------
<S> <C> <C> <C>
2000 (three months) $ 12,500 $ 15,097 $ 27,597
2001 137,500 38,314 175,814
2002 - 21,055 21,055
2003 - 6,054 6,054
--------------------------------------------
150,000 80,520 230,520
Amount representing interest - 10,732 10,732
--------------------------------------------
Total (a) $150,000 $ 69,788 $219,788
============================================
</TABLE>
(a)--Total capital lease obligations represent present value of minimum lease
payments.
5. COMPREHENSIVE INCOME
Total comprehensive income (loss) was $(213,072) and $(152,639) for the three
and nine-months ended November 30, 1999 and $(64,420) and $(207,451) for the
three and nine-months ended November 30, 1998.
-10-
<PAGE> 13
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES
MINIMUM OPERATING LEASE COMMITMENTS
Subject to annual real estate adjustments and additional rent in excess of base
sales, the following is a schedule of future minimum rental payments required
under the Company's leases for the years ending February 28:
<TABLE>
<CAPTION>
<S> <C>
2000 (three months) $ 179,311
2001 730,018
2002 622,200
2003 604,250
2004 530,000
Thereafter 3,920,834
----------------
Total $6,586,613
================
</TABLE>
PSI LITIGATION
In 1993, the shareholders of PSI brought a class action against PSI and certain
of its officers in the United States District Court for the Southern District of
New York, which was settled by a Stipulation of Settlement dated as of November
15, 1993 (the "Stipulation"), pursuant to which PSI Settlement Corp. ("Nexus")
was formed. On January 21, 1994, Judge Robert Sweet signed the Order confirming
the Stipulation. Pursuant to that Stipulation, (i) the eligible shareholders of
PSI received a pro-rata distribution of $1,400,000, after deduction of the fees
and expenses of the class action, which amounted to $.50 per share, and (ii) all
the shares of Nexus were delivered to Escrow Agents to hold for the benefit of
all shareholders of PSI. Pursuant to the Orders of Judge Sweet, PSI transferred
certain assets to Nexus as specified in the Stipulation and the Court's Orders.
These payments, including the shares of Nexus, fully settled all of the claims
by PSI shareholders that could have been asserted against PSI and the other
defendants in the class action.
On June 12, 1995, Judge Sweet signed an Order approving an amendment of the
Stipulation which permitted Nexus to operate as an ongoing entity rather than
liquidating its assets, provided the escrowed shares of Nexus were delivered out
to PSI shareholders by June 12, 1997 (such shares were delivered on August 12,
1996) and listed for trading on NASDAQ.
-11-
<PAGE> 14
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition to settling the class action and making payment to shareholders, PSI
has now settled the action by the Securities and Exchange Commission against it
and resolved the material claims and lawsuits which arose out of its
discontinued vocational school operations.
In May 1999, PSI settled its indebtedness to, and claims by, the United States
and the Department of Education for an amount which was paid by PSI except for
$140,000 to be paid over a period ending in 2001. PSI is negotiating to settle
its indebtedness to the Internal Revenue Service and a former landlord of PSI
school for a total of $125,000. As a result of the 1993 Stipulation described
above, the Company believes it is not responsible for the obligations of PSI.
7. INCOME TAXES
The provision (benefit) for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ (4,463) $ - $ - $ -
State 3,675 (8,910) 15,223 16,054
----------------------------------------------------------------
Total current (788) (8,910) 15,223 16,054
----------------------------------------------------------------
Deferred:
Federal 4,463 - - -
State - (53) - (237)
----------------------------------------------------------------
Total deferred 4,463 (53) - (237)
----------------------------------------------------------------
Total $ 3,675 $ (8,963) $ 15,223 $ 15,817
================================================================
</TABLE>
-12-
<PAGE> 15
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. SALE OF SUBSIDIARY
On May 14, 1999, the Company sold Wendclark, Inc., one of the two subsidiaries
that operate in the food service division. The Company received $975,000 in
cash, resulting in a gain of $96,303. As a result of this sale, $2,342,555 of
debt that was carried on Wendclark was eliminated. The revenues and operating
expenses of Wendclark for the nine months ended November 30, 1999 and 1998 are
presented separately in the consolidated statement of operations.
