UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-SB
-----------
AMENDMENT #4
-------------
TRIMFAST GROUP, INC.
(Name of Small Business Issuer)
NEVADA 88-0367136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 S. Harbour Island Blvd. Suite 780, Tampa, Florida 33602
(Address of principal executive offices)
(813) 275-0050
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of each class to Name of Each Exchange
be registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 Par Value
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Part I Page
Item 1. Description Of Business. . . . . . . . . . . . . . . . . . . . 2
Item 2. Management's Discussion And Analysis Or Plan Of Operation .. . 19
Item 3. Description Of Property. . . . . . . . . . . . . . . . . . . . 24
Item 4. Security Ownership Of Certain Beneficial Owners And Management 24
Item 5. Directors, Executive Officers, Promoters And Control Persons . . 26
Item 6. Executive Compensation. . . . . . . . . . . . . . . . . . . . . 27
Item 7. Certain Relationships And Related Transactions. . . . . . . . . 29
Item 8. Description Of Securities . . . . . . . . . . . . . . . . . . . 29
Part II
Item 1. Market For Common Equity And Related Stockholder Matters . . . 38
Item 2. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 40
Item 3. Changes In And Disagreements With Accountants. . . . . . . . . 43
Item 4. Recent Sale Of Unregistered Securities . . . . . . . . . . . . 43
Item 5. Indemnification Of Directors And Officers. . . . . . . . . . . 47
Part III
Index To Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Part F/S Financial Statements . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
<PAGE>
References in this document to "us," "we," or "the Company" refer to
TrimFast Group, Inc., its predecessors and its subsidiaries.
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development.
We were incorporated in the State of Nevada on February 23, 1987 as Kendrex
Systems, Inc. On November 18, 1996, we reverse split our common stock. We
issued one (1) new share of our common stock in exchange for five (5)
outstanding shares of our common stock.* On the same day, we entered into a
reverse acquisition with HLHK World Group, Inc. (hereinafter "World Group"), a
Nevada corporation, and subsequently changed our name to HLHK World Group, Inc.
World Group was in the business of telecommunications, which was an area in
which we wished to pursue the available opportunities. Pursuant to the terms of
this acquisition, we issued 6,000,000 of our post-split common shares to the
shareholders of World Group plus 250,000 of our post-split shares as finder's
fees. As a result of this transaction, World Group became our wholly owned
subsidiary.
On August 12, 1998, we acquired TrimFast, Inc., which was incorporated in the
State of Florida on April 28, 1991, in a common stock for common stock exchange.
Pursuant to the terms of this transaction, we issued 1,370,049 shares of our
common stock to the shareholders of Trimfast, Inc. As a result of the exchange,
Trimfast, Inc. became our wholly owned subsidiary. Trimfast, Inc.'s
stockholders became stockholders of approximately 60.42% of our common stock,
which represented 1,370,049 shares of our total 2,268,298 issued and outstanding
shares just subsequent to the exchange. As such, the shareholders of Trimfast,
Inc. obtained control of our Company, and Trimfast, Inc. became our wholly
owned subsidiary. On September 4, 1998, we changed our name to TrimFast Group,
Inc. We continued the operations of Trimfast, Inc. As such, the accounting and
disclosure throughout this document reflects Trimfast, Inc. as the surviving
corporation.
Prior to and at the time of this transaction, Trimfast, Inc. was engaged in the
business of formulating and distributing dietary and vitamin supplements. We
entered into the transaction with Trimfast, Inc. because we believed that the
nutrition and vitamin supplement field represented a business opportunity for
us. On December 20, 1998 we reverse split our common stock. We issued one (1)
new share of our common stock in exchange for ten (10) outstanding shares of our
common stock.*
(* Both reverse stock splits are reflected in the numbers and calculations
throughout this document, unless otherwise indicated.)
On September 4, 1998, we incorporated Body Life Sciences, Inc. (hereinafter
"Body Life"), a Florida corporation, as a wholly owned subsidiary of Trimfast,
Inc. We formed this subsidiary in order to expand our business by offering
products under the Body Life trade name.
On March 18, 1999, we acquired IMMMU, Inc. (hereinafter "IMMMU"), a Delaware
corporation, and IMMCEL Pharmaceuticals, Inc. (hereinafter "IMMCEL"), a New York
corporation. Both companies were engaged in the business of developing and
marketing nutritional supplements manufactured by third parties. Pursuant to the
terms of this acquisition, IMMMU and IMMCEL became our wholly owned
subsidiaries. We issued 235,000 shares of our common stock, $50,000 in cash, an
option agreement based upon performance criteria and an employment agreement
pursuant to the terms of the agreement.
<PAGE>
We rescinded these acquisitions effective November 1, 1999. In accordance with
a rescission agreement dated October 23, 1999 the following consideration was
returned and delivered on November 30, 1999, as follows: (i) from our Company to
the prior shareholders of IMMMU and IMMCEL, Leo Ehrlich, Helenka Bodner and
Joseph Levi, stock certificates reflecting 200 shares each of IMMMU and IMMCEL,
representing all of the outstanding shares of those corporations; and (ii) to
our Company, stock certificates reflecting 150,750 shares, 60,750 shares and
13,500 shares of our restricted common stock, respectively from prior IMMMU and
IMMCEL shareholders, Bodner, Ehrlich and Levi. In addition, on November 12,
1999, the $50,000 cash payment was returned to us by IMMMU shareholders Bodner,
Ehrlich and Levi, and on November 15, we received the final 10,000 free trading
shares of our common stock from Moishe Bodner.
On March 18, 1999, we entered into a written agreement with Aryeh Trading, Inc.,
a third party investment group, a registered securities broker-dealer and one of
our market makers, providing that: (i) Aryeh would purchase shares of our stock
in the open market having an aggregate value of no less than $300,000; (ii)
Aryeh would purchase 300,000 shares of our common stock from us at a price of
$4.00 per share according to a stipulated schedule based on the average market
price of the outstanding shares. The purposes of the Aryeh Trading agreement
were to obtain capital for the Company and for Aryeh to purchase free trading
shares for its inventory account to sell to its clients. On March 30, 1999, we
entered into a written agreement with Aryeh which added terms to the March 18th
agreement. The purpose of the March 30th agreement was to clarify that Aryeh
trading would purchase the full 300,000 shares issued to them for $1,200,000.
Additional clauses were added to restrict Aryeh's ability to sell these shares
prior to the entire $1,200,000 purchase being completed. In consideration of
this clause the Company agreed to indemnify and hold Aryeh harmless from any
federal income tax liability should the Internal Revenue Service determine that
Aryeh's basis in the stock was less than $4.00 per share. Since Aryeh Trading
never fully performed on the March 18th agreement, the Company's position was
that the March 30th agreement is unenforceable as to the tax indemnification.
From May 13, 1999 to July 20, 1999, Aryeh purchased 155,000 shares from us at
$4.00 per share for a total purchase price of $620,000. As a result the 300,000
share certificate held in escrow was returned to the Company and a new
certificate was issued for 155,000 shares on July 13, 1999.
On October 22, 1999 the Company entered into a stock repurchase agreement with
Aryeh Trading where we agreed to repurchase the 155,000 shares at $8.25. Our
intent was to repurchase these shares at market value for Treasury Stock. The
agreement sets out a schedule for repurchase and the shares were to be fully
repurchased by December 15, 1999. If the shares were not repurchased by December
15th the Company agreed to a $0.25 per share premium for each two weeks
subsequent to December 15th. On November 10, 1999 the Company entered into an
agreement with Aryeh Trading to modify the repurchase schedule. This agreement
calls for the Company to repurchase all shares before January 25, 2000. Any
shares not repurchased by January 25th are subject to a $0.25 per share per
month premium. As additional security, in the November 10th agreement we pledged
our warehouse facility located in Clearwater, Florida as security against the
October 22, 1999 purchase agreement. As of December 31, 1999, we recorded the
October 22, 1999 stock repurchase commitment for the 155,000 shares at $8.50 per
share as a charge to additional paid-in capital. To date, we have not
repurchased any of the 155,000 shares. See "Part II. Item 2. Litigation."
<PAGE>
From our operations of IMMMU/IMMCEL we had a loss of $88,830. We maintained
sufficient reserves to cover this loss from our accumulated deficits. To date,
we have received no amounts from IMMMU/IMMCEL to reimburse us for such loss.
Because we believe that IMMMU/IMMCEL does not have funds available to reimburse
us for any loss from operations, which we incurred as a result of the
transaction, we have not made a demand from them to reimburse us for our loss
from operations.
When we entered into the IMMMU/IMMCEL agreement, we believed that the
acquisitions of these companies would enhance our product lines. However,
approximately six months after entering into this agreement, we were unable to
obtain audited financial statements for the acquired companies. As such, our
management deemed it in our best interest to rescind the transactions. We
rescinded the transaction because:
i) These companies may have had undisclosed liabilities;
ii) We were unable to verify inventory; and
iii) We were unable to verify previous sales.
As a result of the rescission, we have no formal agreement to sell IMMMU and
IMMCEL products in the United States. This rescission has reduced our product
line by approximately 18 products. We do not feel this will have a materially
adverse effect on our operations given the short period of time in which these
companies were our subsidiaries.
Despite the above, management believed that the products of IMMMU would enhance
our product line. Our management deemed it in our best interest to enter into a
distribution agreement with IMMMU to sell their products in Canada. On November
1, 1999, we entered into an exclusive distributor agreement with IMMMU, Inc.
Such agreement provides that IMMMU appoints us as the exclusive distributor of
products in Canada. Under the agreement, we may market, sell, and distribute
IMMMU products pursuant to a pricing structure set forth by IMMMU. The
compensation provision for the Canadian distribution agreement is verbal and
requires us to pay IMMMU 12% of our sales of IMMMU products. The agreement
includes provisions that we will be indemnified by IMMMU for any loss, damages,
claim or settlement that may arise out of any defect, known or unknown, in any
of the products at the time of manufacture, assuming no material alteration of
the product occurred after manufacture. There is no assurance that IMMMU will
have sufficient assets or insurance coverage to indemnify us against any such
liabilities. The agreement is for a term of November 1, 1999 through December
31, 2001 with automatic renewals. Either party may terminate the agreement on
thirty days written notice.
On April 21, 1999, we formed a wholly owned subsidiary Nutrition Cafe, Inc., a
Florida Corporation which operates a website NutritionCafe.com. The website is
designed to provide nutritional information, provide links to other informative
sites and to market and sell our products.
On May 24, 1999, we acquired certain assets of Ice Cold Water, Inc.
(hereinafter "Ice Water"), a Florida corporation incorporated on August 7, 1997,
including certain receivables, inventory, property, equipment, a customer list
and the name "Ice Cold Water" and all other intellectual property rights
associated with the name. We acquired these assets for $20,000 cash and a
promissory note in the amount of $100,000 bearing interest at 8.5% per annum and
due in four monthly installments of $25,000 plus accrued interest. The
installment payments commenced on June 10, 1999. The promissory note was
secured by 23,000 restricted shares of our common stock held in escrow. The
acquisition agreement provides in the event of our default upon the terms of the
agreement, we must release to Ice Water an amount of our restricted stock equal
to the outstanding principal and accrued interest balance. On November 22,
1999, the escrow agent was notified of a default upon the promissory note of
$30,881 and released 7,321 of our shares to satisfy the note. At the time of
this transaction, Ice Water was engaged in the business of selling bottled water
and leasing water coolers in Tampa, Florida and the surrounding metropolitan
areas. We entered into this transaction in order to expand our product line to
include water products, which would also complement our existing line of
nutritional supplements.
<PAGE>
On November 7, 1999 Perfumania.com, Inc. signed a letter of intent to acquire
Nutrition Cafe.com. The letter of intent provides proposed terms in which
Perfumania.com., Inc. would acquire NutritionCafe.com from our company. The
Letter of intent provides that our company would sell to Perfumania.com, Inc.
all of the assets of NutritionCafe.com, including, but not limited to, goodwill,
trademarks, trade secrets, other proprietary information, domain trade
registrations, computer software and hardware and inventory. Perfumania.com,
Inc. would provide the Company with shares of their common stock valued at
$1,000,000 and $500,000 in cash consideration for the acquisition of
NutritionCafe.com. On January 13, 2000, we received notice from Perfumania.com,
Inc. that they would not be acquiring the assets of NutritionCafe.com and would
not otherwise pursue the acquisition of NutritionCafe.com from us.
On March 20, 2000, we consummated a stock exchange agreement with Nutrition
Superstores.com, Inc. to acquire one hundred per cent of the issued and
outstanding common stock of Nutrition Clubstores, Inc. in exchange for $150,000
and 570,000 shares of the our common stock valued at $4.80 per share based on
the average quoted trading price a few days before and after the announcement of
the transactions for a total of $2,886,000, which includes approximately $5,000
in transaction costs. As a result of the exchange, Nutrition Clubstores became
our wholly owned subsidiary. In the event that Nutrition Clubstores' net worth
as reflected on its audited financial statements, to be provided to us within 60
days of the closing date of this transaction, is less than 85% of the net worth
as reflected on its financial statements as of February 29, 2000, Nutrition
Superstores will receive one share less of our common stock for every $5.00
reduction or portion thereof in net worth. Under the terms of this agreement,
we agreed to pay a royalty fee of 3% of the gross sales revenues generated from
Nutrition Clubstores kiosks for a period beginning three months following the
closing date of the transaction and continuing for a period beginning three
months following the closing date and continuing for a period of twelve months
thereafter. We have thus far issued 570,000 shares and paid the $150.000.
On November 30, 1999, we received approval from the Deutsche Borse AG for our
stock to start trading on the Third Segment of the Frankfurt Stock Exchange. Our
common stock trades under the German trading symbol "TFT" .
On December 23, 1999, our company entered into a letter of intent to sign a
licensing agreement with Marvel Characters, Inc. (Marvel Comics) granting
Trimfast a license to market Spiderman's Children's Chewable Multi-Vitamin and
Mineral Supplement. On February 25, 2000 we signed the licensing agreement with
Marvel Enterprises, Inc.
<PAGE>
Business Description.
I. Nutritional Product Line Activities.
We are engaged in the nutraceutical business. We formulate, distribute and
market natural dietary supplements and health and fitness products through
wholesale and retail outlets. Third parties do all manufacturing of our
products. We also distribute bottled water through our subsidiary Ice Water.
We sell approximately thirty-three (33) varieties of vitamins, nutritional
supplements, weight loss and muscle growth supplements and food supplements
under brand line names TrimFast, Body Life Sciences and IMMMU. TrimFast and Body
Life are our own product lines. We sell the IMMMU products through an exclusive
distributor agreement. (See this ITEM above). Products are formulated in
vitamins/minerals combinations with varying potency levels. They are offered in
soft-gel, two-piece capsule, chewable, and liquid and powder forms to
accommodate various consumer preferences.
There can be no assurances that any of our products will produce the desired
results since the consuming population is diverse in their physical,
psychological and mental makeup and differs in their metabolic rates, genetic
composition and other factors and hence there is no scientific basis for
believing that any of the desired results will be produced. Further, there have
been occurrences where ingredients in certain nutritional supplements have been
determined to be harmful when consumed by humans. We believe that our products
do not currently contain any ingredients not safe for human consumption, however
there is no assurance this assumption is correct. (See PART II, ITEM 2. Legal
Proceedings). Any product liability claims made against us could have an adverse
affect on our business. Many of the ingredients in our products are vitamins,
minerals, herbs and other substances for which there is not a long history of
human consumption. In addition, although we believe all of our products to be
safe when taken as directed by us, there is little experience with human
consumption of certain of these innovative product ingredients in concentrated
form.
Accordingly, no assurance can be given that our products, even when used
as directed, will have the effects intended or be safe for human consumption.
However, because we are highly dependent upon consumers' perception of the
safety and quality of our products as well as similar products distributed by
other companies (which may not adhere to the same quality standards as we do),
we could be adversely affected in the event any of our products or any similar
products distributed by other companies should prove or be asserted to be
harmful to consumers. In addition, because of our dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from consumers' failure to consume our products as we suggest or other
misuse or abuse of our products or any similar products distributed by other
companies could have a material adverse effect on the results of our operations
and financial condition.
We, like any other retailer, distributor and manufacturer of products that are
designed to be ingested, face an inherent risk of exposure to product liability
claims in the event that the use of our products results in injury. Such claims
may include, among others, that our products contain contaminants or include
inadequate instructions as to use or inadequate warnings concerning side effects
and interactions with other substances. With respect to product liability
claims, we have a product liability policy effective May 27,1999 covering
$1,000,000 per occurrence and $2,000,000 in aggregate liability insurance
subject to a self-insurance retention of $10,000. In addition, if such claims
should exceed $2,000,000, we have excess umbrella liability insurance of up to
$4,000,000. We also had received a certificate of insurance effective February
10, 1998 through February 10, 1999 under our third party manufacturer policy
covering $1,000,000 per occurrence and $2,000,000 in the aggregate; however, we
were denied all claims under this policy relating to the Revivarant product (See
item 3 Legal Proceedings). There can be no assurance that product liability
insurance will cover existing claims or continue to be available at a reasonable
cost, or, if available, will be adequate to cover liabilities. We generally do
not obtain contractual indemnification from parties supplying raw materials or
marketing our products. In any event, any such indemnification if obtained will
be limited by our terms and, as a practical matter, to the creditworthiness of
the indemnifying party. In the event that we do not have adequate insurance or
contractual indemnification, product liabilities relating to defective products
could have a material adverse effect on our results of operations, financial
condition and liquidity, including that we may be unable to continue in
business. See "Part II. Item 2. Litigation."
