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U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-SB
AMENDMENT NO. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
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(Name of Small Business Issuer in its charter)
FLORIDA 65-0452156
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(State of incorporation) (I.R.S. Employer Identification No.)
3750 INVESTMENT LANE, SUITE 5
WEST PALM BEACH, FLORIDA 33407
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(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (561) 863-8446
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SECURITIES TO BE REGISTERED PURSUANT TO 12(B) OF THE ACT: NONE
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Securities to be registered pursuant to 12(g) of the Act:
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COMMON STOCK $.001 PAR VALUE
(Title of Class)
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TABLE OF CONTENTS
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Page No.
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PART 1
Description of Business..................................................... 1
Management's Discussion and Analysis........................................ 7
Description of Property..................................................... 11
Security Ownership of Certain Beneficial Owners and Management.............. 11
Directors, Executive Officers, Promoters and Control Persons................ 12
Executive Compensation...................................................... 14
Certain Relationships and Related Transactions.............................. 15
Description of Securities................................................... 16
PART II
Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters................................................... 17
Legal Proceedings .......................................................... 17
Changes in and Disagreements with Accountants............................... 17
Recent Sales of Unregistered Securities..................................... 17
Indemnification of Directors and Officers................................... 18
PART III
Index to Exhibits........................................................... 20
PART FS
Financial Statements F-1.................................................... F-1
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Health & Nutrition Systems International, Inc. (the "Company," "HNS,"
"we" or "us") markets and sells vitamin, herbal and herbal-mineral formulations
to pharmacies, health food store and mass market retailers.
We were organized as a Florida corporation on October 25, 1993. Our
fiscal year end is December 31. Our corporate offices are located at 3750
Investment Lane Building #5, West Palm Beach, Fl. 33404. Our phone number is
(561) 863-8446.
During the course of the last three years of our business operations,
our growth strategy was to establish a nationwide network of distributors. From
1997 to December 1998, we used an outside marketing company to help us establish
this distributor network. We sold our products directly to the marketing
company, which, in turn, would advertise and sell to distributors directly.
In December 1998 we determined that we could improve our profit margins
and provide better retail support by eliminating the marketing company and sell
directly to retail health food and independent retail pharmacy accounts. In
January 1999 we established an in-house telemarketing operation that, since May
1999, has opened a weekly average of 30-40 new accounts. Since January 1999, we
have increased our independent retail account to over 2,000 accounts at March
31, 2000.
In addition, we have pursued opportunities with chain drugstores and
health food stores such as GNC, NBTY and El Amal. We also have begun
participating in industry and trade shows to promote and expose our brand of
products.
We have not spent money on research and development activities during
this time. We have contracted with two manufacturing companies that supply us
with our formulations. These formulations are not proprietary, but research and
development personnel at these manufacturing companies work with our personnel
in developing formulations which meet with our particular specifications. We
provide our key accounts with sample formulations and based on this collective
input determine whether we wish to market a product.
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MANUFACTURING
We contract our manufacturing out to herbal supplement manufacturers.
The manufacturers' research and development personnel, using our specifications,
develop our formulations. Approximately 95% of our manufacturing needs are met
by Garden State Nutritional, a division of Vitaquest International Inc. Garden
State owns a 200,000 square foot manufacturing facility in West Caldwell, New
Jersey. Our secondary source of manufacturing is Florida Supplement Corporation,
which houses a 10,000 square foot manufacturing facility located in Hollywood,
Florida. We use Florida Supplement as a backup supplier of product on a
per-order basis in the event we experience a shortfall from Garden State. We do
not have term contracts with these suppliers. The loss of these suppliers would
have a material adverse effect on us.
FACTORING
We initially entered into a factoring agreement with Nationsbanc
Business Finance Corporation in November 1998. This agreement provided that
Nationsbanc purchases our receivables from time to time at a certain discount.
The term of this agreement was open ended. The factoring agreement has recently
been updated. We recently contracted with NationsBank (now Bank of America) for
one year beginning April 1, 2000 to be our exclusive factor at discount a rate
of 3%. HNS maintains a reserve account with the factor of 15% of the outstanding
receivables held by the factor. The reserve account may be charged additional
fees from 1% to 3% on invoices paid beyond the agreed to terms. We agreed to
factor a minimum of $185,000 per month for 12 months. If we fall below for any
month, we can make up the difference in the following month. However, our
account will be charged 3% of 185,000 or $5,550 per month whether we factor or
not.
This arrangement will assist us since we do not have to carry the large
dollar invoices to term. By selling our invoices, we get paid 85% of the invoice
as soon as we ship. We only factor large accounts and not telemarketing
accounts.
GENERAL NUTRITION CORPORATION, INC. (GNC)
We have served as vendor for the dietary supplements retailer, GNC,
since the fourth quarter of 1998. We have no formal written contract with GNC.
GNC is a leading specialty retailer of nutritional supplements and other health
products, with more than 4,000 company-owned and franchised locations worldwide.
Selected HNS products are included in GNC's Plan-o-gram marketing program, a
pre-planned in-store display format. Other of our products are presently
warehoused by GNC and are available to their corporate and franchise stores. In
1999, we derived $751,945 (or 40%) of revenues from our GNC account.
The Plan-o-gram program guarantees distribution of our products in all
4,000 GNC stores. This program gives our products shelf positions in identical
locations in all GNC stores. Products part of the Plan-o-gram program include
the following:
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ThinTab (90 count bottle)
Carbcutter (60 count bottle)
Warehoused items give our products less exposure as they are stored by
the vendors without any prominent shelf locations or guaranteed exposure. Our
warehoused items include the following:
ThinTab (30 count bottle)
ThinTab (90 count bottle)
Thin Tab Mahuang Free (60 count bottle) Carbcutter (60 count bottle)
ThinTab (3 count pouch)
PHARMACIAS EL AMAL
Since the third quarter of 1999, El Amal, A 50-store pharmacy chain in
Puerto Rico, has sold our product, Thin Tab, under an agreement which provided
for an initial TV and print campaign paid for by us, but deducted from El Amal's
invoices to us through November 1999 (end of campaign) which totaled
approximately $46,000. This is not a written agreement. Pharmacias El Amal is
the largest pharmacy chain in Puerto Rico. In 1999, we derived $234,696 (or 12%)
of revenues from our Pharmacias El Amal account.
INDEPENDENT RETAIL LOCATIONS
Our in-house staff of eight telemarketers has opened 2,000 new
independent retail accounts since we began in-house telemarketing in January
1999. We estimate, based on American Business Information (Info USA), that over
100,000 potential retail outlets, including pharmacies, health food stores and
convenience stores exist in the U.S. We are also participating in trade shows
that retail health and pharmacy stores attend. At these shows, we have sold our
products to the stores as well as established contacts to call after the show so
we can follow up with more information on our products. In 1999, we derived
$327,870 (or 17%) of revenues from independent health and pharmacy accounts. We
cannot be confident that we will be able to expand our number of independent
retail accounts in the near future.
Inasmuch as GNC and El Amal accounted for approximately 52% of our
total sales for 1999, the loss of either or both of these accounts would have a
material negative effect on us. We do not have written contracts other than
simple purchase orders with each of these customers.
INDEPENDENT DISTRIBUTORS
Currently, we have ten active distributors for our products. These
distributors service several accounts which they have set up with our products.
We are no longer focusing on developing relationships with distributors,
although we will continue to work with existing distributors. In 1999, we
derived
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$291,402 (or 16%) of revenues from these distributors. We expect revenues from
independent distributors will continue to decline as a percentage of total
revenues in coming periods.
PRODUCTS
We distribute the following products: Thin Tab(R), Thin Tab Mahuang
Free, Ultra Zoom 2000 (TM), Carbcutter(TM), On The Move(TM), Thin Tab Fat
Binding System and Thin Bar(TM). Most of our products are trademarked. Thin Tab
Ripped Max, Super Carbcutter and Thin Shake are new products under development.
THIN TAB
Thin Tab is an herbal supplement tablet formulated as an energy
enhancer to increase stamina, endurance and mental acuity. We market Thin Tab as
being effective in producing positive benefits without the negative side effects
of caffeine. We also believe ThinTab to be effective in weight management, as it
contains ingredients believed to suppress hunger, metabolize fat and optimize
weight control programs.
THIN TAB MAHUNG FREE is designed to offer the benefits of Thin Tab in
an ephedra -free formula, which some users believe to cause caffeine-like
symptoms such as shakiness or the jitters. We believe the Thin Tab Mahuang Free
formula combines herbs that eliminate this negative side effect.
ULTRA ZOOM 2000(TM) is made of active Ginsenosides and Vitamin B-12,
and designed to deliver instant energy.
CARBCUTTER is a carbohydrate inhibitor that is designed to encourage
weight control by inhibiting carbohydrate absorption.
ON THE MOVE is marketed as a sustained energy, endurance and immune
system booster.
THIN TAB FAT BINDING SYSTEM is designed to promote weight loss and
healthy cholesterol levels through a reduction in fat absorption.
THIN BAR is a high protein and high energy meal replacement bar in a
peanut butter/chocolate flavor.
The following products are under development:
THIN SHAKE is a meal replacement powder, to be available in chocolate
and vanilla flavors. This shake features high-end phytonutrients, vitamins,
minerals and lipotropics.