9. BUSINESS SEGMENT INFORMATION
In the fourth quarter of fiscal 1999, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement 131"). Statement 131 establishes standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for disclosures about products and
service and geographic areas. Operating segments are components of an enterprise
for which separate financial information is available and which is evaluated
regularly by the Company's chief operating decision maker, or decision maker
group, in deciding how to allocate resources and assess performance.
Operating segments are managed separately and represent separate business units
that offer different products and serve different markets. The Company's
reportable segments include: (1) food services, (2) real estate, (3) medical
financing and (4) other, which is comprised of corporate overhead. The food
services segment operates in West Virginia (discontinued as of May 14, 1999) and
the Hudson Valley, NY area. The real estate segment operates in New York and
Connecticut. The medical financing segment operates in New York and New Jersey.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All inter-segment balances have been
eliminated. Inter-segment balances bear interest at the rate of 10% per annum
and are included in net interest expense. Business segment information for the
nine months and three months ended November 30, 1999 and 1998 follows. Certain
prior year information has been reclassified to conform with the current year
presentation.
-13-
<PAGE> 16
FRM Nexus, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
FOOD REAL MEDICAL
SERVICE ESTATE FINANCING OTHER TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED NOVEMBER 30,
1999
Total revenue from external customers $ 2,702,854 $ 176,216 $ 197,932 $ - $ 3,077,002
Income(loss) from operations 58,625 19,909 (172,978) (146,961) (241,405)
Gain on sale of subsidiary - - - - -
Interest expense,net (1,290) (51,036) 52,286 - (40)
Income(loss) before provision for taxes 59,915 70,945 (225,264) (146,961) (241,365)
Capital expenditures 16,419 4,185 12,229 1,248 34,081
Depreciation and amortization 54,996 2,312 13,324 138 70,770
1998
Total revenue from external customers $ 4,317,647 $ 92,455 $ 238,298 $ - $ 4,648,400
Income(loss) from operations 85,950 6,601 (13,656) (88,720) (9,825)
Interest expense,net 51,183 (24,861) 37,236 - 63,558
Income(loss) before provision for taxes 34,767 31,462 (50,892) (88,720) (73,383)
Capital expenditures 536,795 1,245 - - 538,040
Depreciation and amortization 118,894 1,306 5,291 - 125,491
NINE MONTHS ENDED NOVEMBER 30,
1999
Total revenue from external customers $ 9,499,700 $ 555,931 $ 807,513 $ - $ 10,863,144
Income(loss) from operations 298,547 31,968 (219,247) (335,660) (224,392)
Gain on sale of subsidiary 96,303 - - - 96,303
Interest expense,net 41,407 (129,454) 160,022 - 71,975
Income(loss) before provision for taxes 353,443 161,422 (379,269) (335,660) (200,064)
Total assets 1,875,872 5,129,456 3,019,441 - 10,024,769
Capital expenditures 162,036 4,185 79,635 1,248 247,104
Depreciation and amortization 222,152 5,533 38,358 138 266,181
1998
Total revenue from external customers $ 12,734,433 $ 309,653 $ 765,968 $ - $ 13,810,054
Income(loss) from operations 286,929 18,784 (3,973) (331,604) (29,864)
Interest expense,net 138,751 (73,739) 96,758 - 161,770
Income(loss) before provision for taxes 148,178 92,523 (100,731) (331,604) (191,634)
Total assets 5,531,367 5,349,829 2,697,832 - 13,579,028
Capital expenditures 894,120 12,886 - - 907,006
Depreciation and amortization 344,217 3,918 15,874 - 364,009
</TABLE>
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF INTERIM OPERATIONS
AND FINANCIAL CONDITION
All statements contained herein that are not historical facts, including but
not limited to, statements regarding future operations, financial condition and
liquidity, expenditures to develop real estate owned by the Company, future
borrowing, capital requirements and the Company's future development plans are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: changes in the business of the Company's medical
provider clients, changes in the real estate, fast food and financial markets,
and other risk factors described herein and in the Company's reports filed and
to be filed from time to time with the Commission. The discussion and analysis
below is based on the Company's unaudited consolidated financial statements for
the nine months and three months ended November 30, 1999 and 1998. The following
should be read in conjunction with the Management's Discussion and Analysis of
results of operations and financial condition included in the 1999 10-K.