<PAGE>
Specific Products.
The TrimFast Dietary Supplement, formerly named Herbal Plus, was introduced in
January of 1999. It is an all-natural herbal formula marketed weight loss
supplement. It is sold by distributors and in the following health food stores
and weight loss centers: Ansley's Natural Marketplace, Beehive Natural Foods of
Miami, The Honey Tree, Health Quest, Natural Nutrition, Physicians Weight Loss
Clinics and Supplement Warehouse. TrimFast was designed to assist in curbing
appetite and increasing metabolism to affect the fat burning process. In
addition, TrimFast was designed to increase energy and reduce water retention.
However, there can be no assurances that this product will have such effects
uniformly upon all users since the consuming population is diverse from the
standpoint of various metabolic rates. The TrimFast product has also been used
in combination with St. Johns Wort to provide the mental drive in implementing
the positive effects of St. Johns Wort - reducing stress and nervous tension and
causing an alert mood. This product is packaged in a one-month supply bottle.
Immune Blast, introduced in July of 1998, is an all-natural immune system
enhancer designed to aid in the prevention of colds and flu. The product is
marketed to the distributors: Abyss Distributors and Nutraline Distributors.
Max Impact is an entire product line targeted to convenience stores and gasoline
outlets. The products include all-natural packages, thirty count bottles and
daily supply packages of St. John's Wort, Trim Fast, Sudden Energy and Ginseng
Zing.
Kicks, introduced in October of 1998, is an all natural chewable multi-vitamin
and mineral supplement developed and formulated exclusively for active children
and young athletes. This product is designed to compete with national brand
children's vitamins such as Flintstones.
The TrimFast Weight Loss Bar is a new product we introduced on June 14, 1999. We
designed this product to assist the user in a weight loss program by helping to
curb appetite, increase metabolism and increase energy levels; however, there
can be no assurance that any one or all of these effects will be produced in all
or any case. This product was designed to be implemented in conjunction with a
sensible nutritional diet program with exercise. The product was designed to
compete with several national companies including Slim Fast, Nestle's, MediFast
and Pounds Off nutrition. This product is offered in three flavors: chocolate
chocolate chip, chocolate peanut butter and passion fruit.
St. John's Wort: The only herb that has been scientifically studied and proven
to elevate mood and positive outlook, reduce stress and nervous tension which is
used to treat depression and mood related ailments.
<PAGE>
Body Life, our wholly owned subsidiary, will market under its trade name Muscle
Recovery nutritional supplement. This product is a comprehensive remedy for
muscle aches, pains and soreness. It is to be taken immediately after injury or
exercise to boost the body's natural recuperative powers.
To date, we have not undergone any research and development of potential new
products or regarding any other areas of potential development. Although we plan
to devote 2% of our revenues to research and development within the next fiscal
year, such plans are totally dependent upon a number of factors, including:
sufficient revenue streams to support this expense, the retention of qualified
personnel participating in research and development. Currently we employ Steve
Kushner, the company nutritionist that has over 20 years of practical experience
and trained under Dr. Hazel Parcells. In addition, we must have the ability to
attract new qualified personnel to perform research and development and numerous
other factors which management may have not currently contemplated.
Competition.
Nutritional and dietary supplement products involve highly competitive markets.
We are in the process of developing our marketing strategies and product lines
and expect that both will involve an ever-changing and evolving process.
Although we will attempt to competitively price our products, provide superior
quality products, and achieve success through attentive and efficient customer
service and effective marketability strategies, we are limited by a number of
factors, including the developmental character of our company and the
unpredictability and uncertainty of our future revenues. In addition, we are
limited by the intensely competitive nature of the dietary food and vitamin
product industry in which more established companies may offer any combination
of the following: superior service, more competitive pricing, superior product
quality and availability, a variety of marketing strategies and distribution
networks and profitability achieved through sales volume and narrow profit
margins. There are many well-established competitors with substantially greater
financial revenues, as well as, significant new market entrants. Many of these
competitors have been in existence for substantially longer periods of time than
we have and may be better established in the market where we want to operate.
Further, they may have sufficient revenue streams to engage in extensive
advertising and promotional campaigns far in excess of our marketing
capabilities. In addition, many of the competitors in this field are privately
held, leading to unavailability of data of the size of our competition.
Accordingly, our competition is difficult to assess with any preciseness.
Distribution Methods for our Dietary and Nutritional Supplements.
We utilize five different distribution channels for our health and fitness
products. These are wholesalers, distributors, food brokers, and direct sales to
retail outlets and the Internet. Currently, we distribute to twelve (12)
wholesalers and fifteen (15) distributors. We also have agreements with eleven
(11) food brokerage firms that sell products to nationwide retailers and
distributors.
Wholesalers buy products directly from us. These wholesalers in turn sell to
independent sales agents, who then sell to various retail establishments. The
distributors on the other hand buy the product directly from us and resell to
various retail outlets. Brokers are contracted to sell our products to retail
chains, distributors and wholesalers. Any retail accounts secured by the brokers
are directed to the distributors that currently supply the retailer with other
products.
<PAGE>
Wholesalers and distributors are set up on terms of two percent (2%) fifteen-
(15) days net thirty (30) days as long as pre-approved credit has been
established. If credit has not been approved, we require one-half (1/2) of the
purchase order price upon ordering and the balance due on delivery.
We also market through direct response television advertising. Inside sales
personnel who work directly for us will accept orders, arrange for production
and delivery of the products as required to service demand and co-ordinate
delivery of product to retailers and end customers.
Prospective retail locations include convenience stores, supermarkets, drug
stores, health clubs, gasoline outlets, restaurants and bars, and health
specialty outlets.
Once the purchase order has been verified, shipping instructions are delivered
to our distribution center where orders are fulfilled within forty-eight (48)
hours. Typically, product orders are generally shipped by UPS ground
transportation and customers receive their product within seven (7) days.
Express delivery services are also available. Express product orders are
generally shipped within twenty-four (24) hours. Special order products may take
up to a week to deliver but, in general, can be shipped within seventy-two (72)
hours. Unless alternate payment plans are provided, payment is due within thirty
(30) days of delivery.
We plan to the ten Nutrition Clubstore locations in Gold's Gyms in the States of
Florida, California, New York, Iowa and New Hampshire to distribute our products
in the immediate future. We plan to open up additional point of purchase
"micro-stores" or kiosks" located in Gold's gyms in the States of Florida and
California. To date, however, no additional stores have been opened.
II. Internet Activities: Nutrition Cafe.
Nutrition Cafe, Inc., a wholly owned subsidiary of the Company, launched its
Internet site (www.nutritioncafe.com) in June of 1999. The Internet site became
fully operational on July 1, 1999 and currently offers approximately 1,365
products. Through this Internet site, we offer nutritional products, including
vitamins, minerals, dietary supplements, sports nutrition products and
homeopathic products for sale to the public. These products are also offered at
our retail store located in Clearwater, Florida. We will attempt to market
approximately 10,000 vitamins, herbs, dietary supplements and homeopathic
products to members at distributor wholesale prices. The Internet site is
planned to promote all of our products, as well as, market and sell vitamins and
nutritional products from such other manufacturers as Met-Rx, Prolabs and
Nature's Way. Our warehouse facility is equipped with adequate space to
accommodate these expanded number of products and product lines.
In addition to offering a complete line of vitamins and supplements, the
nutritioncafe.com web page offers visitors advice relating to a variety of
highlighted subject areas including nutrition, health, diet, physical fitness
and nutritional supplements. Daily columns on such topics as health care,
vitamins, homeopathic remedies, chiropractic care, fitness and exercise may also
be provided. Management believes that the subject areas, style and special
features are arranged in a simple, easy-to-use fashion intended to enhance
product search and customer knowledge while encouraging repeat business.
<PAGE>
There can be no assurance that we will have the ability to effectively market
our current products or those of other manufacturers. In addition, there can be
no assurance that our Internet site will be able to market a projected 10,000
such products. The marketability rate resulting from our Internet site is
dependent upon revenues from our Internet site and other sources, the relative
success of promoting our Internet site and competition from well-established
Internet sites operated by strong revenue based companies with long-life
operational success.
Membership.
During the period from July 1, 1999 to January 18, 2000, anyone wishing to
purchase products from the NutritionCafe.com site was required to purchase a
membership at the price of $9.95 per month.
Memberships were sold on a pay-as-you-go basis in one-month increments.
Members had the option to continue their membership each month and no long-term
agreements were required. Competing web sites did not charge a membership fee.
As such, we decided to eliminate the monthly membership fee on January 19, 2000,
because we believed that it would increase our ability to attract new customers.
At that time, there were 1,330 enrolled members.
Payment.
Payment for orders placed on the nutritioncafe.com website may be made by check,
money order or credit card. Because of consumer concern on the issue of
utilizing their credit card for Internet purchases, we utilize secure server
software. This software encrypts all of the customer personal information
including credit card number, name and address, so that it cannot be read during
Internet transmission.
Availability and Shipment. Most of the products that are ordered from the
Nutrition Cafe site would be available for shipment within forty-eight (48)
hours. Those products not in stock can be ordered from various distributors or
directly from the
manufacturer. Delivery time for these products can range from two (2) to four
(4) weeks. Orders are planned to be shipped via UPS ground transportation.
Express delivery options will be available at an additional cost. Our goal is to
continue developing our distribution infrastructure to increase efficiency and
support greater customer demand.
Marketing And Promotion.
Our marketing strategy is designed to strengthen the nutritioncafe.com brand
name, to increase customer traffic to the nutritioncafe.com website, to build
customer loyalty, to increase the membership base and to encourage repeat
business. We intend to utilize traditional advertising media to gain name
recognition in the general public including television, radio and print
advertising. We also intend to utilize banners, agreements with search engine
providers and hyperlinks. All products sold on our website are offered with a
100% money back guarantee, if the customer is dissatisfied for any reason with
the purchase.
<PAGE>
Competition.
The online commerce market, particularly over the Web, is new, rapidly evolving
and intensely competitive. Our current or potential competitors include Rexall
Sundown, Metabolife and Lifetrends International, each of which may be or are
currently offering their products on the Web. We also face competition from such
indirect sources as Yahoo and AOL that are involved in online commerce either
directly or in collaboration with other retailers, traditional retailers who
currently sell, or who may sell, products or services through the Internet. We
believe that the principal competitive edge in our market will be brand
recognition, price, selection, and a knowledgeable provider of health care
products, reliability and speed of performance. As the online commerce market
continues to grow, other companies may enter into business combinations or
alliances that strengthen their competitive positions. Our prospective customers
already have the opportunity to purchase various nutritional supplements from
various websites including greentree.com, rx.com, drugstore.com and vitamin.com.
Retail Location.
On May 15, 1999, we opened a Nutrition Cafe retail store at our warehouse
facility in Clearwater. The retail establishment occupies approximately 1,300
square feet of space and caters primarily to local clientele. We expect to use
this store to test the viability of opening additional Nutrition Cafe retail
establishments.
Raw Materials, Suppliers and Manufacturing.
While we employ our own consultants to develop new product mixes, we do not
currently manufacture any of our products; instead, we rely on third-party
contract manufacturers. Currently, Innovative Labs, Phillips Pharmatech Labs,
Inc., Dolisos America, Inc. and Five Star Brands, Inc. manufacture most of the
products for TrimFast and Body Life Sciences.
We procure raw materials from various suppliers, but we contract our finished
product production to one third party primarily. Since December 1998, we have
used a second production factory for some of our products to reduce the risk of
having a sole producer of our products or in the event that any manufacturer
ceases operations or cannot continue to manufacture any product for us. We
believe that there will be little difficulty in locating a manufacturer to
produce any of our products without delivery delays or significantly higher
costs.
The raw materials required for the manufacture of our products are readily
available from a number of different sources. As such, we do not believe there
will be any difficulties obtaining the required raw materials.
III. Bottled Water Activities.
We recently acquired the assets of Ice Water, a bottled water distributor
located in the Tampa, Florida area. Ice Water delivers bottled water to a base
of customers in the Tampa, Florida area. Customers typically either own or rent
their water coolers from Ice Water. Rental customers typically sign a one-year
contract, providing Ice Water with a modest, but relatively stable stream of
revenue from both a monthly cooler rental charge and the sale of bottled water.
Water only customers generate revenues for us through the sale of bottled water
and ancillary services such as cooler repairs. We believe that direct delivery
water cooler companies enjoy several advantages over retailers of bottled water.
<PAGE>
Management believes the strong industry growth has been and will continue to be
driven by: (i) concerns related to the quality of tap water sources, (ii)
consumer preferences for healthy products, (iii) taste preferences over tap
water and other refreshment beverages and (iv) favorable demographics.
Tap Water Concerns.
The aging of the tap water supply infrastructure and the high cost of adequately
maintaining or replacing existing water delivery systems have resulted in an
increase in tap water contamination incidences in recent years. Consequently,
there has been a decrease in consumers' confidence in the quality of tap water,
accompanied by an increase in consumption of bottled water. Management believes
that this trend will continue.
Healthy Products.
There is a movement toward a healthier lifestyle and the consumption of healthy
products, a theme that we attempt to promote in our varied line of products.
Within the "healthy products" segment, clear or natural colored products are
experiencing significant growth. Bottled water is perceived as a product with
strong health and fitness appeal.
Competition.
The bottled water industry is highly fragmented in North America. The bottled
water market is comprised of approximately 2,500 companies generating
approximately $4.0 billion in sales. Of these companies, the five largest
companies account for approximately 55% of the total market, with the remainder
comprised of hundreds of small regional companies. Management believes that the
industry will continue to consolidate as (i) operating leverage of the larger
companies makes the smaller companies uncompetitive, (ii) succession issues at
many smaller, family owned companies lead a number of independent companies to
exit the industry, and (iii) pressure to meet improving water quality standards
eliminates low quality producers.
We compete in the "alternative to tap water" market in two areas. First, we
compete directly with other home and office delivery bottled water companies in
our geographic markets. This segment is highly fragmented with the vast majority
of the companies being operated as small entrepreneurial and family-owned
businesses. We also compete indirectly with companies that distribute water
through retail stores and vending machines.
Management believes that the competitive advantage of water coolers over these
alternative distribution channels is primarily based on the convenience of home
or office delivery and, to a lesser extent, price. Similarly, we compete with
providers of on-premises water filtration systems, including systems distributed
through retail outlets, which we believe are aimed at less affluent consumers.
In certain markets, we market and provide on-premises water filtration system
The "alternative to tap water" industry also includes a number of
well-established, well-capitalized companies. These include Nestle S.A., which
owns Perrier and the Perrier Group of America. Perrier Group of America operates
the Arrowhead, Poland Spring, Zephyrhills, Ozarka, Oasis and Great Bear brands.
Suntory owns Belmont Springs, Hinkley & Schmitt, Crystal, Kentwood, and Polar.
BSN Group owns the Evian and Dannon brands and also operates the Crystal Spring
(Toronto), Spring Valley, and Laurentian businesses. McKesson Corporation
operates the Sparkletts business. Ionics Incorporated operates the Aquacool
businesses. In addition, United States Filter Corp. and Culligan Water
Technologies, Inc. compete in the water filtration segment.
<PAGE>
Business and Products.
We primarily market two types of water. These are spring water and premium
drinking water.
Spring Water.
Spring water is water that has been naturally filtered by its passage through
various geological layers, and is drawn from a protected underground reservoir
called an aquifer. It can then be either bottled at the source or transported in
stainless steel tankers to a more strategically located bottling facility.
Before bottling, spring water is passed through a micron filter that removes
sediment while retaining the natural mineral content of the water. The water is
then purified through an industry standard purification process known as
ozonation.
The Company draws its spring water from local sources. The spring water is
bottled at the source or transported to an independently owned bottling
facility. At the bottling facility, the spring water is filtered and ozonated.
Ozonation is a process whereby impurities not removed through ordinary
filtration are removed through the injection of oxygen. The process involves a
special form of oxygen, ozone, which is the strongest disinfectant and oxidizing
agent available for water treatment. The added oxygen quickly dissipates and
results in tasteless and odorless purification as compared to chlorination. This
process is designed to prevent bacteria and other contaminants from being
transferred from the spring or the tanker to the finished product.
Premium Drinking Water.
Premium Drinking Water is drawn from local municipal sources. It is passed
through a series of carbon and sand filters, processed by either reverse osmosis
or deionization, ozonated and then bottled. Premium drinking water has 99.9% of
all impurities removed from it, including its natural mineral content.