THIN TAB RIPPED MAX is designed to be a maximum strength thermogenic
for energy enhancement and appetite suppression.
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SUPER CARBCUTTER is believed to be a maximum carbohydrate inhibitor.
Also, it is designed to provide for maximum energy support.
COMPETITION
The dietary supplement industry is highly competitive. Some of our
competitors have greater resources and name recognition. These competitors
include: Atkins Nutritional, Twinlabs, Metabolife International, Inc. and Rexall
Sundown, Inc.
We believe that our competitive advantage over these larger competitors
lies with our focus on a limited number of products as well as our ability to
receive rapid feedback about new and existing products from members of our
independent retail health and pharmacy retailers. These retailers represent a
broad cross-section of the population able to give valuable data for us to
interpret and move quickly without a large marketing expense.
Another advantage is our niche focus on diet energy products. We do not
carry multiple product lines. This focus allows us to concentrate our marketing
efforts on a few items, allowing us to spend more dollars per item than some of
our larger competitors who sell a greater variety of items. This niche approach
allows us to foster a brand awareness of our specialization in diet energy
products.
Our manufactures sell us particular formulations of product, which,
despite their uniqueness, might be seen as similar to other products made by the
same manufacturers. We strive to differentiate our products chiefly through our
marketing as well as through our mixture of ingredients and their measurement.
Significant barriers to entry exist within our industry, chief among
them is the difficulty in establishing any new product. This involves a major
capital commitment to advertise, participate in trade shows and build inventory,
which is why we have focused on a limited number of products . Test marketing
also requires a significant commitment of time and capital. Research and
development is not a necessary expense, but it would be advantageous to develop
a patented proprietary product. Many competitors sell a broad range of health
and nutrition products. Our competitors sell to the same retail outlets as we
do. In addition, our suppliers will sell similar products to other marketers,
although they may not represent the same formulations. We as well as other
marketers make the effort to differentiate our particular products and formulas
as well as providing distinctive packaging.
CERTIFICATES OF ANALYSIS
All of our herbal supplement products have certificates of analysis
supplied by each manufacturer, who generally supply each of their customers with
this documentation. These documents provide clinical test results of product
quality and ingredient accuracies. Most major retailers want to see these
certificates
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and, frequently, smaller retailers wish to see them as well. It has been our
experience that consumers rarely, if ever, want to see this documentation.
GOVERNMENT REGULATION
Generally, the regulations of the Federal Drug Administration and state
imposed labeling standards require full disclosure of our products' ingredients,
which we abide by. As required by the Dietary Supplements, Health and Education
Act, we cannot make on our labels or advertising materials either precise health
claims that cannot be substantiated or hint that the product is intended to cure
a disease. We comply with this requirement. Additionally, our manufacturers
abide by industry standards for manufacturing and quality control. Each
manufacturer is subject to regulatory oversight of the United States Department
of Health and Human Services, the Department of Public Health Services and the
Food and Drug Administration.
The FDA oversees safety, manufacturing and product information such as
claims in a product's labeling, package inserts and accompanying literature. The
Federal Trade Commission regulates the advertising of dietary supplements. The
manufacturers review our labeling and will not supply us with the product unless
our labeling satisfies their requirements.
INSURANCE
We are insured for product liability claims up to an aggregate of
$5,000,000. In addition, each of our herbal supplement vendors has supplied us
with industry-standard proof of insurance.
EMPLOYEES
We currently have 30 full time employees, five of which are managerial,
ten are engaged in sales, five administrative personnel and ten are assembly
personnel which is essentially a packaging function. We believe our relationship
with our employees is good.
Our production/assembly personnel package products received from our
manufacturers. Generally, they place the products in plastic or "clamshell,"
packaging to protect the product and afford theft protection to the retailer. We
custom assemble and package our products to each customer's order. Our
production/assembly personnel also fill out shipping documents, UPS forms, FedEx
forms and C.O.D's. We ship approximately 50-100 packages per day. Large orders
are shipped on pallets.
AVAILABILITY OF ADDITIONAL INFORMATION
This registration statement can be read and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
Room 1024, 450 Fifth Street, NW, Washington D. C. 20549. Information about the
Corporation of the Public Reference Room may be obtained by calling
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1-800-SEC-0330. The Registration Statement is also available to the public from
commercial document retrieval services or via EDGAR on the commission's Web site
at www.sec.gov.
Prior to the effective date of the registration statement, we were not
subject to the reporting requirements of the Securities Exchange Act of 1934
("Exchange Act") and did not file quarterly and annual reports with the
Commission. These reports can be accessed via EDGAR at the Commission's Web
site, www.sec.gov. In addition, we expect to furnish our shareholders with
annual reports containing audited financial statements and may distribute
quarterly reports containing unaudited summary financial information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 1998.
NET SALES: Net sales for the twelve months ended December 31, 1999 were
$1,867,800, an increase of $945,392 or 102%, as compared to net sales of
$922,408 for the twelve months ended December 31, 1998. The increase was due to
restructuring sales and marketing programs from outside marketing and broker
services to in-house sales. Our in-house telemarketing program has generated
$327,870 in sales in the independent health food store and independent pharmacy
market. We have established and maintained sales in health food chain accounts
of $820,845 and pharmacy chain accounts of $234,696. Independent distributors
have purchased $414,402 of products.
COST OF SALES: Cost of sales for the twelve months ending December 31,
1999 was $729,994 or (39% of net sales, as compared to $462,008 or 51% of net
sales for the twelve months ending December 31, 1998. The decrease is primarily
attributable to our decision to sell directly to stores without the use of
outside marketing companies. By eliminating the outside marketer, we eliminate
that cost of sales, thereby improving our margins without increasing prices paid
by our customers.
GROSS PROFIT: Gross profit for the twelve months ended December 31,
1999 was $1,137,806 an increase of $677,406 or 147%, as compared to gross profit
of $460,400 for the twelve months ending December 31, 1998. Of this increase,
$43,710 or 6% of the increase was attributable to higher margins resulting from
elimination of use of outside marketing companies. $633,696 or 94% was
attributable to increased sales. As a percent of net sales, gross profit was 61%
for the twelve months ending December 31, 1999, as compared to 50% for the
twelve months ending December 31, 1998. Each increase is primarily attributable
to increased sales and increased profit.
OPERATING EXPENSES: Operating expenses were $1,112,938 for the twelve
months ending December 31, 1999, representing an increase of $416,098 as
compared to $696,840 for the twelve months ending December 31, 1998. As a
percent of net sales, operating expenses were 59% for the twelve months ending
December 31, 1999 as compared to 76% for the twelve months ending December 31,
1998. Each difference is primarily attributable to increased sales to new
channels of distribution.
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NET PROFIT FROM OPERATIONS: Net profit from operations $27,579 or $.004
per share for the twelve months ending December 31, 1999 as compared to a net
loss of $(254,394) or $(0.04) per share for the twelve months ending December
31, 1998. The increase in income from operations is primarily attributable to
increased sales, increased profit margins and decreased operating expenses.
CARRY FORWARD LOSS
We have net operating loss carry forwards of approximately $339,774 for
tax purposes to affect future taxable income. The net operating loss carry
forwards expire between 2008 and 2018.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999.
NET SALES: Net sales for the three months ended March 31, 2000 were
$1,367,460, an increase of $1,079,636 or 375%, as compared to net sales of
$287,824 for the three months ended March 31, 1999. The increase was due to
growth in our in-house telemarketing accounts, from nil in first quarter 1999,
to over 2,500 in first quarter 2000, along with new orders for our new product,
"Carb Cutter," from chain store accounts such as CVS, Eckerd Drugs and GNC. Our
in-house telemarketing program has generated $423,912 or 31% of sales in the
independent health food store and independent pharmacy market. We had $546,984
or 40% of sales in health food chain accounts and $205,119 or 15% of sales in
pharmacy chain accounts. Distributors accounted for $82,047 or 6% of sales.
COST OF SALES: Cost of sales for the three months ending March 31, 2000
was $402,036 or 29% of net sales as compared to $125,882 or 44% of net sales for
the three months ending March 31, 1999. The decrease is primarily attributable
to the increased sales of Carb Cutter, which has a higher gross profit than our
other products. We expect the higher margins on Carb Cutter to remain until
other competitor products enter the market. At that point, the margins will
start to reduce.
GROSS PROFIT: Gross profit for the three months ending March 31, 2000
was $965,424, an increase of $803,482 or 496%, as compared to gross profit of
$161,942 for the three months ending March 31, 1999. As a percent of net sales,
gross profit was 71% for the three months ending March 31, 2000, as compared to
56% for the three months ending March 31, 1999. Each increase is primarily
attributable to increased sales and higher profit margins on our new Carb Cutter
product.
OPERATING EXPENSES: Operating expensed were $628,633 for the three
months ending March 31, 2000, representing an increase of $479,531 as compared
to $149,102 for the three months ending March 31, 1999. As a percent of net
sales, operating expenses were 45.9% for the three months ending March 31, 2000,
as compared to 51.8% for the three months ending March 31, 1999. Each difference
is primarily attributable to increased sales to new channels of distribution,
expenses associated with upgrading hardware and software and increasing
personnel to accommodate growth. In March 31, 1999, we had approximately 7
employees. In March 31, 2000, we had 30 employees.