OVERVIEW
Nexus generates revenues from three business segments: food services, real
estate and medical financing. Revenues in the real estate division vary
substantially from period to period depending on when a particular transaction
closes and depending on whether the closed transaction is recognized for
accounting purposes as a sale or reflected as a financing or is deferred to a
future period.
RESULTS OF OPERATIONS
1999 PERIOD COMPARED TO THE 1998 PERIOD
The Company's revenues decreased by $1,571,000, or 34%, for the three months
ended November 30, 1999 to $3,077,000. 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. Revenues decreased by $2,947,000, or 21%,
for the nine month period in 1999 to $10,863,000. The decrease was a result of
decreased revenues in the food service division offset by increases in the real
estate and medical financing divisions.
The revenue decrease in the food service division for the nine month and three
month periods in 1999 of $3,235,000 and $1,615,000 was attributable to the sale
of the Wendclark subsidiary on May 14, 1999. This subsidiary operated nine
restaurants in West Virginia. The remaining eight restaurants in the food
service division had an increase in revenues of $221,000, or 9%, to $2,703,000
for the three month period in 1999. For the nine month period in 1999, revenue
from the remaining eight restaurants
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<PAGE> 18
increased by $492,000 to $7,928,000 as compared to $7,436,000 for the same
period in 1998. 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 $84,000, to $176,000 for the
three month period ended in 1999. Revenue in the real estate division for the
nine month period ended in 1999 increased by $246,000 as compared to the same
period in 1998. The increase in revenue was attributable to the sale of one
condominium unit during the three month period and a total of four units during
the nine month period in 1999 at the Hunter, NY property.
The $40,000 decrease in revenues in the medical financing division for the three
month period ended in 1999 was due to a decrease in medical claims purchased in
that period as compared to the 1998 period. The decrease was due to a lesser
amount purchased due to the Company's decision to be more selective in the bill
purchasing process. Growth in revenues in the medical financing division for the
nine month period ended 1999 was $42,000 as compared to the same period in 1998.
The growth in revenue was due to the additional revenue earned from the
increased amount of medical insurance claims receivable collected as compared to
the prior year.
Costs and expenses decreased $1,340,000, or 29%, for the three month period
ended in 1999, to $3,318,000 as compared to the same three month period in 1998.
Costs and expenses decreased $2,752,000, or 20%, to $11,088,000 for the nine
month period ended in 1999 as compared the nine month period ended in 1998. The
net decrease for the three month period in 1999 was due to decreases of
$1,524,000 in the food service division and $55,000 in depreciation and
amortization, which were offset by increases of $69,000 in the real estate
division, $111,000 in the medical financing division and $58,000 in corporate
expenses. The net decrease for the nine month period ended in1999 was due to
decreases of $3,124,000 in the food service division and $98,000 in depreciation
and amortization, which were offset by increases of $231,000 in the real estate
division, $234,000 in the medical financing division and $4,000 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 $204,000 for the three month period
ended in 1999 to $2,589,000 as compared to $2,386,000 for the three month period
ended in 1998. The remaining eight restaurants had an increase in costs and
expenses of $416,000, to $7,537,000 in for the nine month period ended in 1999.
Increases in food and labor costs are directly related to the increases in
revenues for the three month and nine month periods ended in 1999 as compared
with the same periods in 1998. In addition, labor costs were higher for the nine
month period ended in 1999 as compared to the same period in 1998 due to the
hiring of additional managers in restaurants that were previously understaffed
during the prior periods.
The increase in costs and expenses in the real estate division is attributable
to the cost of sales of the condominium unit during the three month period in
1999 and for four units during the nine month period ended in 1999. The costs
and expenses in the medical financing division for the three month period ended
in 1999 was $358,000, an increase of $111,000 from the same period in 1998. The
costs and expenses in the medical financing division for the nine month period
ended in 1999 was $988,000, an
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<PAGE> 19
increase of $234,000 from the same period in 1998. The increase in 1999 was
attributable to additional expenditures on staff needed to properly service the
existing and projected client base. The infrastructure of the company as
established, can now service a greater number of clients than currently exists.