Premium drinking water, like spring water is obtained from an independent
bottler. Premium drinking water is accessed through local, publicly available
water supplies. It is further purified through reverse osmosis to remove
chlorine and other chemicals frequently found in tap water. The product then
goes through the ozonation process prior to bottling as premium drinking water.
All water is obtained from sources in the Tampa area. We do not do any bottling;
rather, we rely upon independent bottlers to deliver our supply of water bottles
and coolers that, in turn, are delivered to our customers.
Water Coolers.
Rental customers typically sign a one-year contract, providing us with a stream
of relatively stable revenue from both a monthly cooler rental charge and the
sale of bottled water. While pricing varies depending on the water cooler
selected and the lease term selected by the customer, our current average
monthly rental charge for our coolers is approximately $8 -$10 per month.
<PAGE>
We strip down, clean, and redeploy returned water coolers prior to all new
installations. Our average cost per water cooler is approximately $150, and we
estimate that the average life of a water cooler is ten (10) years. The typical
pay back period on a water cooler investment (assuming only rental revenue) is
approximately fifteen (15) months. In the event of termination of the rental
agreement, water coolers can be readily redeployed at a relatively low cost to
us. In addition, we charge a water cooler collection fee in certain markets when
a customer opts to discontinue purchasing water.
Delivery.
We believe that one of the most important success factors in the delivered
bottled water business is delivery route efficiency.
Route efficiency is the critical cost factor in the water cooler business, as
the average cost of local delivery per bottle is over four (4) times the cost of
preparing one (1) bottle for distribution. However, the marginal distribution
cost of an additional bottle on an existing route is relatively low.
Dependence on a Few Customers.
As of December 31, 1998, we had only 79 customers, of whom one (1) accounted for
sixty percent (60%) of our business and one other accounted for an additional
twelve percent (12%) of our business. Although, our marketing strategy
contemplates increasing our customer base to 250 there are no assurances that we
will meet this goal.
As of December 31, 1999 we had no significant customer concentration.
Intellectual Property.
We currently rely primarily on common law and proprietary protection. Our
business prospects will depend largely upon our ability to capitalize on
favorable consumer recognition of our trade names. We do not hold a trademark
registration for most of our products. We have been granted trademarks in the
state of Florida for TrimFast, Herbal Blast and Water with an Attitude. TrimFast
has also been registered with the U.S. Patent and Trademark Office (75-029550).
We have applied for trademark protection for Kicks. These applications are
currently pending, have not been approved and may not ever be approved. Even, if
obtained, there can be no assurance that our trademarks will not violate the
proprietary rights of others or that our trademarks would be upheld and not
prevented from using our trademarks, if challenged, any of which could have an
adverse effect on us. It is possible that our competitors will adopt product or
service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion. Our inability to protect
our trade names will have a material adverse effect on our business, results of
operations and financial condition.
We also rely on trade secrets and proprietary know-how, and employ various
methods, to protect our concepts. However, such methods may not afford complete
protection, and there can be no assurance that others will not independently
develop similar know-how or obtain access to our know-how and concepts. We do
not maintain confidentiality or non-competition agreements with all of our
executives, key personnel or suppliers. There can be no assurance that we will
be able to adequately protect our trade secrets. Third parties may assert
infringement claims against us or against third parties upon whom we rely and,
in the event of an unfavorable ruling on any claim, we may be unable to obtain a
license or similar agreement to use technology that we rely upon to conduct our
business.
<PAGE>
Unlike pharmaceutical products that rely on specific combinations of drugs and
chemicals, patents cannot protect herbal products. However, management believes
that simply knowing the ingredients to an herbal product does not mean that
other manufacturers can duplicate the product. Effective trademark, copyright
and trade secret protection may not be available in every country in which we
may offer or intend to offer or sell our products. Failure to adequately protect
our intellectual property rights could harm brand-name recognition, devalue our
proprietary content and adversely affect our ability to compete effectively in
the marketplace. Further, defending the intellectual property rights could
result in the expenditure of significant financial and managerial resources,
which could materially affect the operations of the business.
While we believe that our steps are adequate to secure our intellectual property
rights, there can be no assurance that a third party will not misappropriate any
of our proprietary information.
Government Approval and Regulation.
We do not plan to collect sales or other similar taxes in respect of goods sold
by our Nutrition Cafe.com website except where required by law for purchasers
located in certain jurisdictions. However, one or more states or the federal
government may seek to impose sales tax collection obligations on out-of-state
companies (such as nutritioncafe.com) which engage in or facilitate online
commerce, and a number of proposals have been made at the state and local level
that would impose additional taxes on the sale of goods and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce, and could adversely affect our opportunity to derive
financial benefit from such activities.
Due to the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing, and characteristics and quality
of products and services. Furthermore, the growth and development of the market
for Internet commerce may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies conducting business
over the Internet. The adoption of any additional laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for our Internet products and increase our cost of doing business or otherwise
have an adverse effect on our business, results of operations and financial
condition. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as sales tax, libel and personal
privacy is uncertain and may take years to resolve.
In addition, since our service is available over the Internet in multiple states
and we may sell to numerous consumer residents in such states, such
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each such state. Our failure to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject our
business to taxes and penalties for failure to qualify. Any such existing or new
legislation or regulation, including state sales tax, or the application of laws
or regulations from jurisdictions whose laws do not currently apply to our
business, could have a material adverse effect on our business, results of
operations and financial condition.
<PAGE>
The manufacturing, processing, formulating, packaging, labeling, distributing,
selling and advertising of our products are subject to regulation by one or more
federal agencies. The most active regulation has been administered by The Food
and Drug Administration (hereinafter the "FDA") which regulates our products
pursuant to the Federal Food, Drug and Cosmetic Act (hereinafter the "FDCA") and
regulations promulgated thereunder. In particular, the FDA regulates the safety,
manufacturing, labeling and distribution of dietary supplements, including
vitamins, minerals and herbs, food additives, food supplements, over-the-counter
drugs and prescription drugs, medical devices and cosmetics. In addition, the
Federal Trade Commission (hereinafter the "FTC") has overlapping jurisdiction
with the FDA to regulate the labeling, promotion and advertising of dietary
supplements, over the counter drugs, cosmetics and foods.
Although the dietary supplement industry is subject to regulation by the FDA and
local authorities, dietary supplements, including vitamins, minerals, herbs and
other dietary ingredients, now have been statutorily affirmed as a "food."
Dietary supplement companies are authorized to make substantiated statements of
nutritional support and, subject to several possible limitations, to market
manufacture-substantiated-as-safe dietary supplement products without FDA
pre-clearance. Failure to comply with applicable FDA requirements can result in
sanctions being imposed on the Company or the manufacturers of our products,
including but not limited to fines, injunctions, product recalls, seizures and
criminal prosecution.
Compliance with applicable FDA and any state or local statutes is critical.
Although we believe that we are in compliance with applicable statutes, there
can be no assurance that, should the FDA amend its guidelines or impose more
stringent interpretations of current laws or regulations, we would be able to
comply with these new guidelines. We are unable to predict the nature of such
future laws, regulations, interpretations or applications, nor can we predict
what effect additional governmental regulations or administrative orders, when
and if promulgated, would have on our business in the future. These regulations
could, however, require the reformation of certain products to meet new
standards, market withdrawal or discontinuation of certain products not able to
be reformulated, imposition of additional record keeping requirements, expanded
documentation regarding the properties of certain products, expanded or
different labeling and/or additional scientific substantiation.
The FDCA has been amended several times with respect to dietary supplements,
most recently by the Dietary Supplement Health and Education Act of 1994
(hereinafter "DSHEA"). DSHEA was enacted on October 15, 1994. It provides a new
statutory framework governing the composition and labeling of dietary
supplements. DSHEA provides a regulatory framework to ensure safe, quality
dietary supplements and the dissemination of accurate information about such
products. Under DSHEA, dietary supplements are generally excluded from the legal
definition of "food additive."
<PAGE>
With respect to composition, DSHEA created a new class of "dietary supplements",
consisting of vitamins, minerals, herbs, amino acids and other dietary
substances for human use to supplement the diet, as well as concentrates,
metabolites, extracts or combinations of such dietary ingredients. Generally,
under DSHEA, dietary ingredients that were on the market before October 15, 1994
may be sold without FDA pre-approval and without notifying the FDA. On the other
hand, a new dietary ingredient (one not lawfully on the market before October
15, 1994) requires proof that it has been present in the food supply as an
article used for food without being chemically altered, or evidence of a history
of use or other evidence of safety establishing that it is reasonably expected
to be safe. The FDA must be supplied with such evidence at least seventy-five
(75) days before the initial introduction into interstate commerce use of a new
dietary ingredient. There can be no assurance that the FDA will accept the
evidence of safety for any new dietary ingredients that we may decide to use,
and the FDA's refusal to accept such evidence could result in regulation of such
dietary ingredients as adulterated until such time as reasonable expectation of
safety for the ingredient can be established to the satisfaction of the FDA.
As for labeling, DSHEA permits "statements of nutritional support" for dietary
supplements without FDA pre-approval. Such statements may describe how
particular dietary ingredients affect the structure,
function or general well-being of the body, or the mechanism of action by which
a dietary ingredient may affect body structure, function or well-being (but may
not state that a dietary supplement will diagnose, mitigate, treat, cure or
prevent a disease). A company making a statement of nutritional support must
possess substantiating evidence for the statement, and, for such statements that
are not about the effects on the body as a result of a dietary supplement used
as a tool for its nutritive value and are not otherwise "health claims,"
disclose on the label that the FDA has not reviewed that statement and that the
product is not intended for use for a disease, and notify the FDA of the
statement within thirty (30) days after its initial use. The manner for making
the disclosure and notifying the FDA are set forth in the regulations. However,
there can be no assurance that the FDA will not determine that a given statement
of nutritional support that we decide to make is a drug claim rather than an
acceptable nutritional support statement. Such a determination would require
deletion of the drug claim or our submission, and the FDA's approval of a New
Drug Application (hereinafter "NDA"), which would entail costly and
time-consuming clinical studies. In addition, DSHEA allows the dissemination of
"third party literature", publications such as reprints of scientific articles
linking particular dietary ingredients with health benefits. Third party
literature is exempted from FDA regulation as dietary supplement "labeling" and
may be used in connection with the sale of dietary supplements to consumers.
Such a publication may be so used if, among other things, it is not false or
misleading, no particular manufacturer or brand of dietary supplement is
promoted and a balanced view of available scientific information on the subject
matter is presented. There can be no assurance, however, that all pieces of
third party literature that may be disseminated in connection with our products
will be determined by the FDA to satisfy each of these requirements, and any
such failure could subject the product involved to regulation as a new drug or
as a "misbranded" product.
DSHEA permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well being resulting from consumption of a dietary ingredient or the
role of a nutrient or dietary ingredient in affecting or maintaining structure
or function of the body. Any statement of nutritional support beyond traditional
claims must be accompanied by disclosure that the FDA has not evaluated such
statement and that the product is not intended to cure or prevent any disease.
We anticipate that the FDA will promulgate Good Manufacturing Practices
(hereinafter "GMPs"), which are specific to dietary supplements and require at
least some of the quality control provisions contained in the GMPs for drugs.
Management anticipates that the FDA may promulgate GMP regulations authorized by
DSHEA, which are specific to dietary supplements. GMP regulation would require
supplements to be prepared, packaged and held in compliance with such rules, and
may require similar quality control provisions contained in the GMP regulations
for drugs. There can be no assurance that, if the FDA adopts GMP regulations
specific to dietary supplements, that either we or our manufacturers will be
able to comply with such GMP rules upon promulgation or without incurring
material expenses to do so.
<PAGE>
Our products and product related activities may also be subject to regulation by
other regulatory agencies, including but not limited to the FTC, the Consumer
Products Safety Commission, the United States Department of Agriculture, the
United States Postal Service, the United States Environmental Protection Agency
and the Occupational Safety and Health Administration.
These activities are also regulated by various agencies of the states and
localities in which our products are sold.
Advertising of dietary supplement products is subject to regulation by the FTC
under the Federal Trade Commission Act (hereinafter the "FTCA"). Section 5 of
the FTCA prohibits unfair methods of competition and unfair or deceptive trade
acts or practices in or affecting commerce. Section 12 of the FTCA provides that
the dissemination or the causing to be disseminated of any false advertising
pertaining to drugs or foods, which would include dietary supplements, is and
unfair or deceptive act or practice. Under the FTC's Substantiation Doctrine, an
advertiser is required to have a "reasonable basis" for all objective product
claims before the claims are made. Pursuant to this FTC requirement, we are
required to have adequate substantiation of all material advertising claims made
for its products. Failure to adequately substantiate claims may be considered
either deceptive or unfair practices.
In recent years the FTC has initiated numerous investigations of dietary
supplement and weight loss products and companies. The FTC has recently issued a
guidance document to assist supplement marketers of dietary supplement products
in understanding and complying with the substantiation requirement.
The FTC is authorized to use a variety of processes and remedies for
enforcement, both administratively and judicially including compulsory process,
cease and desist orders, and injunctions. FTC enforcement can result in orders
requiring, among other things, limits on advertising, corrective advertising,
consumer redress, divestiture of assets, rescission of contracts and such other
relief as may be deemed necessary. State and local authorities can also regulate
advertising and labeling for dietary supplements and conventional foods. There
can be no assurance that state and local authorities will not commence
regulatory action that could restrict the permissible scope of our product
claims.
Employees.
With the addition of Nutrition Clubstores, we currently have forty five (45)
employees, of whom twenty three (23)are employed full-time and twenty two (22)
are employed part-time.
<PAGE>
Material Agreements.
License Agreement with WCW. In June 1999 we developed our first private label
product by entering into a licensing agreement with the World Championship
Wrestling Organization ("WCW") to produce Energy Bars in three flavors under the
WCW brand name in the United States, its territories and possessions and its
Military Installations. This license agreement is non-exclusive and expires on
December 31, 2002. This agreement provides that we may use logos, slogans and
the likeness of WCW wrestlers, as provided by WCW, on the labels of our energy
bars, which have been designed to target an audience of millions of adults and
children watching and attending professional wrestling matches.
Our agreement with WCW provides that WCW will receive royalty payments of 6% of
net sales with the following minimum payments guaranteed: (i) December 31, 1999
- $100,000; (ii) June 30, 2000 - $100,000; (iii) September 30, 2000 - $100,000;
(iv) December 31, 2000 - $100,000; and (v) June 30, 2001 - $100,000.
There is no provision in this agreement to grant authority to our company to
sell the Energy Bars at WCW wrestling matches. WCW would not be the proper party
from which to obtain this authority, since the company which manages the
location of each individual wrestling match would grant this authority. We have
no plans of pursuing any such grant with any venue at which the WCW wrestling
matches are held.
As of the date of this filing, our WCW energy bars included the three wrestling
figures, Hulk Hogan, Randy "Macho Man" Savage and Bill Goldberg. Because Bill
Goldberg has been injured, preventing him from appearing in our planned
advertising campaign, our advertising campaign to promote the bars has been
delayed. It is unlikely he will appear in our advertising campaign due to his
injury. We are planning to use other wrestling figures to promote the WCW
energy bars if we are able to obtain them on terms acceptable to us. There is no
assurance that we will be able to obtain other wrestling stars on commercially
reasonable terms.
Venture Direct Worldwide Agreement. On June 29, 1999 we entered into an
agreement with Venture Direct Worldwide Inc. as agent for Microsoft Network to
exclusively utilize the keywords vitamins, supplements and Sports Nutrition on
the Microsoft Network. Venture Direct never provided any services to our company
and the contract was terminated on December 31, 1999.
May Davis Group of New York Agreement. We have entered into a series of
agreements with the May Davis Group of New York, whereby the May Davis Group of
New York acts as a placement agent for our securities offered and sold in
private placements. In exchange for these services, May Davis Group of New York
has been compensated with options to purchase forty thousand (40,000) shares of
our common stock at a variable price depending on an equation involving the
trading price at the time of exercise. Such options are exercisable for sixteen
(16) months from the date of each agreement and have registration rights.
Year 2000 Compliance.
Our systems are Year 2000 ("Y2K") compliant. The cost of such compliance on our
part was less than $5,000. The Y2K compliance issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Computer programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. This could result
in a systems failure or miscalculation causing disruption of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. We have verified
that our two principal customers are Y2K compliant. We do not know if our other
suppliers or distributors are Y2K compliant, but believe there will be no
material adverse impact upon us if one of our individual distributors or
manufacturers is not Y2K compliant. We have experienced no adverse affects
related to the Y2K compliance issue at any time. We are unaware of any adverse
affects experienced by any of our suppliers related to the Y2K compliance issue.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS/PLAN OF OPERATION
FINANCIAL STATEMENT PRESENTATION.
The September 30, 1999 interim financial statements are presented without
comparable 1998 quarterly information. We were not publicly traded in 1998 and
systems, though adequate to address annual audit needs, were not in place to
allow for extracting reliable quarterly information. We have presented the
comparison with adjustments from the year end 1998 numbers.