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NET PROFIT FROM OPERATIONS: Net profit from operations was $246,930 or
$.036 per share for the three months ending March 31, 2000, as compared to
$13,190 or $.002 per share for the three months ending March 31, 2000. The
increase in income from operations is primarily due to increased sales,
increased profit margins and decreased operations expenses as a percentage of
net sales.
LIQUIDITY & CAPITAL RESOURCES
At December 31, 1999, the Company had a working capital surplus of
$311,246. Net cash used in operating activities for the year ended December 31,
1999 was $121,578 and resulted primarily from the net income for the year and
payment of trade accounts and accrued expenses. Net cash used in investing
activities was $59,102 for the year ended December 31, 1999. Net cash provided
by financing activities for the year ended December 31, 1999 was $298,121 which
resulted from an equity financing under which we issued 1,363,488 shares of our
common stock, 341,872 of our $.50 warrants and 341,872 of our $2.00 warrants.
At March 31, 2000, the Company had a working capital surplus of
$487,566. Net cash provided by operating activities for the quarter ended March
31, 2000 was $30,391 and resulted primarily from the net income for the quarter
and payment of trade accounts and accrued expenses. Net cash used in investing
activities was $49,340 for the quarter ended March 31, 2000. Net cash provided
by financing activities for the quarter ended March 31, 2000 was $20,864 which
resulted from shareholders exercising 8,000 warrants at $.50 cents each and
capital lease financing.
We factor certain of our account receivables with NationsBank.
NationsBank purchases receivables for 97% of the face amount of certain
invoices, and we maintain a reserve account of 15% of the outstanding
receivables held by the factor. The reserve account may be charged additional
fees from 1% to 3% on invoices paid beyond the agreed terms. NationsBank has
extended credit up to $1,000,000 for factoring GNC up from $500,000.
Health & Nutrition Systems has seen significant increases in accounts
receivable and inventories as our sales have grown. These increases have been
offset partially by increases in accounts payable. During calendar year 1999,
the Company financed its operations and expansions by issuing equity consisting
of units of its common stock and warrants. We believe that sales will continue
to increase in the future, both for the remainder of our 2000 fiscal year and
for the intermediate long term after the fiscal year, given the market response
we are currently receiving for our products and relationships that we have
developed. We have been experiencing positive cash flow since the outset of the
1999 fiscal year, and our ability to factor accounts receivable continues to be
a source of cash flow. At March 31, 2000, Health and Nutrition Systems had
cash in bank and current accounts receivable sufficient for its expected cash
requirements for at least the next twelve months based on current product line
and our marketing program.
In the long term, factoring large pharmacy chain accounts and large
health food accounts will continue to play an important role in providing
capital and liquidity for our future needs. By negotiating
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higher limits on credit and maintaining good rates with Bank of America, we
should be able to fund sufficient levels of operations and growth for fiscal
years 2001 and 2002.
Management believes that we could well need to raise additional capital
to expand significantly our inventory levels, product lines and sales in the
future. We intend to fund our expansion through a variety of means, including
factoring major accounts, which arrangement will provide us revenue of 85% of
the invoice at time of shipment instead of carrying that account receivable for
approximately 30-90 days. In addition, we have negotiated larger credit limits
with our suppliers. For example, formerly our credit limit with Garden State
Nutritional, our primary source of product, was $80,000. Currently, we have over
$400,000 in credit with Garden State Nutritional, which is expected to increase
as our orders expand.
To the extent internal cash flow, credit lines and factoring
arrangements are not sufficient, we will consider private financing under Rule
506 and either institutional funding program if available and feasible.
Additional capital would be directed to expand current inventory, establishing a
greater profile for the Company, participation in additional trade shows and
perhaps develop as many as two or three new products in diet and energy
categories as well as to explore e-commerce possibilities.
At May 31, 2000, HNS had 341,872 outstanding warrants, which if all are
exercised, would provide an additional $683,744 in proceeds to HNS. Through May
31, 2000, warrants to purchase 50,727 shares, representing $25,363 of proceeds
have been exercised. The primary factors that would encourage warrant holders to
exercise their warrants is if the common stock of HNS becomes publicly traded
and whether the price at which the common stock trades exceeds the exercise
price of the warrants.
If we are unable to factor large accounts and if we are unable to raise
secondary sources of capital for expansion, then we would not be in a position
to grow as fast as we would like. Lack of accounts receivable funding would have
a strong adverse effect on our current business. Lack of secondary sources of
capital for expansion would likely have an adverse effect on our future growth.
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Information contained or incorporated by reference in this registration
statement on Form 10-SB and contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," or comparable terminology, or by discussions of
strategy. These forward-looking statements involve certain significant risks and
uncertainties, and actual results may differ materially from the forward-looking
statements. No assurance can be given that future results covered by the
forward-looking statements will be achieved, and other factors could also cause
actual results to vary materially from the future results covered in such
forward- looking statements. The Company does not undertake to publicly update
or revise any of its forward looking statements even if experience or future
change show that the indicated results or events will not be realized.
ITEM 3. DESCRIPTION OF PROPERTY
Our corporate offices and finished product warehouse is located in a
6,000 square foot facility at 3750 Investment Lane, Building 5, West Palm Beach,
Florida, 33404. This lease expires on December 31, 2002 and provides for lease
payments of approximately $2,010.00 per month. We also have storage facilities
at Building 1A which consists of 4,000 square feet with lease payments of $1,767
and expiring December 31, 2000. All packaging and shipping is performed from
this location.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This chart shows: (i) the name and number of shares of each officer or
director; (ii) the name and number of shares held by each person known to be the
beneficial owner of more than 5% of our common stock; and (iii) the holdings of
all officers and directors as a group. The address for each person is 3750
Investment Lane Suite 5, West Palm Beach, Florida 33404 unless we indicate
otherwise. As of May 31, 2000 there were approximately 6,915,621 shares of
common stock issued and outstanding.
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<TABLE>
<CAPTION>
Amount of Beneficial
Name of Beneficial Owner Ownership of Stock Percentage of Class
------------------------ -------------------- -------------------
<S> <C> <C>
Tony Musso 1,138,657 16.5%
Steven Pomerantz 973,657 14.1%
Christopher Tisi 914,575 13.2%
Tony D'Amato 799,104 11.6%
J. C. Herbert Bryant III 500,268 7.2%
Anthony & Renute Dell'aquilla 510,000 7.3%
Napoleon & Tania Paz 520,000 7.4%
All executive officers & directors as a group
(3 People) 3,026,889 43.8%
</TABLE>
The holdings of Anthony and Renute Dell'aquilla include warrants to
purchase 100,000 shares of common stock at a purchase price of $2.00 per share,
exercisable until April 5, 2001. Napoleon and Tania Pas hold identical warrants
to purchase 100,000 shares.
Tony D'Amato's address is 1526 Michigan Avenue, #1, Miami Beach,
Florida. J.C. Herbert Bryant III's address is 517 27 Street, West Palm Beach,
Florida 33407. The Dell'aquilla's address is 15377 Whispering Willow Drive,
Willington, Florida 33414. The Paz' address is 51 Seabreeze Avenue, Delray
Beach, Florida 33483.
A former consultant and its assigns received options to purchase
700,000 shares in contemplation of services. HNS cancelled 650,000 of the shares
subsequently issued based on its position that the services contracted for were
not rendered nor adequate consideration received for the exercise of the option.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, positions with the company
and ages of the executive officers and directors of the company. Directors will
be elected at the Company's annual meeting of shareholders and serve for one
year or until their successors are elected and qualify. The Board elects
officers and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.
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<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven Pomerantz 44 President, Chief Executive Officer,
Treasurer, Director
Christopher Tisi 30 Chief Operating Officer, Secretary, Director
Tony Musso 50 Chairman of the Board of Directors
</TABLE>
Each director holds office until the next annual meeting of
shareholders and until his successor is elected and qualified. Each officer
holds office until the first meeting of directors following the annual meeting
of shareholders and until his successor is elected and qualified, subject to
earlier removal by our board of directors.
STEVEN POMERANTZ
Steven Pomerantz has served as President and Chief Executive Officer
since March 1998. From 1995 to March 1998, Mr. Pomerantz served as Vice
President of Finance and Chief Operating Officer. Prior to joining HNS, Mr.
Pomerantz served as President of CSP International, Inc., a manufacturer of
pepper gas, which he co-founded with Mr. Musso in 1985 and sold in December
1994. From 1982 to 1984 Mr. Pomerantz was an account executive with NCR
Corporation. In 1980, Mr. Pomerantz received his MBA from Emory University in
Atlanta, Georgia.
CHRISTOPHER TISI
Christopher Tisi has served as Chief Operating Officer since December,
1999. Mr. Tisi has also served as Vice President of Sales and Marketing from
March 1998 to December 1999. From 1994 to March 1998, Mr. Tisi served as Vice
President of Training. From 1991 to December 1994, Mr. Tisi served as a
Marketing Director at Quorum International, a multi-level marketing company in
Phoenix, Arizona.