This is necessary to efficiently service expected new clients with properly
trained employees. In addition, the reserve for bad debts was increased by
$31,000 during the three month period ended in 1999. While the reserve for bad
debts was increased, there have not been any actual bad debts in 1999. 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.
The increase in corporate expenses of $58,000 during the three month period is
due to additional professional fees incurred during 1999 as compared to 1998,
offset by a re-allocation of a portion of executive compensation from corporate
to the medical financing division. The increase in corporate expenses of $4,000
during the nine month period is primarily due the increases, as mentioned for
the three month period, 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.
Interest expense decreased by $60,000, to $10,000 for the three month period
ended in 1999. Interest expense for the nine month period ended in 1999 was
$95,000, a decrease of $95,000 from the same period ended in 1998. The decrease
was attributable to the debt that was included in the Wendclark subsidiary. A
portion of the proceeds from the sale of the Wendclark subsidiary were used to
repay amounts that had been borrowed to finance the purchase of medical claims
receivable, the result of which was a further reduction in interest expense.
The gain on sale of subsidiary in 1999 was a result of the sale of the Wendclark
subsidiary for $975,000, which had a carrying value of $878,697.
For the reasons noted above, the Company experienced an increase in net loss of
$181,000 from a net loss of $64,000 for the three months ended in 1998 to a net
loss of $245,000 for the three months ended in 1999. The net loss for the nine
months ended November 30, 1999 was $215,000, $8,000 greater than the net loss of
$207,000 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's three business activities during the nine month period ended
November 30, 1999 resulted in the increase of cash in the amount of $72,000. The
Company expects growth of its medical financing division to increase which will
result in the use of cash. The funds for those needs are expected
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<PAGE> 20
to be provided for by the $785,000 credit line that was repaid from the proceeds
of the sale of the Wendclark subsidiary, the continued sale of real estate and
available cash. In December 1999, the Company sold its property in Brookfield,
Ct for $537,000, resulting in a gain of $43,000. The net proceeds to the company
after paying closing costs and a participant was $464,000. 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 $108,000 from $121,000 in 1998
to $13,000 in 1999. The Company anticipates that the increases in traffic will
continue, however, sales for the remainder of the fiscal year should decrease,
due to seasonal influences. The long-term sales should be sufficient enough to
maintain a positive cash flow for the periods beyond the remainder of the
current fiscal year. The loss of revenues from the Wendclark subsidiary, which
operated nine restaurants, will not impact future liquidity due to the
insignificant amount of cash flows that were generated from them during the
prior two fiscal years. As a result of the sale of Wendclark, $2,342,555 of debt
was eliminated, improving the Company's working capital and debt-equity ratio.
The real estate division is not expected to be a significant user of cash flow
from operations. The Company's remaining 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 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 used by operations during the nine months ended November 30, 1999 was
$156,000 as compared to $209,000 being provided during the same period in the
prior year. The decrease in 1999 was due to fluctuations in operating assets and
liabilities primarily caused by timing differences and the collection of a
rebate due from a soft drink vendor in the food service division in 1998, offset
by the proceeds from the sale of four condominium units.
Cash provided by investing activities was $1,169,000 for the nine months ended
November 30, 1999 as compared with $1,341,000 being used in the prior year. The
net increase of $2,455,000 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 during the 1998 period. In the medical financing division, medical
insurance claims receivable decreased by $419,000 during the nine months ended
November 30, 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 efficiency as a result of the additional costs and expenses in the
medical financing division.
Net cash used in financing activities was $941,000 during the nine months ended
November 30, 1999 as compared with $558,000 being provided in the prior year.
The $1,499,00 decrease in 1999 was primarily due to the repayment of the related
party credit line in the amount of $775,000, and the borrowing in 1998 to
finance the opening of a new restaurant in that period.
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<PAGE> 21
YEAR 2000 COMPLIANCE
The company has completed a review of its computer systems and operations to
determine the extent to which its systems will be vulnerable to potential errors
and failures as a result of the "Year 2000 problem" and concluded that its own
internal mission-critical systems will not be affected by the Year 2000 problem.
That problem is the result of prior computer programs being written using two
digits rather than four digits to define the applicable year. Any computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. As of January 13, 2000, the Company has
not experienced any errors or failures related to the Year 2000 problem and all
mission-critical systems are functioning properly.