RESULTS OF OPERATIONS.
December 31, 1997 and 1998 as compared to September 30, 1999
Sales for the nine months ended September 30, 1999 were $581,337 as compared to
$1,925,332 for the year ended December 31, 1998 ($1,443,999 adjusted
proportionately for the nine months ended September 30, 1998 and $22,338 as of
December 31, 1997). The significant decline in sales from 1998 to 1999 is
primarily attributable to our decision to discontinue the sale of Revivarant, a
muscle replenishment supplement, which accounted for approximately $1.4 million
of revenues during 1998. This decision was initiated by an industry wide
investigation by the Food and Drug Administration into the active ingredient in
Revivarant.
Our salaries and compensation increased from $31,633 in 1997 to $993,773 in 1998
to $505,372 for the nine months ended September 30, 1999 for several reasons.
The 1998 amount included $762,000 non-cash stock based compensation expense.
Our 1999 salaries include increased expenses of support staff. Specifically, we
added two administrative assistants, upgraded our accounting position to Chief
Financial Officer and added a salesman to our staff. In addition, during 1999 we
added two new subsidiaries, Ice Cold Water and Nutrition Cafe, which account for
approximately 40% of the increased salary reported. Moreover, the employment
market in Tampa has been highly competitive in 1999 resulting in our company
paying higher wages to all employees to retain and recruit qualified employees.
Management expected that the introduction of the IMMCEL and IMMMU product lines
would add to revenues. However, customer acceptance proved disappointing and the
prior owner, and key employee refused to honor his contractual commitments to
manage the newly added subsidiaries. As a result, we have rescinded our
agreement with the prior owners of IMMMU and IMMCEL and will focus on the
expansion of our own line of nutritional supplements. All rights title and
interest to the IMMMU/IMMCEL product lines will revert back to their prior
owners, all consideration paid or received will be returned and any profits or
losses generated from the operation on IMMMU and IMMCEL will be allocated to its
prior owners. We recorded in the "Receivable - other" account the loss from
operating IMMMU and IMMCEL for the period of time we managed those companies. We
then recorded a 100% reserve against the balance at September 30, 1999. As of
December 31, 1999, the receivable and reserve balances were written off.
<PAGE>
Management believes that a significant boost to its revenues will be generated
from its licensing agreement with World Championship Wrestling ("WCW"), once
other wrestling stars agree to promote our energy bars. We intend to sell high
nutrition, energy bars with the WCW logo and images of the various wrestling
personalities. Both food brokers and retail stores have shown tremendous
interest in the product. Although we have made shipments to small
retailers, we anticipate that our shipments to large retailers will commence
with the launch of our national advertising campaign, which is tentatively
scheduled to begin in May. While there can be no assurance that the product will
meet anticipated demand, management believes that the sale of the WCW energy
bars will be a significant source of revenues for the Company.
With the acquisition, formation and expansion of business activities during
1999, operating expenses increased significantly. Salaries and compensation
total $31,633 and $983,773 for the year ended December 31, 1997 and 1998
respectively,as compared to $505,372 for the nine months ended September 30,
1999. New employees had to be hired to handle the increased business activities
of the Company.
For the nine months ended September 30, 1999, we recorded $1,467,900 in
professional fees. A significant portion of this amount is non-cash expense,
representing the issuance of common stock to certain professionals in exchange
for professional services. Management anticipates that professional fees will
decline significantly in the future.
Selling general and administrative expenses were $92,565 and $423,289 for the
years ended December 31, 1997 and December 31, 1998 respectively, as compared to
$623,451 for the nine months ended September 30, 1999. Approximately $175,000 of
this increase was attributable to advertising for NutritionCafe.
Approximately $250,000 of the interest expense of $354,569 is attributable to
the intrinsic value of the convertible debenture executed by the Company.
Net loss for the year ended December 31, 1997 was $151,846. Net loss for the
year ended December, 31 1998 was $739,974. Loss before income taxes for the
year ended December 31, 1998 was $719,374. We have generated a net loss of
$3,478,802 for the nine months ended September 30, 1999 or net loss of $0.87 per
share.
LIQUIDITY AND CAPITAL RESOURCES.
December 31, 1997 & 1998 as compared to September 30, 1999.
Total cash and cash equivalents as of September 30, 1999 were $100,312 as
compared to $120,938 as of December 31, 1998 and $17,658 as of December 31,
1997, a decline of approximately 17% from the period ending December 31, 1998 to
the period ending September 30, 1999.
Trade receivables were $4,889 at December 31, 1997 and $357,889 at December 31,
1998, including $267,240 related to Cutting Edge that was subsequently written
off, but declined to $318,407 for the period ending September 30, 1999. Our 1998
trade receivables also included $11,745 related to IMMMU and IMMCEL, an amount
for which we maintained adequate receivables and was fully reserved to cover an
allowance for bad debt.
<PAGE>
We recorded $503,839 in bad debt expense in December 1998, $267,240 of which was
due to unknown financial difficulties experienced by Cutting Edge. The bad debt
expense of $267,240 attributable to Cutting Edge represented 50% of the
receivable balance due from Cutting Edge at December 31, 1998 and was due to the
Cutting Edge's failure to return product we sold them. We recorded the bad
debt expense relating to Cutting Edge in December 1998 and ceased doing business
with them at that time. In addition,the bad debt expense was due to the
bankruptcy of another customer, Dynamic Health Concepts. During 1998 a total of
two (2) customers, Cutting Edge and Dynamic Health Concepts, accounted for
approximately seventy-two percent (72%) of our sales.
Our decision to pull Revivareant from the market impacted our short-term income
potential due to the large percent of 1998 revenues from this product. During
1999 we have made several decisions, which we believe will help replace the lost
revenue. Specifically, we developed our Max Impact line of supplements and
packaged them in a daily package of three pills each, which are marketed to
convenience stores.
Additionally, we signed an agreement with the WCW to produce and market the
ultra energy bars, which include the likenesses of Hulk Hogan, Bill Goldberg and
Randy "Macho Man" Savage. Additionally, during 1999 we increased our usage of
outside brokers for sales to independent retail locations and hired sales
personnel for direct marketing to our target industries. The result of these
changes has been the elimination of our reliance on a few large customers for
our revenue. We believe these changes will position us for increased revenues in
the near future.
Inventory was $23,699 at December 31, 1997, increased to $188,737 at December
31, 1998 and to $377,270 at September 30, 1999. This increase in inventory is
attributable to the launch of Nutrition Cafe and the inventory that we are
required to carry to meet customer orders.
Total current assets were $46,246 at December 31, 1997 and $679,309 at December
31, 1998 and increased approximately 40% to $1,308,267 at September 30, 1999
Property and equipment increased from $5,481 on December 31, 1997 to $33,403 on
December 31, 1998 and to $1,459,270 on September 30, 1999. This increase is due
primarily to our purchase of the facility, which houses our warehouse operations
for Nutrition Cafe, and the equipment purchased to operate this facility. The
$228,705 attributable to software development represents our investment in the
Nutrition Cafe website software.
We also experienced a significant increase in liabilities. Accounts payable
increased from $14,873 on December 31, 1997 to $625,767 on December 31, 1998 and
to $926,612 on September 30, 1999. In addition, we issued a convertible debt
instrument in the amount of $1,000,000 in 1999. The proceeds raised from this
debt offering were used to purchase the warehouse facility.
Management believes that we have sufficient revenue and reserves to finance
ongoing business activities for the 12 months ending September 30, 2000.
However, any judgment or claim in favor of a claimant regarding Revivarant could
have a materially adverse effect on our results of operations, our financial
condition and liquidity, including that we may be unable to continue in
business.
<PAGE>
BUSINESS DEVELOPMENT.
Trimfast, Inc. was organized as a Florida corporation in April of 1997 and, in
its first year of operations generated revenues of $22,338. Start-up and
operating costs totaled $164,559 that resulted in a net loss of $151,846.
Trimfast, Inc.'s president, Michael Muzio, who, as of December 31, 1997, was
owed a total of $150,200, funded these operating expenses. Fiscal year 1998
represented the first full year of operations for Trimfast, Inc. From the
beginning, management chose not to invest the capital required to lease or
acquire the machinery needed to manufacture their products. Instead, Trimfast,
Inc. relied upon contract manufacturers, freeing working capital for other
matters.
At the beginning of August 1998, our assets were negligible, totaling $599.
Liabilities at that time totaled $680,917 with no revenues being generated and
no business plan in place. Accumulated losses totaled $1,122,218 with a
stockholders deficiency of $680,318. Due to the lack of revenues and no business
plan, our management sought out an acquisition candidate and, on August 12,
--
1998, acquired all of the issued and outstanding shares of common stock of
Trimfast, Inc., a company engaged in the nutraceutical business.
With the addition of our wholly owned subsidiary, Trimfast, Inc., revenues in
1998 were $1,925,332.
Cost of sales was $567,472 resulting in a gross profit of $1,357,860. Operating
expenses totaled $2,076,797 resulting in loss from operations of $718,937. We
recorded $503,839 in bad debt expense in December 1998. This sum was partially
due to the financial difficulties experienced by Cutting Edge, a customer who
accounted for approximately sixty percent (60%) of our revenues in 1998 and the
bankruptcy of another customer. The bad debt expense of $267,240 attributable to
Cutting Edge represented 50% of the receivable balance due from Cutting Edge at
December 31, 1998 and was due to the failure of Cutting Edge to return product
we sold to them. In December 1998, we recorded the bad debt expense relating to
Cutting Edge and ceased doing business with them at that time. During 1998, a
total of two (2) customers accounted for approximately seventy-three (72%) of
our sales. Prior to our acquisition of Trimfast, Inc., Trimfast, Inc. was
engaged in the nutraceutical business, distributing health and fitness products.
Our cash balance as of December 31, 1998 was $105,641. We also had approximately
$358,000 in accounts receivable and $188,000 in inventory. Our total assets as
of December 31, 1998 were $731,438. Liabilities totaled $718,467 that was
comprised of approximately $626,000 in accounts payable, $72,000 in notes and
$20,600 in income taxes payable.
1998 represented a growing year for us. Relationships with distributors,
manufacturers and wholesalers had to be established. Manufacturing rates and
shipping costs all had to be analyzed and evaluated. With our acquisition of
Trimfast, Inc. in 1998, we opened new financing opportunities that would have
otherwise been foreclosed to us. We received a significant capital infusion
through the issuance of our common stock in private placements and borrowed
funds from private lenders.
1999 saw our launch of the NutritionCafe website and the purchase of the assets
of Ice Water. Management believes direct sales to consumers will significantly
reduce reliance on several customers. During the next twelve months of
operation, management remains confident that revenues from operations will be
able to support our ongoing operations. However, any judgment or claim in favor
of a claimant regarding Revivarant could have a materially adverse effect on our
results of operations, our financial condition and liquidity, including that we
may be unable to continue in business. Should the Company determine additional
financing is necessary, the additional financing will be to expand current or
proposed operations.
<PAGE>
Debentures.
In June 1999, we entered into a debenture agreement. As a result, we have
$1,000,000 of 7.0% convertible debentures outstanding, which mature on June 14,
2002. After the date of issuance and continuing until the maturity date of the
Debentures, the Debentures may be converted, at the option of the holder, into
shares of our common stock, $0.001 par value per share, at a conversion price
equal to the lesser of $8.50 or 80.0% of the 5 day average closing bid price as
reported by Bloomberg, LP for the five consecutive trading days prior to the
conversion date.
Interest will be paid on the Debentures at a rate of 7.0% per annum, at the time
of any conversion, with respect to the principal amount of the Debenture being
converted, until the principal amount is paid in full or has been converted
entirely. Interest may be paid in cash or shares of common stock, at our option.
With our twenty (20) days notice, we may redeem the Debentures in whole or in
part at any such time as the closing bid price of our common stock, as reported
by Bloomberg, LP,
falls to $6.00 or less at a redemption price equal to the principal amount of
the Debenture being redeemed plus accrued interest on such amount and the profit
that the holder would have received upon conversions of that portion of the
Debenture being redeemed.
ITEM 3. DESCRIPTION OF PROPERTY
Our executive offices are located at 777 South Harbour Island Boulevard, Suite
780, Tampa, Florida 33602, where we lease approximately 2,772 square feet of
office space at a monthly rent of $5,197.50. We feel that this space is adequate
for our needs at this time. The current lease term expires on October 31, 2004.
Upon such expiration, we believe that we will be able to obtain renewal terms or
a lease for new space at terms favorable to the Company.
We also exercised a lease option to acquire a 17,000 square foot warehouse
facility in Clearwater, Florida. The total purchase price for the property was
$1.2 million. On July 30, 1999, we paid for the warehouse facility in full with
funds raised from the issuance of preferred stock and warrants.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth the ownership, as of September 30, 1999, of our
common stock by our officers, directors and principal shareholders who are known
by us to own, either beneficially or of record, more than 5% of said stock and
by all directors as a group.
<PAGE>
Security Ownership of Officers and Directors.
TITLE OF NO. OF NATURE OF
CLASS NAME & ADDRESS SHARES(1) OWNERSHIP %OWNED
------------------------------------------------------------------ ------------
Common Michael Muzio 1,194,203 Direct 26.30%
4957 Bayshore Blvd.
Tampa, Florida 33611
Common Gregg Vosler 0 Direct 0%
851 Lantana Avenue
Clearwater Beach, Florida 34630
Common Christopher Hee 1,590 Direct Less than 1%
3152 Fiesta Drive
Dunedin, Florida 34689
Common John Troy 0 Direct 0%
4014 W Waters Avenue #1508
Tampa, Florida 33614
------------------------------------------------------------------------------
All Officers and Directors as a Group
(3 Individuals) 1,195,793
26.5%
(1) Any shares of Common stock underlying outstanding options, warrants
or convertible debentures are included in the figures under number
of shares.
Changes in Control.
There are currently no arrangements, which would result in a change in control
of our Company.
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our Bylaws provide that we shall have a minimum of three (3) directors on the
board at any one time. Vacancies are filled by a majority vote of the remaining
directors then in office. The directors and executive officers of the Company
are as follows:
NAME AND ADDRESS AGE POSITIONS HELD
------------------------------------------------------------------------------
Michael Muzio 36 President/Treasurer/Director
4957 Bayshore Blvd.
Tampa Florida 33611
Gregg Vosler 52 Vice President/Secretary/Director
851 Lantana Avenue
Clearwater Beach Florida 34630
Christopher Hee 58 Director
3152 Fiesta Drive
Dunedin Florida 34689
John Troy 37 Chief Financial Officer
4014 W Waters Avenue #1508
Tampa, Florida 33614
The directors named above will serve until the next annual meeting of our
shareholders or until their successors shall have been elected and accepted
their positions. Directors are elected for one-year terms. Mr. Muzio, Mr. Vosler
and Mr. Troy are parties to oral employment agreements with the Company that
pays annual salaries of $150,000, $50,000 and $65,000 respectively. In addition,
these oral employment agreements include provisions for family health insurance
coverage through the Company, provisions for memberships at the Harbour Island
Athletic Club, and Mr. Vosler has use of an automobile owned by the Company.
We have no minimum or maximum bonuses, which are implied or expressly
communicated, to any of our employees. Bonuses are only paid at the direction of
our Board of Directors. All factors affecting performance are evaluated by our
board of directors, including the company's overall performance and the impact
that individual had upon our performance. When appropriate, a bonus amount is
proposed to the Board of Directors and is submitted for a vote.
MICHAEL MUZIO: Since 1996, Mr. Muzio has served as president of the Company and
Trimfast, Inc. Prior thereto, from 1991 until 1995 he served as chief executive
officer of Advanced Medical Diagnostics, Inc. Research and development in health
related products represent a significant portion of his prior work experience.
In 1994, Mr. Muzio filed for Bankruptcy Protection under Chapter 7 in the
Southern District of Florida, Case Number 93-5409-8P7.
GREGG VOSLER: Mr. Vosler has served as vice president of the Company and
Trimfast, Inc. since November of 1997. Previously, from June 1996 to November
1997, he served as Director of Development for Physician's Weight Loss Center in
Akron, Ohio. In that capacity he was responsible for systems and franchise
development in the United States. From 1993 through June 1996, he served as an
independent consultant in the medical weight loss and health industry.
CHRISTOPHER HEE: Mr. Hee was appointed to serve as a director of the Company on
October 6, 1998. Dr. Hee received his M.D. degree at Sydney University, in
Sydney, Australia. He completed his residency at State General Hospital in
Melaka, Malaysia in 1975. Dr. Hee opened and operated four medical clinics in
Tampin, Malaysia from 1981 to 1992. After gaining admission to practice medicine
in the United States in 1992, Dr. Hee became the Chief Medical Officer of the
Tampa Military Processing Station for the United States Department of Defense,
where he still presently works. Dr. Hee provides the Board with the medical
background and skills necessary for the Company to develop vitamins and
supplements.