TONY MUSSO
Tony Musso serves as Chairman of the board of directors, a position he
has held since March 1998. From 1993 to March 1998, Mr. Musso served as
President and Chief Executive Officer. Mr. Musso has served as Chairman of the
Board of Nutrition Superstore.com since November 1997. In 1985 Mr. Musso
co-founded CSP Int., Inc. with Mr. Pomerantz and sold the Pepper Spray
Manufacturing Company in December 1994. In 1989 Mr. Musso founded International
Marketing Strategies and served as Executive Director until December 1997. The
company distributed Health & Beauty products for NYSE (NUS) Nu-Skin
International. From 1977 to 1985 Mr. Musso served as V.P. of Sales of S.G.M., a
Halon Fire Extinguisher company. From 1972 to 1976, Mr. Musso served as an
internal auditor for Thomas Jefferson University in Philadelphia, P.A. In 1974,
he received his Law Degree from Delaware Law School and in 1971, he received his
Bachelors of Science from the University of Scranton.
13
<PAGE> 16
ITEM 6. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table summarizes all compensation recorded by Health &
Nutritional System in the last three fiscal years for the Company's executive
officers serving as such.
<TABLE>
<CAPTION>
Name Year Salary Bonus Position
---- ---- ------ ----- --------
<S> <C> <C> <C> <C>
Steve Pomerantz 1999 $ 13,356 $1,022 President
1998 $ 41,731 $ 0 President
1997 $140,673 $ 0 Vice President
Tony Musso 1999 $ 1,100 $ 0 Director
1998 $ 10,577 $ 0 Vice President
1997 $ 52,778 $ 0 President
</TABLE>
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999
No options were granted to any executive officers in 1999.
STOCK OPTION PLAN
In May 1998 the Company adopted a stock option plan. Currently, no
options are outstanding. The purpose of the stock option plan was to increase
the employees and non-employee directors' proprietary interest in HNS and to
align more closely their interests with the interests of the shareholders of
HNS, as well as to enable HNS to attract and retain the services of experienced
and highly qualified employees and non-employees directors.
Options granted under this plan may either be options qualifying as
incentive stock options under Section 422 of the Internal revenue Code of 1986,
as amended, or options that do not so qualify. Any incentive option must provide
for an exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of any
incentive option granted to an eligible employee owning more than 10% of the our
common stock must be at least 110% of such fair market value as determined on
the date of the grant.
The term of each option and the manner in which it may be exercised is
determined by the board of directors, provided that no option may be exercisable
more that 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more that 10% of the our common
stock, no more than five years after the date of the grant. The exercise price
of non-qualified options shall be determined by the board of directors.
14
<PAGE> 17
We reserved an aggregate of 2,500,000 shares of common stock for
issuance of options under the stock option plan. As of May 31, 2000, options
to purchase an aggregate of 335,000 have been granted, all of which have been
exercised by two former directors, J.C. Herbert Bryant, III and John Tomaselli.
Therefore, options to purchase 2,165,000 remain. The board of directors or a
committee of the board of directors will administer the plan including, without
limitation, the selection of the persons who will be granted plan options under
the plan, the type of plan options to be granted, the number of shares subject
to each plan options and the plan option price.
The per share exercise price of shares granted under the plan may be
adjusted in the event of certain changes in the total purchase price payable
upon the exercise in full of options granted under the plan. Officers, directors
and key employees of and consultants to HNS will be eligible to receive
non-qualified options under the plan.
Only officers, directors and employees of HNS who are employed by HNS
or by any subsidiary thereof are eligible to receive incentive options.
EMPLOYMENT AGREEMENTS
STEVEN POMERANTZ
Effective January 1, 2000, we entered into a two year employment
agreement with Steven A. Pomerantz, Chief Executive Officer, President and
Treasurer. The agreement provides for an annual base salary of $100,000 and is
terminable for cause. The agreement also provides for quarterly bonuses of up to
$10,000, based upon our attainment of quarterly sales revenue benchmarks of
$600,000. Mr. Pomerantz has, in the past, voluntarily accrued certain portions
of his salary owed him by us. To date, all such amounts have been repaid.
CHRISTOPHER TISI
Effective January 1, 2000, Health & Nutrition Systems International,
Inc. entered into a two year employment agreement with Christopher Tisi, our
Vice President of Sales & Marketing and Secretary. The agreement provides for an
annual base salary of $100,000 and is terminable for cause. The agreement also
provides for quarterly bonuses of up to $10,000, based upon our attainment of
quarterly sales revenue benchmarks of $600,000.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Health & Nutritional Systems International, Inc. has, in the past,
engaged in related party transactions with J.C. Herbert Bryant III, who, served
as Vice President and Secretary between March
15
<PAGE> 18
18, 1998 and September 13, 1999. The entity controlled by Mr. Bryant, KMS-Thin
Tab 100, Inc., purchased products from us for resale to its customers on terms
no more favorable than those given to unaffiliated third parties in arms'-length
transactions. For the year ended December 31, 1999, KMS-Thin Tab 100, Inc. made
aggregate purchases of herbal supplements of $136,944 from us. For 1998,
purchases totaled $62,766.
Steven Pomerantz and Tony Musso and affiliated companies advanced to
HNS a total of $104,109 during 1998. These advances did not bear interest and no
other consideration was received. As of this date, these advances have been
repaid.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of common stock,
par value $.001 per share of which approximately 6,915,621 shares were issued
and outstanding as of May 31, 2000. Holders of the shares are entitled to one
vote per share on each matter submitted to a vote at a meeting of shareholders.
The common stock do not have cumulative voting rights or preemptive rights and
there are no redemption or conversion privileges attached thereto. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the company and to participate ratably in the distribution of any assets
legally available for distribution with respect to the common stock. The Company
does not expect to pay dividends for the foreseeable future.
FLORIDA ANTI-TAKEOVER STATUTES; INDEMNIFICATION
Florida has enacted legislation that may deter or frustrate a take-over
of a Florida Corporation. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires super majority approval by disinterested directors or
shareholders of certain specified transactions between a corporation and holders
of more than 10% of the outstanding voting shares of the corporation (or their
affiliates). The Florida law permits the Company's Articles of Incorporation to
require the Company to indemnify the Company's directors, officers, employees
and agents.
16
<PAGE> 19
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
As of May 31, 2000, there were 109 shareholders of record of our common
stock. Our common stock is not included for trading on any exchange or quotation
system. There are approximately 6,915,621 shares of common stock issued and
outstanding.
The Transfer Agent for our common stock is Florida Atlantic Stock
Transfer, Inc. 7130 Nob Hill Road, Tamarac, FL 33321.
In January 1997, the shareholders approved an amendment to the articles
of incorporation to increase the number of shares of common stock, par value
$0.001 per share. We increased our authorized common stock from 7,500,000 to
30,000,000.
In January 1997, our board of directors authorized a forward stock
split of 1.771144278607 shares for each share then outstanding, not including
the shares underlying warrants and other shares of common stock which were
issued in connection with an offering of shares in 1995, which were canceled.
The per share information included in the accompanying financial statements and
related notes are restated to reflect this stock split.
DIVIDED POLICY
We have never paid cash dividends on our common stock. We presently
intend to retain future earnings, if any, to finance the expansion of our
business and we do not anticipate that any cash dividends will be paid in the
foreseeable future. The future dividends policy will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors.
ITEM 2. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not Applicable
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In October 1995, we sold in a private placement 59,000 shares for a
purchase price of $0.50 per unit, which were ultimately converted into an
aggregate of 59,000 shares of our common stock to 10
17
<PAGE> 20
persons who were either accredited or otherwise sophisticated investors with
whom we had pre-existing relationships and access to relevant information
concerning us in an offering exempt from registration under the Securities Act
in reliance on Sections 3(b) and Rule 504 of Regulation D of the Securities Act.
We received gross proceeds of $29,500 in this transaction. We did not utilize
the services of an underwriter and we paid no commissions or other compensation
for sales made in this private placement.
In January 1997, we consummated the private sale of an aggregate of
265,000 shares of common stock at a purchase price of $.50 per share to 24
persons who were either accredited or otherwise sophisticated investors. The
securities were exempt from registration under The Securities Act pursuant to
Rule 504 of Regulation D thereunder.
In May 1998, we completed a private placement to 6 individuals of an
aggregate of 57,550 units, each unit consisting of one share of common stock and
one warrant to purchase one share of common stock at a purchase price of $2.00
per share, expiring May 19, 2000 (the "1998 Offering"). Inasmuch as these
individuals were either accredited or otherwise sophisticated individuals with
whom we had preexisting relationships and had access to relevant information
about us, the issuance of these securities was exempt form the registration
requirements of the Securities Act pursuant to the exemption set forth in
Sections 3(b) and Rule 504 of Regulation D of the Securities Act. We received
gross proceeds of $37,325 and we paid no commissions or other compensation for
sales made in this private placement.