STATE OF READINESS
Food Services Division: This division presently consists of eight Wendy's
restaurants. The revenues of this division are received at the restaurants in
cash and do not depend on Information Technology (IT) Systems. The in-house
computer systems and cash registers from which the operating data from each
restaurant is transmitted to the Company's headquarters and to Wendy's
International are in compliance with the year 2000. The payment of the employees
and creditors of this division will not be affected by the Year 2000 problem.
Real Estate Division: Neither the revenues nor the expenses of this division are
dependent on computer systems for their receipt or disbursement.
Medical Financing Division: This division purchases insurance company
receivables from medical providers and transmits the purchased receivables to
the insurance company for payment without the use of electronic equipment. The
Company receives hard copy bills from the medical providers and forwards hard
copy bills for collection to the insurance company. The Company's in-house
computer systems that record the transactions and prepare reports for management
and medical providers are compliant with the Year 2000.
Suppliers, Customers and Third Party Providers: The revenues in the Medical
Financing Division are received entirely from insurance companies which have
been accepted by the Company as responsible and are licensees of the New York
State Insurance Department (the "Insurance Department"). In October 1998 the
Insurance Department announced that it has stepped up its efforts to ensure that
its licensees are properly addressing the Year 2000 problem. In addition to
reviewing responses received to its compliance requests, the Insurance
Department has conducted on-site investigations and has certified the licensees
with which the Company does business is in compliance.
Except for providers of electricity and phone service the Company is not
dependent on any single third party provider or group of providers other than
said insurance companies.
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<PAGE> 22
COSTS
As of January 13, 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.
RISKS/CONTINGENCY PLANS
The Company has no control over services, functions and data provided by third
party vendors or payors which may affect dealings with its customers. As to the
insurance companies which make payment of the receivables purchased by the
Company, management is relying on the Insurance Department's assurance that they
have become Year 2000 compliant. The company has followed the public statements
and reports from the Insurance Department as to the readiness of the companies
with which it does business because a sustained interruption in the receipts
from several state licensees may adversely impact the ability of the Medical
Financing Division to do business. The Company's contingency plans to meet this
risk which include obtaining additional financing for the carrying of increased
receivables and the prompt enforcement of the statutory periods by which the
insurance companies must respond to the requests for payment of the receivables.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises principally from the interest rate risk related
to its receivables. Interest rate risk is a consequence of having fixed interest
rate receivables in the Company's Real Estate and Medical Financing Divisions.
The Company is exposed to interest rate risk arising from changes in the level
of interest rates.
The Company is not subject to interest rate risk on the fixed interest rate of
its long term 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.
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<PAGE> 23
PART II-OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company is negotiating to subscribe for 2,000,000 shares of common stock,
par value $0.001 per share of GreenShoe.com, Inc., a Delaware corporation
organized in 1999 as an internet financial solutions provider ("GreenShoe"). The
subscription price is at par value or a total cost to the Company of $2,000. The
2,000,000 shares will represent about 5% of the outstanding capital stock of
GreenShoe and will be included in the registration of GreenShoe's shares under
the Securities Act of 1933. THE NEGOTIATION IS IN AN EARLY STAGE, THERE ARE NO
DEFINITIVE TERMS AGREED UPON, THE PARTIES ARE NOT COMMITTED AND THERE IS NO
ASSURANCE THAT A TRANSACTION WITH GREENSHOE WILL BE COMPLETED. The Company will
require GreenShoe to register the shares of common stock it may acquire under
the Securities Act of 1933 so that they may be distibuted to the Company's
shareholders as a dividend on the basis of 1 share of GreenShoe for each 1 share
of the Company's outstanding. The transaction is not expected to occur, if at
all, before, the Spring of 2000 and THERE IS NO ASSURANCE THAT SUCH A DIVIDEND
WILL BE PAID TO THE COMPANY'S SHAREHOLDERS.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
27. Financial Data Schedule
b) REPORTS ON FORM 8k.
None.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FRM NEXUS, INC.
By: /S/ VICTOR BRODSKY
-----------------------------------------
Victor Brodsky
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: January 14, 2000
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