<PAGE>
JOHN TROY: Mr. Troy became our Chief Financial Officer in October of 1999. Prior
to his current position, he served as a Controller for EnviroSys International
from February to September of 1999. From November 1997 through October 1998, Mr.
Troy was an Assistant Controller of Raymond James & Associates. From November
1995 through May of 1997, he was Accounting Manager at Lykes, Financial Services
Division. Prior to this position, Mr. Troy was a Controller of Chico's FAS, Inc.
until March of 1995. Mr. Troy obtained his Associates of Science Degree in May
of 1988 from Holyoke Community College and his Bachelor of Science Degree in
Accounting from Western New England College in 1990.
ITEM 6. EXECUTIVE COMPENSATION
Mr. Muzio, our president and treasurer, oversees the operations of the Trimfast,
Inc. subsidiary and in consideration thereof, receives annual compensation of
$150,000. Mr. Vosler, the Company's vice president and secretary, oversees sales
and in consideration thereof receives annual compensation of $50,000. Mr. Muzio
and Mr. Vosler exercise complete control over employee compensation. Mr. Troy is
responsible for the accounting and financial reporting activities of the Company
and receives annual compensation of $65,000.
The terms and conditions of each officer's employment is reviewed annually by
our Board of Directors who may also award annual bonuses. There is no
compensation paid to our board members for serving on the Board of Directors.
However, board members are reimbursed for all costs and expenses incurred in
either attending Board meetings or, for any expenses incurred on our behalf.
The following table sets forth the compensation of the company's three (3)
officers for the last three (3) fiscal years:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation ---------
Name & -------------------
---------------------- Other
Position Year Salary Bonus Other Stock
SARs LTIP Comp
--------------------------------------------------------------------------------
-------------------------------------
Michael Muzio 1999 $150,000 $0 $0 $0
$0 $0 $0
President & 1998 $150,000 $0 $0 $240,000(1)
$0 $0 $0
Treasurer 1997 $0 $0 $0 $0
$0 $0 $0
Gregg Vosler 1999 $50,000 $0 $0 $0
$0 $0 $0
Vice President 1998 $50,000 $0 $0 $96,000(1)
$0 $0 $0
& Secretary 1997 $31,000 $0 $0 $0
$0 $0 $0
John Troy 1999 $52,500 $0 $0 $53,750(2)
$0 $0 $0
Chief Financial 1998 $0 $0 $0 $0
$0 $0 $0
Officer 1997 $0 $0 $0 $0
$0 $0 $0
(1) The amount used in this table was calculated using the market close price
for TRIM common stock on December 31, 1998.
(2) The amount used in this table was calculated using the market close price
for TRIM common stock on December 31, 1999.
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 12, 1998, we acquired all of the issued and outstanding shares of
common stock of Trimfast, Inc., in exchange for the issuance
of 1,370,049 shares
of our common stock. In conjunction therewith, Michael Muzio acquired 975,000
shares of our common stock and Gregg Vosler was issued 120,000 shares of our
common stock. As a result of this transaction the shareholders of Trimfast, Inc.
gained control of our Company after August 12, 1998.
On December 8, 1998, Mr. Muzio purchased all 508,313 shares of our outstanding
common stock held beneficially by our prior principal shareholder in a private
transaction.
Effective December 31, 1998, our principal shareholder exchanged $126,664 of
loans due to him by us for 70,358 shares of our common stock. The number of
shares received by Mr. Muzio was on a dollar for dollar basis, based upon the
outstanding debt obligation as of December 1, 1998 and the stock valued at $1.80
per share, with the debt due Mr. Muzio. During 1998, we issued 19,500 shares of
our common stock to Marsha Hardin, an associate and business consultant to Mr.
Muzio, in a related party exchange for a loan payable by us in the amount of
$40,000.
In February Michael Muzio contributed 500,000 shares of restricted stock of
Insiderstreet.com, Inc. to the Company. The shares were valued at the $7.50
based on the quoted trading price on the date of contribution. The shares
contributed are less than 20% of issued and outstanding shares of
Insiderstreet.com, Inc. and is accounted for as a long-term investment.
Mr. Muzio has entered into an oral employment agreement with us, which pays him
an annual compensation of $150,000. It is expected that we will renew this
agreement in the year 2001. Mr. Vosler has entered into an oral employment
agreement with us, which pays him an annual compensation of $50,000. It is
expected that we will renew this agreement in the year 2001. As of January 1,
2000, Mr. Troy has entered into an oral employment agreement with us, which pays
him an annual compensation of $65,000. It is expected that we will renew this
agreement in the year 2001.
We periodically advance funds to the principal stockholder and his affiliates as
well as borrow funds from the same parties. All of these amounts are interest
free without specific repayment terms.
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
The following description is a summary and is qualified in its entirety by the
provisions of our Articles of Incorporation and Bylaws, copies of which have
been filed as exhibits to the Registration Statement.
COMMON STOCK.
General.
We are authorized to issue one-hundred million (100,000,000) shares of common
stock having a par value of $ 0.001 per share. As of September 30, 1999, there
were 4,540,978 common shares issued and outstanding. All shares of common stock
outstanding are validly issued, fully paid and non-assessable.
Voting Rights.
Each share of common stock entitles the holder thereof to one vote, either in
person or by proxy, at meetings of shareholders. The holders are not permitted
to vote their shares cumulatively. Accordingly, the holders of common stock
holding, in the aggregate, more than fifty percent (50%) of the total voting
rights can elect all of our directors and, in such event, the holders of the
remaining minority shares will not be able to elect any of such directors. The
vote of the holders of a majority of the issued and outstanding shares of common
stock entitled to vote thereon is sufficient to authorize, affirm, ratify or
consent to any item submitted a vote of the shareholders, except as otherwise
provided by law.
Dividend Policy.
All shares of common stock are entitled to participate ratably in dividends when
and as declared by our Board of Directors out of the funds legally available
therefore and subject to the rights, if any, of the holders of outstanding
shares of preferred stock. Any such dividends may be paid in cash, property or
additional shares of common stock. We have not paid any dividends since our
inception and presently anticipate that all earnings, if any, will be retained
for development of our business, and that no dividends on the shares of common
stock will be declared in the foreseeable future. Any future dividends will be
subject to the discretion of our Board of Directors and will depend upon, among
other things, our future earnings, operating and financial condition, our
capital requirements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the common stock will
be paid in the future.
Miscellaneous Rights and Provisions.
Holders of common stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of our
dissolution, whether voluntary or involuntary, each share of common stock is
entitled to share ratably in any assets available for distribution to holders of
our equity after satisfaction of all liabilities and payment of the applicable
liquidation preference of any outstanding shares of preferred stock.
Under Nevada law, stockholders may take certain actions without the holding of a
meeting by a written consent or consents signed by the holders of a majority of
the outstanding shares of the capital stock of the company entitled to vote
thereon. Prompt notice of the taking of any action without a meeting by less
than unanimous consent of the stockholders will be given to those stockholders
who do not consent in writing to the action. The purposes of this provision are
to facilitate action by stockholders and to reduce corporate expense associated
with annual special meetings of the shareholders. If shareholder action is taken
by written consent, we will be required to send each shareholder entitled to
vote on the applicable matter, but whose consent was not solicited, an
information statement containing information about the action taken.
<PAGE>
PREFERRED STOCK.
We have authorized the issuance of twenty million (20,000,000) shares of Class A
Preferred Stock with a par value of $0.01 and twenty-million (20,000,000) shares
f Class B Preferred Stock with a par value of $0.01.
31
These shares have such rights and preferences as determined by the Board of
Directors. The Board of Director's ability to issue preferred stock without
further shareholder approval has the potential to delay, defer or prevent a
change in control of the Company.
As of March 31, 2000, there were 15,000 shares of Series A Preferred Stock, par
value $0.01 per share, outstanding. According to the terms of the Security
Purchase Agreement for these shares signed on the same date, such shares were
purchased at a price of $100.00 per share. The shares are (i) validly issued,
fully paid and non-assessable and (ii) free from all taxes, liens and charges
with respect to the issue thereof. All shares of our common stock are declared
junior in rank to such Series A preferred shares.
Dividends.
Regular Dividends. Each holder of the preferred shares shall be entitled to
receive on each July 1 and January 1, or if such date is not a business day, the
immediately subsequent business day, commencing January 1, 2000, dividends at a
rate of eight percent (8%) per annum, computed on the basis of $100.00 per
preferred share. Such dividends shall be cumulative from (and including) the
issuance date of such preferred shares and shall accrue daily, whether or not
earned or declared, thereafter until paid, and shall be calculated on the basis
of a 360 day year. Dividends shall be payable in cash; provided, however, that
in lieu of paying such dividends in cash, we may, at our option, pay any or all
of such dividends by delivery of a number of shares of our common stock equal to
the quotient of (x) the dollar amount of the Regular Dividends to be paid on
such date, divided by (y) the conversion price, as provided by agreement,
determined on the day which is the third (3rd) business day prior to the date.
Participating Dividends. In the event any dividend or other distribution payable
in cash or other property is declared on our common stock, each Series A
preferred shareholder on the record date for such dividend or distribution shall
be entitled to receive, per preferred share on the date of payment or
distribution of such dividend or other distribution, the amount of cash or
property equal to the cash or property which would be received by the Series A
preferred shareholders of the number of shares of common stock into which such
preferred share would be converted immediately prior to such record date.
Conversion.
Any holder of the Series A preferred shares shall be entitled to convert any
whole number of preferred shares into fully paid and nonassessable shares of
Common Stock in accordance with the Certificate of Designations, Preferences and
Rights for such preferred shares. Without our prior consent, a holder shall not
be entitled to convert any preferred shares during the period beginning on and
including the issuance date and ending on and including the date that is 120
days after such issuance date.
<PAGE>
We shall not issue any fraction of a share of common stock upon any conversion.
If the issuance would result in the issuance of a fraction of a share of common
stock, we shall round such fraction of a share of common stock up to the nearest
whole share. Each share of the Series A Preferred Stock is convertible at the
lesser of (a) $8.5938 or (b) 80% of the market price of the common stock as
defined in the agreement and is subject to adjustment as provided in the
Certificate of Designations, Preferences and Rights for such preferred shares
which is included as an exhibit to this Registration Statement. Adjustment is
provided for in situations such as, but not limited to: our issuance of options,
our issuance of convertible securities, or our change or alternative treatment
of option prices or prices of conversion.
Voting.
Holders of Series A preferred shares shall have no voting rights, except as
required by law, including but not limited to the General Corporation Law of the
State of Nevada, and as expressly provided in the Certificate of Designations,
Preferences and Rights. The person or persons entitled to receive the shares of
common stock issuable upon a conversion of Series A preferred shares shall be
treated for all purposes as the record holder or holders of such shares of
common stock, with rights described above, on the date of conversion.
Liquidation.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A preferred shares shall be
entitled to receive in cash out of our assets, whether from capital or from
earnings available for distribution to our stockholders, before any amount shall
be paid to the holders of any of our capital stock of any class junior in rank
to the preferred shares in respect of the preferences as to the distributions
and payments upon our liquidation, dissolution and winding up, an amount per
preferred share equal to $100 and any accrued but unpaid Regular Dividends and
Participating Dividends. If insufficient funds are available to fulfill this
obligation, each Series A preferred shareholder would receive his pro rata
share.
Redemption.
In addition to all other rights of the holders of Series A preferred shares,
upon our consummation of a major transaction or triggering event, as defined by
the Certificate of Designations, Preferences and Rights for such preferred
shares, each holder of Series A preferred shares shall have the right, at their
option, to require us to redeem all or a portion of such holder's preferred
shares at a price per Series A preferred share equal to the greater of (i) 125%
of the stated value of such preferred share and (ii) the product of the
conversion rate in effect at such time as such holder delivers a Notice of
Redemption at Option of Buyer and the Closing Sale Price of our common stock on
the date immediately preceding such major transaction or triggering event on
which the principal market, or the market or exchange where the common stock is
then traded, is open for trading.
<PAGE>
Taxes.
We shall pay any and all taxes that may be payable with respect to the issuance
and delivery of common stock upon the conversion of Series A preferred shares.
THE FOLLOWING DESCRIPTIONS OF CERTAIN TERMS OF THE DEBENTURES AND WARRANTS DO
NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO
THE DEBENTURES AND WARRANTS PURSUANT TO WHICH THE DEBENTURES AND WARRANTS WERE
ISSUED, A COPY OF WHICH IS AN EXHIBIT TO THE REGISTRATION STATEMENT.
TERMS (WHETHER OR NOT CAPITALIZED) USED BUT NOT DEFINED IN THIS SECTION HAVE THE
MEANINGS GIVEN TO THEM IN THE RESPECTIVE WARRANTS OR DEBENTURES.
WARRANTS.
MAY 1999 WARRANTS.
In General.
We have warrants outstanding to purchase 20,000 common shares at an exercise
price of $4.00 per share. These warrants are exercisable on any date until May
12, 2000. In addition, we have warrants outstanding to purchase 20,000 common
shares at an exercise price of $7.00 per share. These warrants are exercisable
on any date until May 13, 2000. These warrants carry no other rights or
provisions.
JULY 1999 WARRANTS.
In General.
We currently have Warrants outstanding affording the holders thereof the
opportunity to purchase a total of 223,881 shares of our common stock. The
holders of the Warrants are entitled to purchase each share of common stock at a
price of $10.31 per common share (subject to adjustment as hereinafter provided)
at any time until 11:59 p.m. Central Time on July 16, 2002. Unless exercised,
the Warrants will automatically expire on July 16, 2002. The Warrant Agreement
may be amended, subject to certain exceptions, by the Company and the warrant
agent with the consent in writing of the holders of at least a majority of the
Warrants, provided that no such action may increase the Warrant Exercise Price
of the Warrants or decrease the number of shares or class of stock obtainable
upon exercise of any Warrants without the written consent of the holder of such
Warrant.
Adjustment of Warrant Exercise Price.
The Warrant Exercise Price and the number of shares of common stock issuable
upon exercise of the Warrant may be adjusted from time to time due to our
subsequent issuance of any shares of common stock not issued in connection with
an approved stock plan or upon exercise or conversion of the other Securities,
our issuance of options, our issuance of convertible securities, our declaration
of dividends or subscription rights, our subdivision or combination of common
stock, our distribution of our assets other than dividends, or other certain
events undertaken on our part including, without limitation, the granting of
stock appreciation rights, phantom stock rights or other rights with equity
features.
Immediately upon any adjustment of the Warrant Exercise Price, we are required
to give written notice thereof to the holders of these Warrants, setting forth
in reasonable detail, and certifying the calculation of such adjustment.
Further, we are required to give written notice to the holders of these Warrants
at least twenty (20) days prior to the date on which we close our books or take
a record (a) with respect to any dividend or distribution upon the common stock,
(b) with respect to any pro rata subscription offer to holders of common stock
or (c) for determining rights to vote with respect to any organic change,
dissolution or liquidation, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to such
holder.
<PAGE>
Failure to Issue.
If we shall fail for any reason or for no reason to issue to the holder, on a
timely basis as described in the Warrant, a certificate for the number of shares
of common stock to which the holder is entitled upon the holder's exercise of
this Warrant or a new Warrant for the number of shares of common stock to which
such holder is entitled pursuant to the Warrant, we shall pay the amount of
0.25% of the product of (a) the number of shares of common stock not issued to
the holder on a timely basis and to which the holder is entitled and/or, the
number of shares represented by the portion of this Warrant which is not being
converted, as the case may be, and (b) the average of the closing bid price of
our common stock for the three consecutive trading days immediately preceding
the last possible date which we could have issued such common stock or Warrant,
as the case may be, to the holder as additional damages in cash each day the
issuance of such common stock certificate or new Warrant, as the case may be, is
not timely effected.
Taxes.
We shall pay any and all taxes which may be payable with respect to the issuance
and delivery of Securities upon exercise of the Warrant.
JULY 1999 WARRANTS.
In General.
We have warrants outstanding to purchase 18,000 common shares at an exercise
price of $4.00 per share. These warrants are exercisable on any date until July
26, 2000. In addition, we have warrants outstanding to purchase 50,000 common
shares at an exercise price of $4.00 per share. These warrants are exercisable
on any date until July 29, 2000. These warrants carry no other rights or
provisions.
DEBENTURES.
In General.
We have $1,000,000 of 7.0% convertible debentures to Calp II LP, a Bermuda
corporation with a mailing address in Toronto, Ontario outstanding, which mature
on June 14, 2002. After the date of issuance and continuing until the maturity
date of the Debentures, the Debentures may be converted, at the option of the
holder, into shares of our common stock, $0.001 par value per share at a
conversion price equal to the lesser of $8.50 or 80.0% of the 5 day average
closing bid price as reported by Bloomberg, LP for the five consecutive trading
days prior to the conversion date. (see item 4 recent sales of unregistered
securities)
<PAGE>
We have received notice from Cranshire Capital, L.P., The DotCom Fund, LLC, S
Roberts Productions, LLC and Keyway Investments Limited, the subscribers to the
Company's Series A Convertible Preferred Stock that each seeks redemption of its
holdings, a total of 1,500 preferred shares issued to these investors. The
investors seek a total of $1,875,000 for the redemption of their Series A
Preferred Stock plus all accrued but unpaid dividends and all accrued but unpaid
liquidated damages. The redemption requirement applies unless the Company has
registered the Common Stock issuable upon conversion by the holders. The
Company is unable to register the underlying common stock at this timebecause it
cannot file a registration statement with the Securities and Exchange
Commission that complies with the accountants' report requirements. The Company
[was/is] required to cause a registration statement covering the shares to be
declared effective before November, 2000. There can be no assurances that
we will ever be in a position to file a registration statement that complies
with the applicable requirements.