In March 1999, we consummated the sale to 51 individuals, in a private
placement of units, each consisting of (i) four shares of common stock, (ii) one
warrant to purchase one share of common stock at a purchase price of $.50 per
share ("$.50 Warrants") and (iii) one warrant to purchase one share of common
stock at a purchase price of $2.00 per share. Each of the $.50 Warrants and the
$2.00 Warrants expire in one year from their issuance. We issued an aggregate of
1,363,488 shares of common stock, 341,872 $.50 Warrants and 341,872 $2.00
Warrants, receiving gross proceeds of $374,898. Inasmuch as these investors were
accredited or otherwise sophisticated investors or had a preexisting
relationship with us and access to relevant information concerning us, the
issuance of these securities was exempt, from the registration requirements of
the Securities Act pursuant to the exemption set forth in Sections 3(b) and Rule
504 of Regulation D of the Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporations. The Company's
Articles of Incorporation and Bylaws provided that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Corporation
Act. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
18
<PAGE> 21
PART F/S
The following audited financial statements for Health & Nutrition
Systems International, Inc., including the audited balance sheet at December 31,
1998 and 1997 and the related audited statements of operations, changes in
stockholder's equity and cash flows for each of the years ended December 31 1998
and 1997 have been audited by Butner & Kahle CPA's, PA, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
19
<PAGE> 22
PART III
Exhibits Description of Exhibits
-------- ------------------------
3.1(a) Articles of Incorporation of Health & Nutrition Systems
International, Inc.*
3.1(b) Amended Articles of Incorporation of Health & Nutrition Systems
International, Inc.*
3.1(c) Amended Articles of Incorporation of Health & Nutrition Systems
International, Inc.*
3.2 By-Laws of Health & Nutrition Systems International, Inc.*
10.1 Employment Agreement between Health & Nutrition Systems
International, Inc. and Steven Pomerantz*
10.2 Employment Agreement between Health & Nutrition Systems
International, Inc. and Christopher Tisi*
10.3 Agreement with NationsBank Business Finance Corporation*
27.1 Financial Data Schedule 1998
27.2 Financial Data Schedule 1999
27.3 Financial Data Schedule 1st Quarter 2000
-------------------------
* Previously filed.
20
<PAGE> 23
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTH & NUTRITION SYSTEMS
INTERNATIONAL, INC.
Date: June 28, 2000 By: /s/ Steven Pomerantz
----------------------------------
Steven Pomerantz, President
and Treasurer
21
<PAGE> 24
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report F-2
Balance Sheets F-3
Statements of Operations F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-1
<PAGE> 25
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Health & Nutrition Systems International, Inc.
West Palm Beach, Florida
We have audited the accompanying balance sheets of Health & Nutrition Systems
International, Inc. as of December 31, 1999 and 1998, and the related statements
of operations, stockholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Health & Nutrition Systems
International, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Butner & Kahle CPAs PA
West Palm Beach, Florida
May 1, 2000
F-2
<PAGE> 26
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 154,246 $ 36,805
Accounts receivable (net of reserve of $61,336 at 1999
and $13,200 at 1998) 235,173 31,287
Inventory 120,326 112,859
Prepaid expenses and other current assets 66,239 2,066
--------- ---------
Total current assets 575,984 183,017
--------- ---------
FIXED ASSETS
Furniture, fixtures and equipment (net of depreciation
of $65,981 at 1999 and $53,180 at 1998) 49,402 16,611
--------- ---------
OTHER ASSETS
Due from related parties 8,146 10,861
Other assets (net of amortization of $1,397 and $691) 18,337 4,504
--------- ---------
Total other assets 26,483 15,365
--------- ---------
Total Assets $ 651,869 $ 214,993
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 227,304 $ 113,923
Accrued taxes 10,946 2,380
Due to related parties 19,465 104,109
Capital leases -- current portion 6,994 3,892
Other current liabilities -- 9,145
--------- ---------
Total current liabilities 264,709 233,449
--------- ---------
Capital leases -- less current portion 6,327 4,277
--------- ---------
Total Liabilities 271,036 237,726
========= =========
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, authorized 30,000,000 shares,
7,487,894 shares at 1999 and 6,062,606 shares at 1998
Issued and outstanding 7,488 6,063
Additional paid in capital 685,540 312,005
Stock subscription receivable (700) (1,027)
Accumulated deficit (311,495) (339,774)
--------- ---------
Total stockholders' equity (deficit) 380,833 (22,733)
--------- ---------
Total Liabilities and Stockholders' Equity $ 651,869 $ 214,993
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 27
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Sales of products $ 1,885,855 $ 924,653
Less: Returns and allowances (18,055) (2,245)
----------- -----------
Net sales 1,867,800 922,408
OPERATING EXPENSES
Cost of sales 729,994 462,008
----------- -----------
Gross profit 1,137,806 460,400
----------- -----------
Other operating expenses:
Selling expenses 289,060 180,875
Office expenses 182,103 70,674
Outside services 104,176 45,678
Salaries, wages and benefits 354,998 307,508
Professional services 49,505 31,599
Occupancy expenses 31,911 30,671
Bad debts 80,138 18,359
Depreciation and amortization 13,507 7,611
Other expenses 6,840 3,865
----------- -----------
Total expenses 1,112,238 696,840
----------- -----------
Profit (loss) before other income (expense) and taxes: 25,568 (236,440)
----------- -----------
Other income (expense) 2,711 (17,954)
Income tax expense -- --
----------- -----------
Net profit (loss) $ 28,279 $ (254,394)
=========== ===========
Net profit (loss) per share basic $ 0.004 $ (0.0434)
=========== ===========
Net profit (loss) per share assuming dilution $ 0.004 $ (0.0434)
=========== ===========
Weighted average number of shares 6,775,250 5,848,678
=========== ===========
Weighted average number of shares assuming dilution 7,458,994 5,848,678
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 28
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Number Additional Stock Total
of Shares Common Paid in Subscription Accumulated Stockholders'
Outstanding Stock Capital Receivable Deficit Equity (Deficit)
----------- ------ ---------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1997 5,634,750 $ 5,635 147,645 (1,087) (85,380) $ 66,813
Shares issued for cash 79,000 79 44,821 -- -- 44,900
Options exercised for cash 5,000 5 2,495 -- -- 2,500
Shares issued for services 8,856 9 4,419 -- -- 4,428
Officer and director options for
services exercised 335,000 335 112,625 -- -- 112,960
Collection of subscription receivable -- -- -- 60 -- 60
Net Loss -- -- -- -- (254,394) (254,394)
--------- ------- ------- ------ -------- ----------
BALANCES, DECEMBER 31, 1998 6,062,606 6,063 312,005 (1,027) (339,774) (22,733)
Shares issued for cash 1,425,288 1,425 373,535 -- -- 374,960
Collection of subscription receivable -- -- -- 327 -- 327
Net profit -- -- -- -- 28,279 28,279
--------- ------- ------- ------ -------- ----------
BALANCES, DECEMBER 31, 1999 7,487,894 $ 7,488 685,540 (700) (311,495) $ 380,833
========== ======= ======= ====== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 29
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $ 28,279 $(254,394)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 13,507 7,611
Shares issued for services and options for services exercised 62 117,388
(Increase) decrease in accounts receivable (203,886) 72,490
(Increase) decrease in inventory (7,467) 64,015
(Increase) decrease in prepaids and other current assets (64,173) 11,761
Increase (decrease) in accounts payable 113,381 (19,279)
Increase (decrease) in accrued liabilities (581) (59,591)
--------- ---------
Total adjustments (149,157) 194,395
--------- ---------
Net cash provided by (used in) operating activities (120,878) (59,999)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in trademarks (1,747) (866)
Acquisition of fixed assets (45,592) (3,005)
Other assets (11,763) --
--------- ---------
Net cash provided (used) by investing activities (59,102) (3,871)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 374,898 47,460
Proceeds (repayment) of financing 5,152 (9,192)
Advances from (repayments to) related parties (82,629) (992)
--------- ---------
Net cash provided (used) by financing activities 297,421 37,276
--------- ---------
Net increase (decrease) in cash and equivalents 117,441 (26,594)
CASH and equivalents, beginning of period 36,805 63,399
--------- ---------
CASH and equivalents, end of period $ 154,246 $ 36,805
========= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Non-cash investing and financing activities:
Shares issued for services and options for services exercised $ 62 $ 117,388
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 30
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS--Health & Nutrition Systems International, Inc. ("HNS"
or the "Company") is a marketer and distributor of health and nutrition herbal
supplements. The Company was incorporated in Florida on October 25, 1993. HNS
product sales consist of seven primary dietary supplements: Thin TabR, Carb
CutterTM, This Tab Mahuang Free, On The MoveTM, Thin Tab With Chitosan, Ultra
Zoom 2000TM, Thin BarTM. These products are sold primarily wholesale to health
stores, drug stores, nutrition centers, and other retailers. Additionally, the
products are sold through certain related parties to similar customer types. The
current markets are concentrated in North America and Puerto Rico.
Two manufacturers produce all of the HNS dietary supplements.
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve judgments that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year end and the reported amounts of
revenues and expenses during the year. Actual results could differ from those
estimates.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with maturities of three or fewer months to be cash equivalents. Cash
equivalents consist primarily of investments in money market funds.
INVENTORIES--Inventories are stated at the lower of cost or market with cost
being determined on a first-in, first-out basis.
PROPERTY, EQUIPMENT, LEASEHOLD IMPROVEMENTS, AND DEPRECIATION--Property and
equipment are carried at depreciated cost. Depreciation is provided using the
straight-line or MACRS methods, were not materially different from the
straight-line method, over the estimated economic lives of the assets, which
range from three to seven years. Leasehold improvements are amortized over the
expected lease term. The Company reviews the valuation of fixed assets and their
remaining economic lives annually and adjusts depreciation accordingly.
TRADEMARKS--The Company records the costs of trademarks as intangible assets and
amortizes their value over their estimated economic life.
REVENUE RECOGNITION--Sales revenue is recognized at the date of shipment to
customers. Provision is made for an estimate of product returns and doubtful
accounts and is based on historical experience.
ADVERTISING COSTS--The Company expenses advertising production costs as they are
incurred and advertising communication costs the first time the advertising
event takes place. Advertising expenses for years ending 1999 and 1998 were
$125,592 and $90,549 respectively.
STOCK-BASED COMPENSATION--The Company applies the intrinsic value method in
accounting for its stock options issued to employees. Accordingly, no
compensation expense will be recognized for options granted with an exercise
price equal to market value at the date of grant. Compensation is recorded when
options are exercised when the exercise price is below the market value of the
stock.
F-7
<PAGE> 31
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES-- Prior to April 1, 1996, the Company elected S Corporation status
under the applicable sections of the Internal Revenue Code (IRC) and relevant
state income tax regulations, whereby income of the Company was included in the
income tax returns of its shareholders. Accordingly, the financial statements
for the periods prior to that date do not reflect the income tax effects of the
Company's operations. Effective April 1, 1996, the Company elected to be taxed
as a C Corporation under the provision of the IRC.
For the periods subsequent to April 1, 1996, deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and tax rates in
effect for the periods in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
EARNINGS (LOSS) PER COMMON SHARE--Basic earnings (loss) per share is based on
the weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income (loss) by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming conversion of all potentially dilutive common shares
outstanding. The exercise or conversion of securities that would be antidilutive
are not presented. This was the case in 1998. In 1999 the dilutive effect of
warrants, if exercised, would have been less than $0.01 per share.
COMPREHENSIVE INCOME--The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the year ended
December 31, 1998. The Company did not have any components of comprehensive
income.
SEGMENT INFORMATION--The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the year ended December
31, 1998. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.
NOTE 2. INCOME TAXES
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
$28,279 $(254,394)
</TABLE>
Income tax benefit (provision) consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current income taxes $ -- $ --
Deferred income taxes -- --
Increase (decrease) in valuation allowance (6,763) 47,620
</TABLE>
F-8
<PAGE> 32
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2. (CON'T)
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities. They
are measured by applying the enacted tax rates and laws in effect for the years
in which such differences are expected to reverse. The significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 9,470 $ --
Net operating loss carry-forwards 9,068 25,313
Stock for services 22,319 22,307
-------- --------
Total deferred tax assets 40,857 47,620
Valuation allowance (40,857) (47,620)
-------- --------
Deferred tax liabilities: -- --
Total net deferred tax assets -- --
======== ========
</TABLE>
The Company has established a valuation allowance for the deferred tax assets.
This valuation allowance was recorded in accordance with SFAS 109, which
requires that a valuation allowance be established when there is significant
uncertainty as to the realizability of the deferred tax assets. Management
believes that, based on a number of factors, including prior net operating
losses, that there is sufficient uncertainty regarding the realizability of
these deferred tax assets. The deferred tax assets were calculated for both
years using United States federal tax rate of 15% and a Florida tax rate of 5.5%
for an effective tax rate of 19.675%. There were non-deductible permanent
differences for meals and entertainment and penalties of $9,791 and $12,210 for
the years ending December 31, 1999 and 1998 respectively. The net operating loss
carry-forwards of $43,090 remaining at December 31, 1999 expire in 2018.
NOTE 3. FINANCING ARRANGEMENTS
ACCOUNTS RECEIVABLE FACTORING--The Company factors certain of its accounts
receivable with a commercial finance company subsidiary of a bank. The factor
purchases receivables for 97% of the face amount of certain invoices and the
Company maintains a reserve account with the factor of 15% of the outstanding
receivables held by the factor. The reserve account may be charged additional
fees from 1% to 3% on invoices paid beyond the agreed to terms.
NOTE 4. RELATED PARTY TRANSACTIONS
The Company has engaged in related party transactions with an individual who, at
the time of the transactions, was an officer of the Company, but has since
resigned. The entity controlled by this individual, KMS-Thin Tab 100, Inc.,
purchased products from the Company for resale to its customers on terms no more
favorable than those given to unaffiliated third parties in arms'-length
transactions. For the years ended December 31, 1999 and 1998, KMS-Thin Tab 100,
Inc. made aggregate purchases of approximately $136,944 and $62,766
respectively. In 1998, there were sales to previously related parties of
approximately $110,000 and a loan to a previous related party of $10,861 since
reduced to $8,146. Additionally, in 1998, as indicated on the balance sheet,
there were advances due to the chairman and president of the Company and
companies owned by them of $104,109. In 1999 these advances were paid down to
$19,465.
F-9
<PAGE> 33
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5. COMMON STOCK
AUTHORIZED SHARES--The Company has authorized 30,000,000 shares of common stock,
par value $0.001 per share.
STOCK OFFERINGS IN PRIVATE PLACEMENTS --- The Company has engaged in several
private placements of common stock. In 1998, the Company offered 700,000 shares
of common stock and 700,000 warrants to purchase one common share at $2.00 for a
combined price of $1.10 per share and warrant. This offering was amended in
March, 1999 when the Company offered four shares of common stock and two
warrants to purchase one share each, one at $0.50 and one at $2.00. In this
offering the Company received proceeds net of expenses of $374,898 and issued
1,363,488 shares of common stock and 683,744 warrants.
STOCK AND OPTIONS ISSUED FOR SERVICES --- The Company authorized the 1998 Stock
Option Plan of the Corporation in May, 1998. The plan set aside a reserve of
2,500,000 shares of common stock for this purpose. At this time, the board of
directors granted 335,000 to two board members to purchase shares at $0.001 per
share. The options were exercised and restricted shares were issued. The Company
recorded $112,960 in compensation to those directors, or $0.337 per share. A
total of 61,800 additional shares were issued during the year ended December 31,
1999 at $0.001 per share for services.
NOTE 6. COMMITMENTS, CONTINGENCIES, AND CERTAIN CONCENTRATIONS
LEASE COMMITMENTS--The Company leases 6,000 sq. feet as its office and warehouse
space under the extension of a lease to December 31, 2002. The lease payments
are $2,010 per month.
The Company also leases various equipment under non-cancelable financing leases.
The future annual lease payments at December 31, 1999 were as follows: $6,994 in
the period ending December 31, 2000, $3,606 in the period ending December 31,
2001 and $2,721 in the period ending December 31, 2002.
LEGAL MATTERS--The Company has been subject to legal proceedings and claims
arising in the ordinary course of business. The Company disputed a bill for
promotional materials from 1995. The vendor has not sought collection since that
time and management does not expect any potential outcome to have a material
adverse effect on the Company's financial condition, results of operations, or
cash flows. The Company is also subject to two actions which in the aggregate
claim $30,000. The Company denies any liability in theses actions and is
defending them.
PRODUCT LIABILITY--The Company is insured to the extent of $5 million for
product liability claims and uses vendors who are also insured. There is a risk
that certain vendors may not have sufficient product liability insurance or may
loose their insurance, or the Company may not be able to insure at reasonable
cost. In any of these events, there could be a material adverse effect on the
financial condition, results of operations, or cash flows of the Company.
CERTAIN CONCENTRATIONS--The Company purchases a number of its products from
single sources and has sales to several major customers. The loss of any one
source or major customer could adversely affect the financial condition, results
of operations, and cash flows.
F-10
<PAGE> 34
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7. SEGMENT INFORMATION
The Company has sales from seven primary dietary supplements. These dietary
supplements are sold to customers in the United State and Puerto Rico. The
Company does not prepare information for internal use regarding each of the
products other than total revenues for each product and gross profit from each
product for those that represent greater than 10% of the reported combined
revenues, as it is impractical to do so. All of the operating segments are under
the guidance of the chief operating officer who is the segment manager. All of
the products sold are offered to all customers of the Company.
Enterprise-wide disclosures about revenue by significant products, gross profit
from significant product segments, and major customers are presented below.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
12 Months 12 Months
----------------- -----------------
<S> <C> <C>
Revenues:
Thin Tab 30 $ 405,312 $223,222
Thin Tab 90 874,130 228,757
Other products sales 588,358 470,429
---------- --------
Total revenues $1,867,800 $922,408
========== ========
Gross profit:
Thin Tab 30 $ 291,419 $134,602
Thin Tab 90 655,597 153,953
Other products gross profit 190,790 171,845
---------- --------
Total gross profit $1,137,806 $460,400
========== ========
</TABLE>
MAJOR CUSTOMERS--Health & Nutrition Systems International, Inc. sells a
significant amount of its products to the national distribution centers of a
nationwide chain of nutrition centers. It also sells a significant amount of its
products to a pharmacy chain with many retail operations. These large customers
have dominant positions within their markets and the Company monitors the
financial condition of these customers. Sales to these two customers were
$986,641 and $208,205 during the years ending December 31, 1999 and 1998
respectively. At December 31, 1999 and 1998, amounts due from these two
customers accounted for 26% and 76%, respectively of gross trade receivables.