Interest.
Interest will be paid on the Debentures at a rate of 7.0% per annum, at the time
of any conversion, with respect to the principal amount of the Debenture being
converted, until the principal amount is paid in full or has been converted
entirely. Interest may be paid in cash or shares of common stock, at our option.
Redemption.
With our twenty (20) days notice, we may redeem the Debentures in whole or in
part at any such time as the closing bid price of our common stock, as reported
by Bloomberg, LP, falls to $6.00 or less at a redemption price equal to the
principal amount of the Debenture being redeemed plus accrued interest on such
amount and the profit that the holder would have received upon conversions of
that portion of the Debenture being redeemed.
Marketability.
There is no public market for the Debentures and a limited public market for our
common stock. There can be no assurance that a public market will develop for
the Debentures or that the public market for the common stock will continue. The
terms of the Debentures were determined by negotiation between the parties bound
thereby and do not necessarily bear any direct relationship to our assets,
earnings, book value per share or other generally accepted criteria of value.
Our common stock is presently quoted on the OTCBB under the trading symbol
"TRIM."
Taxes and Fees.
We shall pay any and all documentary, stamp, or similar issue or transfer tax
due on the issue of shares of common stock upon conversion of the Debenture.
<PAGE>
Conversion of Debentures.
The holder of a Debenture will be entitled at any time prior to the close of
business on June 14, 2002, subject to prior redemption and conversion, to
convert the Debentures in denominations of $5,000, or multiples thereof, at the
principal amount thereof, into shares of our common stock at the conversion
price of the lesser of $8.50 or 80.0% of the 5-day average closing bid price as
reported by Bloomberg, LP, for the five consecutive trading days prior to the
conversion date. We will not issue fractional shares upon conversion of
Debentures. Instead, we will round up or down, as the case may be, to the
nearest whole share.
The number of shares of common stock purchasable upon the conversion of the
debenture is subject to adjustment in certain events, as set forth in the
Debentures. Such adjustments include the issuance of our stock as a dividend or
distribution on the common stock; subdivisions, combinations and
reclassifications of the common stock; the issuance to all holders of common
stock of certain rights (but only when the rights become exercisable) or
warrants entitling them to subscribe for our common stock at less than the
current market price; except for cash dividends permitted by the Indenture, the
distribution to all holders of our common stock of our assets or debt securities
or rights (other than those referred to above, but only when such additional
rights become exercisable) or warrants (other than those referred to above) to
purchase our assets, debt securities or other securities; the issuance, in
certain circumstances, of shares of our common stock for less than the then
current market price; and the issuance in certain circumstances of securities
which are convertible into or exchangeable for common stock (other than pursuant
to transactions described above) for a consideration per share less than the
then current market price of the common stock.
If we consolidate or merge with or into or transfer or lease all or
substantially all of our assets to any person, the person must assume in writing
our obligations under the Debenture.
Events of Default.
In the event that the common stock is not delivered per the written instruction
of the Debenture holder, within seven (7) business days of the conversion date,
we must pay the Debenture holder one percent (1.0%) in cash of the dollar value
of the Debentures being converted per each day after the seventh (7th) business
day following the conversion date that the common stock is not delivered. A
provision for liquidated damages is also included in the Debenture in order to
provide for damages that would be difficult to ascertain in the case of default
on our part.
Should the delivery of shares of common stock upon conversion be delayed by our
failure to have the common stock necessary for complete conversion available, we
have agreed to pay to all holders of the outstanding Debentures for conversion
default. The exact terms of such conversion default payment are included in the
Debenture.
An Event of Default occurs if we default in payment of any principal of the
Debenture when the same becomes due and payable at maturity, upon redemption or
otherwise; default for five (5) business days on a payment other than the
principal; fail to comply with the provisions of the Debenture for the period
and after the notice required by the Debenture; engage in certain events of
bankruptcy, insolvency or reorganization; or fail to maintain listing on any
recognized exchange including the OTCBB. We must cure such default within five
(5) business days of such notice as provided for in the Debenture, or the
Debenture holder will have the right to accelerate the payments due and declare
the remaining principal amount of the Debenture to be due and payable upon such
failure to cure.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE.
A significant portion of the shares of our common stock currently outstanding
are "restricted securities" within the meaning of Rule 144 promulgated under the
Securities Act, and may not be sold except in compliance with the registration
requirements of the Securities Act or an applicable exemption under the
Securities Act, including an exemption pursuant to Rule 144 thereunder.
In general, under Rule 144 as currently in effect, any of our affiliates and any
person (or persons whose sales are aggregated) who has beneficially owned his or
her restricted shares for at least one year, may be entitled to sell in the open
market within any three-month period a number of shares of common stock that
does not exceed the greater of (i) 1% of the then outstanding shares of our
common stock, or (ii) the average weekly trading volume in the common stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain limitations on manner of sale, notice requirements, and
availability of current public information about us. Non-affiliates who have
held their restricted shares for one year may be entitled to sell their shares
under Rule 144 without regard to any of the above limitations, provided they
have not been affiliates for the three months preceding such sale.
Further, Rule 144A as currently in effect, in general, permits unlimited resales
of certain restricted securities of any issuer provided that the purchaser is an
institution that owns and invests on a discretionary basis at least $100 million
in securities or is a registered broker-dealer that owns and invests $10 million
in securities. Rule 144A allows our existing stockholders to sell their shares
of common stock to such institutions and registered broker-dealers without
regard to any volume or other restrictions. Unlike under Rule 144, restricted
securities sold under Rule 144A to non-affiliates do not lose their status as
restricted securities.
TRANSFER AGENT.
Florida Atlantic Stock Transfer, located in Tamarac, Florida, has recently been
appointed the transfer agent of our common stock and preferred stock. Our prior
transfer agent was in Nevada, and we wanted to appoint a transfer agent in the
Eastern Standard Time Zone for convenience purposes.
PART II.
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information.
Our common stock is currently traded on the National Quotation Service Inc.'s
pink sheets under the symbol "TRIM." As of December 31, 1999, there were
4,521,682 common shares and 15,000 preferred shares outstanding. There is
limited trading activity in our securities, and there can be no assurance a
regular trading market for our common stock will be sustained.
The following table sets forth, for the period indicated, the bid price range of
our common stock. Please note that the prices reflected prior to August 12, 1998
reflect those of World Group and are not representative of the current business
activities reflected throughout this registration statement.
<PAGE>
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
1997
<S> <C> <C>
Quarter Ended March 31, 1997 $ 9.00 $ 3.37
Quarter Ended June 30, 1997 5.50 1.55
Quarter Ended September 30, 1997 3.75 1.50
Quarter Ended December 31, 1997 2.62 0.25
1998
Quarter Ended March 31, 1998 $ 12.50 $ 2.50
Quarter Ended June 30, 1998 5.31 3.10
Quarter Ended September 30, 1998 2.60 1.50
Quarter Ended December 31, 1998 5.30 1.20
1999
Quarter Ended March 31, 1999 $ 6.31 $ 2.75
Quarter Ended June 30, 1999 10.37 5.12
Quarter Ended September 30, 1999 9.19 7.06
Quarter Ended December 31, 1999 7.31 4.00
2000
Quarter Ended March 31, 2000 7.25 3.50
</TABLE>
Such market quotations reflect the high bid and low prices as reflected by the
OTC BB or by prices, without retail mark-up, markdown or commissions and may not
necessarily represent actual transactions. The following companies serve as
market makers for our securities: D.L. Cromwell, Wilson Davis and Knight
Securities. Aryeh Trading Inc. was market maker for our securities until
approximately November 1, 1999
Holders.
As of March 31, 2000 there were approximately 196 holders of record of our
common
stock.
Dividends.
We have not paid any cash dividends since our inception, and the Board of
Directors does not contemplate doing so in the near future. Dividends payments
on the common stock are restricted while any shares of preferred stock or
debentures remain outstanding. Loan agreements entered into in the future will
likely restrict the payment of dividends. Any decisions as to future payment of
dividends will also depend on our earnings and financial position and such other
factors as the Board of Directors deems relevant.
ITEM 2. LEGAL PROCEEDINGS
Product Liability.
In early 1999, our product, Revivarant, which contains the chemical GBL was
determined by the Food and Drug Administration to be unsafe for human
consumption. Pursuant to a voluntary arrangement with the Food and Drug
Administration, the product was recalled and removed from sale. Since the time
of the recall, we have been subject to five known lawsuits and three
notifications of possible claims relating to consumer use of this product. As of
the date of this report, only one lawsuit has claimed a specific dollar amount
of damages, specifically, $400,000 of compensatory damages and $350,000 of
punitive damages.
<PAGE>
At the time that the alleged causes of action arose, our third party
manufacturer had an insurance policy in the amount of $1,000,000 per occurrence
and up to $2,000,000 in the aggregate. We had received a certificate of
insurance from the insurer under such policy. We have since obtained a company
owned policy with an effective date of May 27, 1999. Our company owned product
liability insurance will not be available to cover these claims, should we be
found liable. The claims have been denied under our third party manufacturer's
policy. We intend to contest the claim denials. As such, if we are found
liable for these claims, our business, results of operations and financial
condition could be adversely affected, including that we may be unable to
continue in business. We intend to vigorously oppose any factual basis for
imposition of punitive damages based upon research and efforts made prior to the
distribution of the Revivarant product to determine its safety. We estimate
that the total damages sought in these cases may be, in the aggregate, millions
of dollars. Our management and outside legal counsel are unable to evaluate and
determine the likely outcome of each cause of action.
The Revivarant Suits.
An action was filed in the District Court of the Fourth District of Idaho on
June 7, 1999 (Case No. CV PI 9900250D; Jensen v. Body Life Sciences, Inc. &
Trimfast Group, Inc.). In this case, the Plaintiff has requested an unspecified
amount of damages "to be proven at the time of trial, including punitive
damages."
On June 14, 1999 an action was filed in the Circuit Court for Harrison County,
Mississippi (Sheri Peck v. Trimfast Group, Inc., Body Life Sciences et al.) Case
No.CV-PI_99-250D). In the Peck case, the Plaintiff has requested an unspecified
amount of "actual, compensatory and punitive damages."
On April 5, 1999, an action was filed in the Circuit Court of Tennessee for the
Thirteenth Judicial District at Memphis (Case No. 99-3121; Cliffton v. Body Life
Sciences, Inc.), seeking $400,000 in compensatory damages and $350,000 in
punitive damages. The consumer of the product alleges serious harm, including
seizures and loss of consciousness requiring hospitalization, from the
consumption of Revivarant.
On August 6, 1999, an action was filed (Shaw v. Body Life Sciences, Inc.
Trimfast Group, Inc., et al, State Court in Fulton County, State of Georgia,
Case No. 99-US156301-E) against Body Life Sciences by Bryan Shaw resulting from
the use of Revivarant. In this case the Plaintiff has requested an unspecified
amount of damages.
In October 22,1999, an action (Brooks vs. Body Life Sciences, Inc. Trimfast,
Inc. et al. U.S. District Court, Western District of the State of Tennessee Case
No. 00-2300-GA) was filed against us seeking an unspecified amount of damages
resulting from the use of Revivarant.
Since our company owned product liability insurance only became effective on May
27, 1999, we may have no insurance coverage, other than any coverage that we may
have under our third party manufacturer's policy, for the above mentioned claims
or for future claims relating to the sale of Revivarant. All claims that we
have submitted to our third party manufacturers insurance company have been
denied. Further, we have insufficient assets available to pay any such product
liability claims. Any judgment or claim in favor of the Claimant could have a
materially adverse effect on our results of operations, our financial condition
and liquidity, including that we may be unable to continue in business.
We are presently engaged in various legal actions as mentioned above, although
ultimate liability for such other actions cannot be determined at the present
time. As a result, our business could be adversely affected, including that we
may not be able to continue in business.
<PAGE>
Intellectual Property.
In June of 1999, we received a written communication from counsel for Slimfast
Foods Company including a demand to cease and desist use of the TrimFast name.
To date, no litigation has been filed in this matter, and management feels
confident that our registration of the name with the U.S. Patent and Trademark
office as well as the State of Florida will be sufficient to defend this usage.
We believe that there is no confusion between the TrimFast and Slimfast in the
marketplace, and the matter has been referred to outside counsel for an opinion
on this matter. Should Slimfast Foods Company file suit in this matter and a
judgment be rendered against us, it could have a material adverse effect on our
business and operations.
Breach of Contract.
Phillips Pharmatech Labs filed suit against us on July 12,1999 (County Court
Pinellas 99-004791; Phillips Pharmatech Labs v. Body Life Sciences, Inc.)
seeking damages in the amount of $14,000 in outstanding invoices for prior
products not delivered. We have not had the opportunity to evaluate the
likelihood of an unfavorable outcome in this suit, but plan to vigorously defend
this action. Should a judgment be granted against us, the amount should not
exceed the damages claimed.
On June 14, 1999, a suit was filed against us for breach of contract (Case No.
99-8611CC; L.N. Label Company, Inc. v. Trimfast, Inc.) claiming damages in
the amount of approximately $10,500.00 as a result of labels being produced for
us. We have not had the opportunity to evaluate the likelihood of an unfavorable
outcome in this suit, but plan to vigorously defend this action. Should a
judgment be granted against us, the amount should not exceed the damages
claimed.
On April 21, 1999, a suit was filed against us for breach of contract (Case No.
99-5117CC; Graffiti Graphics Corporation v. Trimfast, Inc.) claiming damages in
the amount of approximately $5,500.00. A judgment was awarded against us in the
amount of $6,442.95. Plaintiff has garnished our bank account for this amount
and a satisfaction of judgment should be forthcoming.
On June 1, 1999, a suit was filed against us for breach of contract (Supreme
Court of New Jersey Docket # BER-L-4756-99; Kingchem, Inc. v. TrimFast Group,
Inc.) claiming damages in the amount of approximately $35,000. Kingchem was one
of our suppliers, until a dispute arose about the quantity of supplies that had
been delivered to us. A default judgment has been entered against us in this
matter in the amount of $34,949.
On March 27 2000, a suit was filed against us for breach of contract (United
States District Court for the Southern District of New York Docket # 00CV229
Gainsford Ventures, Inc. v. TrimFast Group, Inc. Harry Kay, Arcobel Investment
and Interwest Transfer). The suit alleges, that 600,000 shares of the TrimFast
stock, which was previously owned by Kay, were improperly canceled by us while
still validly owned by the Plaintiff Gainsford Ventures, SA. Gainsford has
demanded the removal of the stop transfer order from their share certificate(s)
or in the alternative demanded that the company reissue new share certificates.
Gainsford has also alleged in its complaint a breach of fiduciary responsibility
on the part of our Company. In addition to the allegations made by Gainsford
Ventures, Royalsea International Incorporated, a Panamanian corporation has
alleged a breach of a consulting agreement with us and is seeking the issuance
of 270, 000 shares of the company's common stock. In addition to the remedies
set forth herein, the Plaintiffs seek $100,000 in compensatory damages and
$10,000,000 in punitive damages. We have not had the opportunity to evaluate
whether we will prevail in this suit, but plan to vigorously defend this action.
Should a judgment be granted against us, the amount should not exceed the
damages claimed. A damage award could have an adverse effect upon our
operations and financial condition.
<PAGE>
On February 8, 2000, a suit was filed against us in Pinellas County Circuit
Court (Case No. 00-802) Aryeh Trading Inc, Plaintiff vs. Trimfast Group, Inc.
Aryeh Trading has recently filed an action in Pinellas County Circuit Court
seeking specific performance pursuant to an agreement for us to purchase 155,000
shares of our common stock from Aryeh at $8.50 per share. The Plaintiff also
seeks to foreclose on our warehouse facility located at 2555 Black Burn St.
Clearwater Florida. We believe that the underlying agreement requires
arbitration of any disputes. As a result, management believes such action will
be dismissed or delayed pending a proper resolution of the issues concerning
enforceability of the arbitration provision. We also believe that the
instrument, which allegedly created the Plaintiff's interest in the real
property, is not in recordable form and cannot be the basis to file a mortgage
foreclosure action. We have filed a Motion to Dismiss with respect to both
causes of action. Discovery is beginning and no opinion is available as to the
likely result.