NOTE 8. STOCK COMPENSATION PLAN
At December 31, 1999, the Company had one stock-based compensation plan. The
1998 Nonqualified Stock Option Plan initiated in May, 1998. The plan set aside a
reserve of 2,500,000 shares of common stock for this purpose. Any options
granted expire 10 years from the grant date and are immediately vested. At that
time, the board of directors granted 335,000 to two board members to purchase
shares at $0.001 per share. The options were exercised and restricted shares
were issued. Compensation cost of $112,960 was recorded. There were no
outstanding options at December 31, 1999 and 1998.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, under which no compensation cost will be recognized. As future options are
granted and not immediately exercised, compensation costs for these options
under the Company's plan also will be determined based on the fair value of the
option at the grant date consistent with Statement of Financial Accounting
Standards No. 123,
F-11
<PAGE> 35
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8. (CON'T)
"Accounting for Stock-Based Compensation" ("SFAS 123"), and will be disclosed to
reflect the reported and pro forma net income (loss) and earnings per share on a
basic and diluted basis. The fair value of each option grant will be estimated
on the date of grant using the Black-Scholes option pricing model using
assumptions in calculating compensation costs for expected stock price
volatility, a risk-free interest rate, and an expected average life of the
option.
NOTE 9. SUBSEQUENT EVENTS
Subsequent to December 31, 1999 the company entered into a lease agreement with
its current landlord for 4,000 sq. feet of additional commercial warehouse
space. For a lease payment of $1,767.02 expiring December 31, 2000
In February, 2000 the board of directors canceled 650,000 shares of stock
previously issued for services contracted but neither rendered nor paid.
F-12
<PAGE> 36
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
Unaudited Financial Statements
March 31, 2000
<PAGE> 37
INDEX TO UNAUDITED FINANCIAL STATEMENTS
Balance Sheet F-14
Statements of Operations F-15
Statement of Stockholders' Equity F-16
Statements of Cash Flows F-17
Notes to Financial Statements F-18
F-13
<PAGE> 38
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 156,162
Accounts receivable (net of reserve of $108,398) 443,045
Inventory 169,976
Prepaids and other current assets 94,980
-----------
Total current assets 864,163
-----------
FIXED ASSETS
Furniture, fixtures and equipment (net of depreciation of $74,986) 86,737
-----------
OTHER ASSETS
Due from related parties 8,471
Other assets (net of amortization of $1,590) 72,033
-----------
Total other assets 80,504
-----------
Total Assets $ 1,031,404
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 248,821
Accrued income taxes 102,864
-----------
Total Liabilities 50,256
-----------
STOCKHOLDERS' EQUITY
Common Stock, $0.001 par value, authorized 30,000,000 shares
6,793,894 shares issued and outstanding 6,794
Paid in Capital 687,234
Accumulated deficit (64,565)
-----------
Total Stockholders' Equity 629,463
-----------
Total Liabilities and Stockholders' Equity $ 679,719
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE> 39
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
REVENUE
<S> <C> <C>
Sales of products $ 1,410,853 $ 288,042
Less: Returns and allowances (43,393) (218)
----------- -----------
Net sales 1,367,460 287,824
----------- -----------
OPERATING EXPENSES
Cost of Sales 402,036 125,882
----------- -----------
GROSS PROFIT 965,424 161,942
----------- -----------
Other Operating Expenses:
Selling expenses 218,594 50,765
Office expenses 84,697 24,984
Outside services 20,114 12,422
Salaries, wages and benefits 185,444 35,430
Professional services 47,777 4,728
Occupancy expenses 11,549 7,359
Vehicle leasing 5,367 1,190
Bad debts 45,893 8,847
Depreciation and amortization 9,198 3,377
----------- -----------
TOTAL EXPENSES 628,633 149,102
----------- -----------
Profit before other income and income taxes 336,791 12,840
----------- -----------
Other income 13,003 350
Income tax expense (102,864) --
----------- -----------
NET PROFIT $ 246,930 $ 13,190
=========== ===========
Net profit per share basic $ 0.036 $ 0.002
=========== ===========
Net profit per share assuming dilution $ 0.033 $ 0.002
=========== ===========
Weighted average number of shares 6,789,894 5,360,606
=========== ===========
Weigthed average number of shares assuming dilution 7,473,638 5,360,606
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE> 40
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Total
Number Additional Stock Stockholders'
of Shares Common Paid in Subscription Accumulated Equity
Outstanding Stock Capital Receivable Deficit (Deficit)
----------- ---------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1998 6,062,606 $ 6,063 312,005 (1,027) (339,774) $ (22,733)
--------- ---------- ------- ------ -------- ----------
Collection of subscription receivable -- -- -- 327 -- 327
Net profit -- -- -- -- 13,190 13,190
--------- ---------- ------- ------ -------- ----------
BALANCE, MARCH 31, 1999 (Unaudited) 6,062,606 6,063 312,005 (700) (326,584) (9,216)
--------- ---------- ------- ------ -------- ----------
Shares issued for cash 1,425,288 1,425 373,535 -- -- 374,960
Net profit -- -- -- -- 15,089 15,089
--------- ---------- ------- ------ -------- ----------
BALANCES, DECEMBER 31, 1999 7,487,894 7,488 685,540 (700) (311,495) 380,833
--------- ---------- ------- ------ -------- ----------
Collection of subscription receivable -- -- -- 700 -- 700
Share cancellation and reissuance (702,000) (702) (2,298) -- -- (3,000)
Exercise of warrants 8,000 8 3,992 -- -- 4,000
Net profit -- -- -- -- 246,930 246,930
--------- ---------- ------- ------ -------- ----------
BALANCES, MARCH 31, 2000 (Unaudited) 6,793,894 $ 6,794 687,234 -- (64,565) $ 629,463
========= ========== ======= ====== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE> 41
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit $ 246,930 $ 13,190
--------- ---------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 9,198 3,376
Shares issued for services and options for services exercised -- --
(Increase) in accounts receivable (207,872) (7,592)
(Increase) decrease in inventory (49,650) 11,692
(Increase) decrease in prepaids and other current assets (28,741) 2,066
Increase in accounts payable 21,903 21,538
(Decrease) in accrued liabilities (10,945) (3,856)
(Increase) decrease in other assets (53,516) 1,528
Increase in income taxes payable 103,084 --
--------- ---------
Total Adjustments (216,539) 28,752
--------- ---------
Net Cash Provided by Operating Activities 30,391 41,942
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash payments for the purchase of property (46,340) --
Repurchase of company stock (3,000) --
--------- ---------
Net Cash Provided (Used) by Investing Activities (49,340) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital lease advances 21,612 5,971
Proceeds from issuance of commons stock 4,000 --
Payments on capital leases (1,748) (1,703)
Payments to related parties (3,000) (17,877)
--------- ---------
Net Cash Provided (Used) by Financing Activities 20,864 (13,609)
--------- ---------
Net increase in cash and equivalents 1,916 28,333
Cash, beginning of period 154,246 36,805
--------- ---------
Cash, end of period $ 156,162 $ 65,138
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 42
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS--Health & Nutrition Systems International, Inc. ("HNS"
or the "Company") is a marketer and distributor of health and nutrition herbal
supplements. The Company was incorporated in Florida on October 25, 1993. HNS
product sales consist of seven primary dietary supplements: Thin TabR, Carb
CutterTM, Thin Tab Mahuang Free, On The MoveTM, Thin Tab With Chitosan, Ultra
Zoom 2000TM, and Thin BarTM. These products are sold primarily wholesale to
health stores, drug stores, nutrition centers, and other retailers.
Additionally, the products are sold through certain related parties to similar
customer types. The current markets are concentrated in North America and Puerto
Rico.
Two manufacturers produce all of the HNS dietary supplements.
INTERIM DISCLOSURES--The information as of March 31, 2000, and for the three
months ended March 31, 2000 and 1999, is unaudited, but in the opinion of
management, reflects all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of financial position and results of
operations for the interim periods. The accompanying financial statements should
be read in conjunction with the financial statements and notes thereto in the
Company's December 31, 1999 fiscal year end financial statement.
The results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 2000.
USE OF ESTIMATES--The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of management's
estimates. These estimates are subjective in nature and involve judgments that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at fiscal year end, and the reported amounts
of revenues and expenses during the year. Actual results could differ from those
estimates.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments with
maturities of three or fewer months to be cash equivalents. Cash equivalents
consist primarily of investments in money market funds.
INVENTORIES--Inventories are stated at the lower of cost or market with cost
being determined on a first-in, first-out basis.
PROPERTY, EQUIPMENT, LEASEHOLD IMPROVEMENTS, AND DEPRECIATION--Property and
equipment are carried at depreciated cost with depreciation provided using the
straight-line or MACRS method, which is not materially different from the
straight-line method, over the estimated economic lives of the assets, which
range from three to seven years. Leasehold improvements are depreciated over the
expected lease term. The Company reviews the valuation of fixed assets and their
remaining economic lives annually and adjusts depreciation accordingly.
TRADEMARKS--The Company records the cost of trademarks as intangible assets and
amortizes the value over the estimated economic life.
REVENUE RECOGNITION--Sales revenue is recognized at the date of shipment to
customers. Provision is made for an estimate of product returns and doubtful
accounts and is based on historical experience.
ADVERTISING COSTS--The Company expenses advertising production costs as they are
incurred and advertising communication costs the first time the advertising
event takes place. Advertising expenses for the three months ending March 31,
2000 and 1999 were $140,161 and $20,393 respectively.
STOCK-BASED COMPENSATION--The Company applies the intrinsic value method in
accounting for its stock options issued to employees. Accordingly, no
compensation expense will be recognized for options granted with an exercise
price equal to market value at the date of grant. Compensation is recorded when
options are exercised when the exercise price is below the market value of the
stock.
F-18
<PAGE> 43
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. (CON'T)
INCOME TAXES-- Prior to April 1, 1996, the Company elected S Corporation status
under the applicable sections of the Internal Revenue Code (IRC) and relevant
state income tax regulations, whereby income of the Company was included in the
income tax returns of its shareholders. Accordingly, the financial statements
for the periods prior to that date do not reflect the income tax effects of the
Company's operations. Effective April 1, 1996, the Company elected to be taxed
as a C Corporation under the provision of the IRC.
For the periods subsequent to April 1, 1996, deferred tax assets and liabilities
are recognized for the expected future tax consequences attributable to
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and tax rates in
effect for the periods in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
EARNINGS PER COMMON SHARE--Basic earnings per share is based on the weighted
effect of all common shares issued and outstanding, and is calculated by
dividing net income by the weighted average shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. Both are
adjusted for the retroactive cancellation and re-issuance of shares during the
three months ended March 31, 2000.
COMPREHENSIVE INCOME--The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," in the year ended
December 31, 1998. The Company did not have any components of comprehensive
income.
SEGMENT INFORMATION--The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the year ended December
31, 1998. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.
NOTE 2. INCOME TAXES
Income before income taxes consisted of the following:
March 31, 2000
--------------
$349,794
Income tax provisions consisted of the following:
March 31, 2000
--------------
Current income taxes $102,864
Decrease in valuation allowance (9,068)
F-19
<PAGE> 44
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. (CON'T)
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities. They
are measured by applying the enacted tax rates and laws in effect for the years
in which such differences are expected to reverse. The significant components of
the Company's deferred tax assets and liabilities are as follows:
March 31, 2000
--------------
Deferred tax assets:
Accounts receivable reserves $ 9,470
Stock for services 22,319
---------
Total deferred tax assets 31,789
Valuation allowance (31,789)
---------
Deferred tax liabilities: --
Total net deferred tax assets --
=========
The Company has established a valuation allowance for the deferred tax assets.
This valuation allowance was recorded in accordance with SFAS 109, which
requires that a valuation allowance be established when there is significant
uncertainty as to the realizability of the deferred tax assets. Management
believes that, based on a number of factors, including prior net operating
losses, that there is sufficient uncertainty regarding the realizability of
these deferred tax assets. The deferred tax assets were calculated for the
period using United States federal tax rate of 15% and a Florida tax rate of
5.5% for an effective tax rate of 19.675%. There were non-deductible permanent
differences for meals and entertainment of $4,202 during the period ending March
31, 2000.
NOTE 3. FINANCING ARRANGEMENTS
ACCOUNTS RECEIVABLE FACTORING--The Company factors certain of its accounts
receivable with a commercial finance company subsidiary of a bank. The factor
purchases receivables for 97% of the face amount of certain invoices and the
Company maintains a reserve account with the factor of 15% of the outstanding
receivables held by the factor. The reserve account may be charged additional
fees from 1% to 3% on invoices paid beyond the agreed to terms.
NOTE 4. COMMON STOCK
AUTHORIZED SHARES--The Company has authorized 30,000,000 shares of common stock,
par value $0.001 per share.
STOCK OFFERINGS IN PRIVATE PLACEMENTS --- The Company has engaged in several
private placements of common stock. In March, 1999 the Company offered four
shares of common stock and two warrants to purchase one common share each, one
at $0.50 and one at $2.00. In this offering the Company received proceeds net of
expenses of $374,898 and issued 1,363,488 shares of common stock and 683,744
warrants.
F-20
<PAGE> 45
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4. (CON'T)
STOCK AND OPTIONS ISSUED FOR SERVICES --- The Company authorized the 1998 Stock
Option Plan of the Corporation in May, 1998. The plan set aside a reserve of
2,500,000 shares of common stock for this purpose. At this time, the board of
directors granted 335,000 to two board members to purchase shares at $0.001 per
share. The options were exercised and restricted shares were issued. The Company
recorded $112,960 in compensation to those directors, or $0.337 per share. A
total of 61,800 additional shares were issued during 1999 at $0.001 per share
for services.
CANCELLATION OF SHARES AND REISSUED --- In February, 2000 the Company cancelled
shares issued for services, returned a subscription for shares issued, and
reissued shares. The net amount cancelled was 702,000 shares and the
subscription returned was $3,000.
NOTE 5. COMMITMENTS, CONTINGENCIES, AND CERTAIN CONCENTRATIONS
LEASE COMMITMENTS--The Company leases 6,000 sq. feet as its office and warehouse
space under the extension of a lease to December 31, 2002 at $2,010 per month
and 4,000 sq. feet of warehouse space under a lease for $1,767 per month ending
December 31, 2000. The Company also leases various equipment under
non-cancelable financing leases.
LEGAL MATTERS--The Company has been subject to legal proceedings and claims
arising in the ordinary course of business. The Company disputed a bill for
promotional materials from 1995. The vendor has not sought collection since that
time and management does not expect any potential outcome to have a material
adverse effect on the Company's financial condition, results of operations, or
cash flows. The Company is also subject to two actions which in the aggregate
claim $30,000. The Company denies any liability in theses actions and is
defending them.
PRODUCT LIABILITY--The Company is insured to the extent of $5 million for
product liability claims and uses vendors who are also insured. There is a risk
that certain vendors may not have sufficient product liability insurance or may
loose their insurance, or the Company may not be able to insure at reasonable
cost. In any of these events, there could be a material adverse effect on the
financial condition, results of operations, or cash flows of the Company.
CERTAIN CONCENTRATIONS--The Company purchases a number of its products from
single sources and has sales to several major customers. The loss of any one
source or major customer could adversely affect the financial condition, results
of operations, and cash flows.
NOTE 6. SEGMENT INFORMATION
The Company has sales from seven primary dietary supplements. These dietary
supplements are sold to customers in the United States and Puerto Rico. The
Company does not prepare information for internal use regarding each of the
products other than total revenues for each product and gross profit from each
product for those that represent greater than 10% of the reported combined
revenues, as it is impractical to do so. All of the operating segments are under
the guidance of the chief operating officer who is the segment manager. All of
the products sold are offered to all customers of the Company.
F-21
<PAGE> 46
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. (CON'T)
Enterprise-wide disclosures about revenue by significant products, gross profit
from significant product segments, and major customers are presented below.
March 31, 2000 March 31, 1999
3 Months 3 Months
-------------- --------------
Revenues:
Thin Tab $ 286,424 $197,160
Carb Cutter 957,974 --
Other products sales 123,062 90,664
---------- --------
Total revenues $1,367,460 $287,824
=========
Gross profit:
Thin Tab $ 183,040 $127,768
Carb Cutter 717,750 --
Other products gross profit 64,634 34,174
---------- --------
Total gross profit $ 965,424 $161,942
========== ========
MAJOR CUSTOMERS--Health & Nutrition Systems International, Inc. sells a
significant amount of its products to the national distribution centers of a
nationwide chain of nutrition centers. It also sells a significant amount of its
products to two pharmacy chains with many retail operations. These large
customers have dominant positions within their markets and the Company monitors
the financial condition of these customers. Sales to these three customers were
$718,249 and $157,440 during the periods ending March 31, 2000 and 1999
respectively. At March 31, 2000 and 1999, amounts due from these three customers
accounted for 61% and 50%, respectively of gross trade receivables.
NOTE 7. STOCK COMPENSATION PLAN
At March 31, 2000, the Company had one stock-based compensation plan. The 1998
Nonqualified Stock Option Plan initiated in May, 1998. The plan set aside a
reserve of 2,500,000 shares of common stock for this purpose. Any options
granted expire 10 years from the grant date and are immediately vested. At that
time, the board of directors granted 335,000 to two board members to purchase
shares at $0.001 per share. The options were exercised and restricted shares
were issued. Compensation cost of $112,960 was recorded. There were no
outstanding options at March 31, 2000.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, under which no compensation cost will be recognized as future options are
granted and not immediately exercised. Compensation costs for these options
under the Company's plan also will be determined based on the fair value of the
option at the grant date consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and
will be disclosed to reflect the reported and pro forma net income (loss) and
earnings per share on a basic and diluted basis. The fair value of each option
grant will be estimated on the date of grant using the Black-Scholes option
pricing model using assumptions in calculating compensation costs for expected
stock price volatility, a risk-free interest rate, and an expected average life
of the option.
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