On February 24, 2000, a suit was filed against us in Hillsborough County Circuit
Court (Case No. 00-1444) Francois Goelo, Plaintiff vs. Michael Muzio, Trimfast
Group, Inc. Insidersteet.com Inc. Sierra Holdings Gruo, Inc. and Millennium
Health Products, Inc. This suit alleges seven counts against the defendants
including an action to enforce a contract, specific performance to deliver
stock previously paid for, treble damages pursuant to Civil Remedies for
Criminal Practices Act, Conversion, imposition of a constructive trust,
imposition of an action to impose an equitable lien on assets and an accounting.
This action arises from Plaintiff's allegation that plaintiff had purchased
approximately 22,000 shares of our common stock, but that Defendants failed to
deliver this stock and 100,000 shares of Sierra Holdings which were fully paid
for in the amount of $95,750($77,000 for the TrimFast shares). The Plaintiff
seeks delivery of the shares of common stock pursuant to the agreement and seeks
compensatory damages in excess of $500,000, costs of the action, and punitive
damages totaling $293,000 under Section 772.11 of the Florida Statutes. On May
3, 2000 plaintiff offered to settle this matter whereby our chief executive
officer would pay the plaintiff, Mr. Francois Goelo, the sum of $95,750 and he
would transfer 20,000 shares of our common stock to the plaintiff. In addition,
the settlement offer provides that the parties will enter into a joint
stipulation for dismissal of the action and execution of general releases. On
May 9, 2000 we and our chief executive officer notified counsel for the
plaintiff that we will accept the settlement offer.
Popov and McCullogh LLP v. Trimfast
On February 4, 2000, a suit was filed against us in Superior Court, San Diego
County California.(Case No. GIC-742910) Popov and McCullogh LLP, Plaintiff vs.
TrimFast Group, Inc., Defendant. The case alleges that during 1999 Popov and
McCullogh LLP performed services on behalf of TrimFast Group, Inc. and was never
compensated for those services. The Plaintiff seeks payment for services
rendered in the amount of $5,978.59. We have not had the opportunity to evaluate
the likelihood of an unfavorable outcome in this suit.
Other.
<PAGE>
In 1999, we initiated a legal proceeding against a former major customer in
April of 1999 (Case No. 99-003807; Body Life Sciences, Inc. v. Threshold
Technology, Inc.) to collect amounts receivable from such customer in an
approximate amount of $535,000.00 as of December 31, 1998. Such receivables
related to products sold to that customer during 1998, a portion of which were
voluntarily recalled by us in January 1999, but never returned by the customer.
The amounts recalled included 27 boxes of (12 count) 32oz. Revivarant, 1 Box of
(9 count) 32oz. Revivarant, 3 Bottles of 4oz. Revivarant, 29 Boxes of (12 count)
200g Revivarant and some individual products from these lines. These products
were voluntarily recalled because they contained GBL, which was found by the FDA
to cause significant and potentially dangerous sedating effects. These products
have no commercial value as they were recalled.
We have had difficulty ascertaining the domicile of corporation, and are in the
process of attempting to confirm that we are making a claim against the
appropriate defendant. Once this is ascertained, we will proceed with this
action.
Bankruptcy.
We incorporated HLHK International Systems Pte Ltd., as a wholly owned
subsidiary in the State of Nevada on July 8, 1996 to conduct telecommunications
business in Malaysia and Singapore. This entity filed for bankruptcy protection
in Singapore, and pursuant to The Companies Act Cap 50, the affairs of HLHK
Interactive were wound up by High Court Order No. 84 of 1988 on May 22, 1998. We
have no operations through this subsidiary and do not plan to have operations
through this subsidiary in the future.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The accounting firm of Schvaneveldt and Company previously audited our financial
statements. As a result of the stock exchange agreement entered into between the
Shareholders of Trimfast, Inc. and us on August 12, 1998, there was a change in
control of the Company and a relocation of our principal place of business from
Las Vegas, Nevada to Tampa, Florida. As a result of this move, the Board of
Directors felt that we would be better served by retaining an accounting firm
located in the State of Florida. As a result, we engaged the firm of Weinberg &
Co. to conduct our latest audit.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On August 12, 1998, while we were still known as HLHK World Group, Inc., and
while we had a total of 817,749 shares of common stock issued and outstanding,
we acquired 100% of the issued and outstanding common stock of Trimfast, Inc., a
Florida corporation, in exchange for 1,370,049 shares of our stock. Under this
exchange every 3 of our shares were exchanged for every 1 of Trimfast, Inc.'s
shares. Concurrent with the acquisition, 5,500 additional shares of common stock
were issued to an attorney and an employee.
On August 12, 1998, concurrent with our acquisition of Trimfast, Inc., Florida,
we issued 75,000 shares of our common stock to our principal stockholder, in
exchange for $491,198 which we owed to him.
In December 1998, our principal stockholder and president, Mike Muzio, exchanged
$126,644 of loans due to his wholly owned affiliates for 70,358 shares of our
common stock valued at a market price of $1.80 per share based upon the trading
price of our common stock at the exchange date.
<PAGE>
During 1999, we issued 44,500 shares of our common stock to unrelated parties in
exchange for loans payable of $70,125 plus accred interest resulting in a loss
on extinguishment of debt of $150,979.
During 1999, we issued 7,321 shares of common stock to an unrelated party in
exchange for the remaining unpaid balance of a loan payable plus accred interest
of a total of $30,882.
During 1999, one of our principal stockholder returned 50,000 shares of our
common stock to us to settle $400,000 of liabilities owed to us.
During 1999, we issued 655,005 shares of our common stock to unrelated parties
for cash consideration of $635,750. Included in these shares are the 155,000
restricted shares of common stock issued to Aryeh Trading for $4.00 each. Under
agreements dated October 22, 1999 and November 10, 1999 the Company is obligated
to repurchase these shares for $8.25 or at a higher amount pursuant to an
escalation clause where the price increases $0.25 per share per month if not
repurchased by a set date. To date none of the 155,000 shares have been
repurchased. When repurchase, we will account for these shares as treasury
stock.
During 1999, we issued 918,300 shares of our common stock to consultants and
other professionals, in exchange for consulting and other professional services
during 1999 and payment of software, all of which was valued at $4,745,061
During 1999, we issued 104,900 shares of our common stock to employees for
$500,180 representing bonuses to these employees. The shares of common stock
were valued for accounting purposes on the trading price of the grant date of
the commons stock.
During 1999, we issued 100,000 shares of common stock valued at $4.75 per share
to an escrow account as a $475,000 security deposit for an inventory line of
credit.
During 2000, we issued 570,000 shares of common stock valued at $4.80 per share
for the acquisition of Nutrition Clubstores, Inc.
During 2000, we issued 10,000 shares of common stock valued at $4.88 per share
for legal services rendered in connection with various SEC filings.
The above issuances of our common stock were made by us in reliance upon the
exemption from registration contained in Section 4(2) of the Act. We believed
Section 4(2) was available because there was no general solicitation or
advertising used in connection with the offering and the transaction did not
involve a public offering.
We conducted an offering pursuant to Rule 504 of Regulation D of the Securities
Act of 1933, as amended, raising total cash proceeds of $934,500 and resulting
in the issuance of 403,000 shares of common stock. At the time of the offering,
we were not subject to the reporting requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). We were not a
development stage company at the time of the offering and had not raised funds
in the twelve months prior to the offering in reliance on Section 3(b) of the
Act. A Form D was filed in connection with the offering. These shares were
purchased from February 9, 1999 through April 5, 1999. Each shareholder in this
offering received subscription documents stating that the securities had not
been registered under the Act, and subsequently made representations that they
were purchasing for investment purposes only and not with a view toward
distribution of the securities.
<PAGE>
In May of 1999, we issued warrants for the purchase of 40,000 shares of our
common stock in exchange for placement services. Of these, 20,000 were issued to
Cranshire Capital and are exercisable on any date until May 12, 2000 at a price
of $4.00 per share. The remaining 20,000 were issued to Namex and are
exercisable on any date until May 13, 2000 at a price of $7.00 per share. These
warrants were issued without registration in reliance on the exemption from
registration provided in Section 4(2) of the Securities Act.
In June 1999, we issued a total of $1,000,000 in convertible debentures to Calp
II LP, a Bermuda corporation with a mailing address in Toronto, Ontario, out of
a total offering of $3 million which mature on June 14, 2002. After the date of
issuance and continuing until the maturity date of the Debentures, the
Debentures may be converted, at the option of the holder, into shares of our
common stock, $0.001 par value per share at a conversion price equal to the
lesser of $8.50 or 80.0% of the 5 day average closing bid price as reported by
Bloomberg, LP for the five consecutive trading days prior to the conversion
date. The Company issued these debentures in reliance upon the exemption from
registration contained in Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. The issuance of the convertible debenture was an
isolated issuance of securities to a non-U.S. entity, which is also an
accredited investor. We believed section 4(2) was available because there was no
general solicitation or advertising used in connection with the offering and the
transaction did not involve a public offering.
In July 1999, we issued 15,000 Class A convertible preferred shares and 223,881
warrants. Cranshire Capital purchased 5,000 preferred shares and 74,627
warrants for consideration of $300,010. Dotcom Fund purchased 3,000 preferred
shares and 44,776 warrants for consideration of $500,010. Keyway Investments
purchased 5,000 preferred shares and 74,627 warrants for $500,010. Robert
Productions, Inc. purchased 2,000 preferred shares and 29,851 warrants for
consideration of $200,010. The debentures contain a beneficial conversion
feature whereby the stock is convertible any time after the issuance date at the
lesser of (a) $8.5938 or (b) 80% of the market price of the common stock as
defined in the Agreement. The preferred stock entitled the holder to receive on
each July 1, and January 1, commencing January 1, 2000 cumulative dividends at
8% per annum computed on the basis of $100 per preferred stock. The warrants
are exercisable at any time until July 16, 2002 at an exercise price of $10.31
per share and vest immediately. The Company relied upon the exemption from
registration provided in Section 4(2) of the Act. We believed Section 4(2) was
available for the issuance of the preferred shares and warrants because there
was no general solicitation or advertising used in connection with the offering
and the transaction did not involve a public offering.
We have received notice from Cranshire Capital, L.P., The DotCom Fund, LLC, S
Roberts Productions, LLC and Keyway Investments Limited, the subscribers to the
Company's Series A Convertible Preferred Stock that each seeks redemption of its
holdings, a total of 1,500 preferred shares issued to these investors. The
investors seek a total of $1,875,000 for the redemption of their Series A
Preferred Stock plus all accrued but unpaid dividends and all accrued but unpaid
liquidated damages. The redemption requirement applies unless the Company has
registered the Common Stock issuable upon conversion by the holders. The
Company is unable to register the underlying common stock at this timebecause it
cannot file a registration statement with the Securities and Exchange Commission
that complies with the accountants' report requirements. The Company [was/is]
required to cause a registration statement covering the shares to be declared
effective before November, 2000. There can be no assurances that we will ever
be in a position to file a registration statement that complies with the
applicable requirements.
On April 25, 2000 the Company entered into a convertible debenture agreement
with Gibralt U.S., Inc. a Colorado Corporation and FAC Enterprises, Inc. a
Pennsylvania Corporation for a total of $3,000,000 due July 13, 2001 with
interest at 12%. The proceeds will be used to open additional Nutrition
Clubstores and produce and air the commercial spots for our WCW Ultra Energy
Bars. On April 28, 2000 the first $1,000,000 was wired to our account.
<PAGE>
In July of 1999, we issued warrants to purchase 68,000 shares of our common
stock in exchange for consulting services. Of these, 18,000 were issued to
Francois Goelo and are exercisable on any date until July 26, 2000 at a price of
$4.00 per share. The remaining 50,000 were issued to Sal Russo and are
exercisable on any date until July 29, 2000 at a price of $4.00 per share. These
warrants were issued without Registration in reliance on the exemption from
registration provided in Section 4(2) of the Act. We believed section 4(2) was
available because there was no general solicitation or advertising used in
connection with the offering and the transaction did not involve a public
offering.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.7502 of the NRS provides that Nevada corporations may limit, through
indemnification, the personal liability of their directors or officers in
actions, claims or proceedings brought against such person by reason of that
person's current or former status as an officer or director of the corporation.
Indemnification of directors or officers is available if the person acted in
good faith and in a manner the person reasonably believed was, at least, not
opposed to the best interests of the corporation. In the event of a criminal
action or proceeding, indemnification is not available if the person had
reasonable cause to believe their action was unlawful.
Further, in an action brought by the corporation or in the right of the
corporation, if the person, after exhaustion of all appeals, is found to be
liable to the corporation, or if the person makes payment to the corporation in
settlement of the action, indemnification is available only to the extent a
court of competent jurisdiction determines the person is fairly and reasonably
entitled to indemnification. Such discretionary indemnification is available
only as authorized on a case-by-case basis by: (1) the stockholders; (2) a
majority of a quorum of the board of directors consisting of members of the
board who were not parties to the action, suit or proceeding; (3) if a majority
of a quorum of the Board of Directors consisting of members of the Board who
were not parties to the action, suit or proceeding so orders, by independent
legal counsel in a written opinion; or (4) if a quorum of the Board of Directors
consisting of members of the Board who were not parties to the action cannot be
obtained, by independent legal counsel in a written opinion.
To the extent that a director or officer of a corporation is successful in
defending against an action, suit or proceeding brought against that person as a
result of their current or former status as an officer or director, the
corporation must indemnify the person against all expenses actually and
reasonably incurred by the person in connection with their defense. Nevada law
also allows Nevada corporations to advance expenses of officers and directors
incurred in defending a civil or criminal action as they are incurred, upon
receipt of an undertaking by or on behalf of the director or officer to repay
such expenses if it is ultimately determined by a court of competent
jurisdiction that such officer or director is not entitled to be indemnified by
the corporation because such officer or director did not act in good faith and
in a manner reasonably believed to be in or not opposed to the best interests of
the corporation.
<PAGE>
Section 78.751 of the NRS provides that any indemnification provided for by NRS
78.7502 (by court order or otherwise) shall not be deemed exclusive of any other
rights to which the indemnified party may be entitled and that the scope of
indemnification shall continue as to directors or officers who have ceased to
hold such positions and to their heirs, executors and administrators.
Section 78.752 of the NRS allows corporations to provide insurance, or other
financial arrangements such as a program of self-insurance, for their directors
or officers. Such insurance may provide coverage for any liability asserted
against the person and liability and expenses incurred by the person in their
capacity as a director or officer or arising out of their status as such,
whether or not the corporation has the authority to indemnify the person against
such liability and expenses. However, no financial arrangement made under
Section 78.752 may provide protection for a person adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
for intentional misconduct, fraud or a knowing violation of law, except with
respect to the advancement of expenses or indemnification ordered by a court.
Our By-laws provide for the indemnification of its directors and officers to the
maximum extent provided by law. It is the position of the Securities and
Exchange Commission and certain state securities administrators that any attempt
to limit the liability of persons controlling an issuer under the federal
securities laws or state securities laws is contrary to public policy and
therefore unenforceable.
Our By-laws provide for the indemnification of its directors and officers to the
maximum extent provided by law. It is the position of the Securities and
Exchange Commission and certain state securities administrators that any attempt
to limit the liability of persons controlling an issuer under the federal
securities laws or state securities laws is contrary to public policy and
therefore unenforceable.
EXHIBIT INDEX
--------------------------------------------------------------------------------
Exhibit # Description Page Number
--------------------------------------------------------------------------------
2.1 Kendrex and HLHK Merger (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 2.1)
--------------------------------------------------------------------------------
2.2 Trimfast, Inc. Acquisition (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 2.2)
--------------------------------------------------------------------------------
2.3 Rescission of IMMMU and IMMCEL Acquisitions N/A
(Incorporated by reference as filed in Form
10-SB/A filed on 12/23/99 as Exhibit 2.3)
--------------------------------------------------------------------------------
3.1 Articles of Incorporation (Incorporated by N/A
reference as filed in Form 10-SB filed on
7/12/99 as Exhibit 3.1)
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
3.2 Bylaws (Incorporated by reference as filed in N/A
Form 10-SB filed on 7/12/99 as Exhibit 3.2)
--------------------------------------------------------------------------------
4.1 Specimen Share Certificate (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 4.1)
--------------------------------------------------------------------------------
4.2 Debenture Agreement (Incorporated by reference N/A
as filed in Form 10-SB filed on 7/12/99 as
Exhibit 4)
--------------------------------------------------------------------------------
4.3 Warrant Agreement (Incorporated by reference N/A
as filed in Form 10-SB/A filed on 12/23/99 as
Exhibit 4.3)
--------------------------------------------------------------------------------
4.4 Preferred Share Agreement (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 4.4)
--------------------------------------------------------------------------------
4.5 Series A Certificate of Designations, N/A
Preferences and Rights
--------------------------------------------------------------------------------
10.1 Lease Option Agreement (Incorporated by N/A
reference as filed in Form 10-SB filed on
7/12/99 as Exhibit 10)
--------------------------------------------------------------------------------
10.2 WCW Agreement E-60
--------------------------------------------------------------------------------
10.3 Venture Direct Worldwide Agreement N/A
(Incorporated by reference as filed in Form
10-SB/A filed on 12/23/99 as Exhibit 10.3)
--------------------------------------------------------------------------------
10.4 Distribution Agreement (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 10.4)
--------------------------------------------------------------------------------
10.5 Convertible Debenture Subscription Agreement E-74
--------------------------------------------------------------------------------
10.6 Aryeh Trading Agreement dated March 18, 1999 E-91
--------------------------------------------------------------------------------
10.7 Aryeh Trading Agreement dated March 30, 1999 E-93
--------------------------------------------------------------------------------
10.8 Aryeh Trading Agreement dated October 22, 1999 E-96
--------------------------------------------------------------------------------
10.9 Aryeh Trading Agreement dated November 10, 1999 E-97
--------------------------------------------------------------------------------
10.10 Stock Exchange Agreement- Nutrition Clubstores
(Incorporated by reference as filed in Form 8-K N/A
filed on 5/12/00)
--------------------------------------------------------------------------------
21 Subsidiaries of Registrant (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 21)
--------------------------------------------------------------------------------
27 Financial Data Schedule E-98
--------------------------------------------------------------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION PAGE
----
Consolidated Balance Sheet as of
September 30, 1999 (Unaudited) and
December 31, 1998 3
Consolidated Statements of Operations
for the Twelve Months Ended December 31, 1998
and for the Three and Nine Month Periods
Ended September 30, 1999 (Unaudited) 4
Consolidated Statement of Cash Flows
for the Year ended December 31, 1998
and for the Nine Months Ended
September 30, 1999 (Unaudited) 5
Consolidated Statement of Changes in Stockholders'
Equity for the one year ended December 31, 1998 and
for the Nine Months Ended September 30, 1999 (Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) as of September 30, 1999 7-15
Management Discussion and Analysis of Financial
Condition and Results of Operations 16-17
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998 AND SEPTEMBER 30, 1999
ASSETS
------
CURRENT ASSETS
SEPTEMBER 30, 1999
DECEMBER 31, 1998 (UNAUDITED)
------------------- --------------------
<S> <C> <C>
Cash 105,641 $ 59,092
Short-term investments 15,297 $ 41,220
Accounts Receivable- Trade 357,889 318,407
Accounts Receivable- Other 11,745 512,278
Inventory 188,737 377,270
------------------- --------------------
Total Current Assets 679,309 1,308,267
PROPERTY AND EQUIPMENT - NET 33,403 1,459,270
OTHER ASSETS
Prepaid expenses 0 50,000
Rent deposit 10,619 15,000
Cash surrender value of life insurance 8,107 12,646
Software development 0 228,705
Goodwill - Net 0 54,708
------------------- --------------------
Total Other Assets 18,726 361,060
------------------- --------------------
TOTAL ASSETS $ 731,438 $ 3,128,596
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 625,767 $ 926,612
Notes and loans payable 72,100 33,881
Income taxes payable 20,600 20,600
Convertible debentures 0 1,000,000
------------------- --------------------
Total Current Liabilities 718,467 1,981,093
------------------- --------------------
TOTAL LIABILITIES 718,467 1,981,093
------------------- --------------------
STOCKHOLDERS' EQUITY
Preferred Stock, Class A, $0.01 par value; 20,000,000
shares authorized; 0 and 15,000 shares issued and outstanding
as of December 31, 1998 and September 30, 1999 respectively 0 150
Preferred Stock, Class B, $0.01 par value;
20,000,000 shares authorized; none issued and outstanding 0 0
Common Stock, $0.001 par value; 100,000,000 shares
authorized, 2,260,775 and 4,540,978 shares issued and outstanding
as of December 31, 1998 and September 30, 1999 respectively 2,260 4,541
Common Stock to be issued (77,881 shares) as of December 31, 1998
and (8,478 shares) as of September 30, 1999 78 8
Additional Paid-in capital 925,987 6,936,610
Accumulated deficit (891,820) (4,370,622)
Less cost of treasury stock (5,500 as of December 31, 1998
and 32,500 as of September 30, 1999) (23,534) (139,547)
Less common stock shares advanced 0 (925,312)
Less common stock subscriptions receivable 0 (358,325)
------------------- --------------------
Total Stockholders' Equity 12,971 1,147,503
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 731,438 $ 3,128,596
=================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE ONE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
FOR THE THREE FOR THE NINE
FOR THE ONE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
DECEMBER 31, 1998 (UNAUDITED) (UNAUDITED)
------------------ ------------------- -------------------
<S> <C> <C> <C>
NET SALES 1,925,332 207,201 581,337
COST OF SALES 567,472 89,925 408,495
------------------ ------------------- -------------------
GROSS PROFIT 1,357,860 117,276 172,842
------------------ ------------------- -------------------
OPERATING EXPENSES
Salaries and other compensation 983,773 208,215 505,372
Commissions 41,700 14,302 18,117
Depreciation and amortization 10,498 54,202 54,202
Professional fees 49,511 505,576 1,467,900
Bad debt expense 503,839 102,723 102,723
Selling, general and administrative expenses 423,289 249,593 623,451
Travel and entertainment 64,187 54,240 132,249
------------------ ------------------- -------------------
Total Operating Expenses 2,076,797 1,188,851 2,904,014
------------------ ------------------- -------------------
INCOME FROM OPERATIONS (718,937) (1,071,575) (2,731,172)
------------------ ------------------- -------------------
OTHER INCOME (EXPENSE)
Realized gain on sale of trading securities - net 1,905 499 499
Unrealized gain on sale of trading securities - net 922 0 (18,549)
Interest expense (3,264) (354,569) (354,569)
------------------ ------------------- -------------------
Total Other Income (Expense) (437) (354,070) (372,619)
------------------ ------------------- -------------------
LOSS BEFORE INCOME TAXES (719,374) (1,425,645) (3,103,791)
FEDERAL AND STATE INCOME TAXES 20,600 0 0
------------------ ------------------- -------------------
NET INCOME/ (LOSS) (739,974) (1,425,645) (3,103,791)
================== =================== ===================
Dividend on Preferred Stock (375,011)
------------------ ------------------- -------------------
NET INCOME/ (LOSS) APPLICABLE TO COMMON STOCK (739,974) (1,425,645) (3,478,802)
================== =================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 1,710,860 4,574,887 4,028,972
NET INCOME (LOSS) PER COMMON SHARE-BASIC AND DILUTED (0.43) (0.31) (0.87)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ONE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
FOR THE NINE MONTHS
FOR THE ONE YEAR ENDED
ENDED SEPTEMBER 30, 1999
DECEMBER 31, 1998 (UNAUDITED)
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (739,974) (3,103,791)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization 10,498 54,202
Bad debt expense 503,839 6,498
Unrealized gain on short term investments (922) (18,459)
Stock based compensation 762,000 0
Issuance of common stock for professional services 0 1,238,505
Changes in operating assets and liabilities
(Increase) decrease in :
Accounts receivable (856,839) (472,796)
Prepaid expenses 0 (50,000)
Inventory (165,038) (188,533)
Increase (decrease) in :
Accounts payable and other liabilities 496,181 300,845
Income taxes payable 20,600 0
-------------------- -------------------
Total adjustments 770,319 870,262
-------------------- -------------------
Net cash (used in) provided by operating activities 30,345 (2,233,529)
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in :
Short term investments (14,375) (25,923)
Due from employees (5,800) 5,800
Property and equipment (37,821) (1,764,682)
Due from affiliate (5,945) 5,945
Rent deposit (8,119) (4,381)
Cash surrender value of life insurance (8,107) (4,529)
-------------------- -------------------
Net cash (used in) provided by investing activities (80,167) (1,787,770)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,975 961,781
Purchase of treasury stock (23,534) (116,013)
Proceeds from issuance of common stock 177,800 1,628,942
Proceeds from issuance of preferred stock 0 1,500,040
Due to stockholder/ officer (18,436) 0
-------------------- -------------------
Net cash provided by (used in) financing activities 137,805 3,974,750
-------------------- -------------------
CHANGE IN CASH AND CASH EQUIVALENTS 87,983 (46,549)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 17,658 105,641
-------------------- -------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 105,641 59,092
==================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC.
INTERIM CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE ONE YEAR ENDED DECEMBER 31, 1998 (AUDITED)
AND THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED)
Common Stock
and Common Additional Preferred
Stock to be Issued Paid-In Stock Issued Accumulated
SHARES Amount Capital SHARES Amount Deficit
---------- -------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 1,286,625 $ 1,287 (287) - - ($151,846)
Issuance of common stock for cash 63,924 64 187,736 - - -
Issuance of common stock in exchange to related
party in exchange for $40,000 debt 19,500 19 39,981 - - -
HLHK equity at August 12, 1998 817,749 818 441,083 - - (1,122,218)
Reclassification pursuant to recapitalization - - (1,122,218) - - 1,122,218
Common stock issued to employees 500 - - - - -
Common stock issued to attorney for services 5,000 5 (5) - - -
Common stock issued in exchange for debt of HLHK
principal stockholder 75,000 75 491,123 - - -
Issuance of common stock in exchange for
stockholder loans 70,358 70 126,574 - - -
Compensation to principal stockholder - - 762,000 - - -
Purchase of treasury stock at cost - - - - - -
Net income 1998 - - - - - (739,974)
---------- -------- ------------ ------ ------- ------------
Balance, December 31, 1998 2,338,656 $ 2,338 $ 925,987 - - ($891,820)
---------- -------- ------------ ------ ------- ------------
Equity financing - issuance of common stock for cash 1,058,005 1,058 1,659,817 - - -
Issuance of common stock in exchange for
consulting and other professional services 769,459 770 1,237,735 - - -
Issuance of common stock acquisition of Immmu and
Imcel. To be returned per rescission agreement. 235,000 235 925,077 - - -
Issuance of common stock to employees 150,358 150 95,247 - - -
Issuance of convertible debentures - - 250,000 - - -
Return of common stock in repayment of debt (50,000) (50) (399,950) - - -
Issuance of common stock held in escrow to
secure loan 23,000 23 199,790 - - -
Issuance of common stock for debt repayment 24,500 25 168,006 - - -
Repurchase of treasury stock at cost - - - - - -
Issuance of Preferred Stock - - 1,874,901 15,000 150 (375,011)
Net Loss, year to date as of September 30, 1999 - - - - - (3,103,791)
---------- -------- ------------ ------ ------- ------------
Balance, September 30, 1999 4,540,978 $ 4,549 $ 6,936,610 15,000 $ 150 ($4,370,622)
========== ======== ============ ====== ======= ============
Subscriptions Shares Treasury
Receivable Advanced Stock Total
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 - - - ($150,846)
Issuance of common stock for cash - - - $ 187,800
Issuance of common stock in exchange to related
party in exchange for $40,000 debt - - - $ 40,000
HLHK equity at August 12, 1998 - - - ($680,317)
Reclassification pursuant to recapitalization - - - $ 0
Common stock issued to employees - - - $ 0
Common stock issued to attorney for services - - - $ 0
Common stock issued in exchange for debt of HLHK
principal stockholder - - - $ 491,198
Issuance of common stock in exchange for
stockholder loans - - - $ 126,644
Compensation to principal stockholder - - - $ 762,000
Purchase of treasury stock at cost - - (23,534) ($23,534)
Net income 1998 - - - ($739,974)
----------- ---------- ---------- -------------
Balance, December 31, 1998 - - ($23,534) $ 12,971
----------- ---------- ---------- -------------
Equity financing - issuance of common stock for cash - - - $ 1,660,875
Issuance of common stock in exchange for
consulting and other professional services (358,325) - - $ 880,180
Issuance of common stock acquisition of Immmu and
Imcel. To be returned per rescission agreement. - (925,312) - $ 0
Issuance of common stock to employees - - - $ 95,397
Issuance of convertible debentures - - - $ 250,000
Return of common stock in repayment of debt - - - ($400,000)
Issuance of common stock held in escrow to
secure loan - - - $ 199,813
Issuance of common stock for debt repayment - - - $ 168,031
Repurchase of treasury stock at cost - - (116,013) ($116,013)
Issuance of Preferred Stock - - - $ 1,500,040
Net Loss, year to date as of September 30, 1999 - - - ($3,103,791)
----------- ---------- ---------- -------------
Balance, September 30, 1999 ($358,325) ($925,312) ($139,547) $ 1,147,503
=========== ========== ========== =============
</TABLE>
<PAGE>
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
the rules and regulations of the Securities and Exchange Commission for
interim financial information. Accordingly, they do not include all the
information and footnotes necessary for a comprehensive presentation of
financial position and results of operation.
It is management's opinion, however that all material adjustments
(consisting of normal recurring adjustments) have been made which are
necessary for a fair financial statements presentation. The results for the
interim period are not necessarily indicative of the results to be expected
for the year.
For further information, refer to the consolidated financial statements and
footnotes included in the company's Form 10-SB, as amended for the year
ended December 31, 1998.
The financial statements are presented without comparable 1998 quarterly
information. The Company was not publicly traded in 1998 and systems,
though adequate to address annual audit needs, were not in place to allow
for extracting reliable quarterly information.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) Revenue Recognition
--------------------
Nutrition Cafe charges a monthly membership fee for access to order
products at discounted prices. Memberships are sold on a pay-as-you-go
basis in one month increments. Members choose whether or not to continue
their membership each month; no long term agreements are required. The
membership fees are recognized as revenue in the month they are paid.
Effective January, 2000, the monthly membership fees have been eliminated.
Management believes the increased revenues from allowing everyone who
visits the site to place orders will offset the decrease in revenue from
membership fees. Revenue for products ordered is recognized and an accrual
for returns is posted when the product is shipped. To date returns of
products sold has been immaterial. We believe the returns will be
immaterial. Therefore no accrual for estimated returns has been made
for these financial statements.
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
Sales of our products offered through TrimFast, Inc. (weight loss bars, WCW
bars, and Max Impact supplements) are sold utilizing food brokers,
distributors
<PAGE>
and directly to vendors. We use brokers and distributors to identify new
vendors, and all sales are made directly to the vendor with the distributor
or broker informed of any sales through their efforts. Because of this, we
ship to, invoice and receive payments directly from the end user; and our
policy is to record any returns against current sales. Due to the nature of
the products offered, and customers ordering product conservatively, we
have experienced no material product returns, and the estimated returns are
immaterial.
Revenue for the Cooler Group is earned through rental of water coolers and
delivery of water. A contract is signed for cooler rental and/or water
delivery service, and is invoiced monthly. Revenue is recognized for cooler
rental each month when invoiced and for water service based on usage when
delivered.
(B) Accounts Receivable - Other
------------------------------
Components of A/R - Other is as follows:
Millennium - related party $259,558
Cash from rescission of IMMMU purchase 50,000
Stock held in escrow securing loan 199,790
------------------------------------------- ---------
Other 2,930
---------
$512,278
---------
(B) Accounts Receivable - Other (Cont'd)
----------------------------------------
On May 26, 1999 the company placed in an escrow account 23,000 shares of
its' common stock valued at $199,790 to secure the loan to acquire Ice Cold
Water, Inc. (See note 7B) The shares will be returned to authorized when
the loan is satisfied.
The receivable from Millennium represents cash advances to an affiliated
company during the year. The balance at December 31, 1999 is $156,212.
(C) Inventory
---------
Components of inventory are as follows:
Finished Goods $ 320,296
---------------
Product Components 56,974
----------
Total $ 377,270
----------
The Company performs periodic inspections of inventory to identify expired
or obsolete items. Any merchandise, which has past its expiration date, or
has been deemed obsolete by management, is removed from inventory and
written off.
<PAGE>
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION -
(CONT'D)
(D) Advertising Costs
------------------
Advertising costs are expensed as incurred unless a direct measurable
response exists. All advertising related costs have been recognized as
expense in these Interim Financial Statements.
(E) Software Development
---------------------
The Company has contracted with an outside software development firm to
develop software that runs the website for Nutrition Cafe. All costs
associated with the development of the software have been capitalized while
any costs associated with content have been expensed.
NOTE 3 - ACQUISITION OF BUILDING
On July 30, 1999 the Company exercised its option to purchase the facility
located at 2555 Blackburn Street, Clearwater, FL for $1,200,000. The
property is used as the sales, storage and distribution facility for
Nutrition Cafe, Inc. The funds were raised through the sale of 15,000
shares of Class A Preferred Stock and 223,681 warrants to purchase common
stock. (See Note 6)
NOTE 4 - WCW LICENSE AGREEMENT
On June 2, 1999 the Company signed a license agreement with World
Championship Wrestling, Inc (WCW) to utilize certain names, likeness,
characters, trademarks and/or copyrights in connection with the
manufacture, distribution, advertising, promotion and sale of certain
articles of merchandise.
The license extends through December 2002. The agreement includes a
non-refundable advance of $50,000 which, has been capitalized as prepaid
expense and
will be amortized over the life of the agreement. Terms of the agreement
include a royalty payment of 6% of net sales with the following guarantees:
$100,000 Due No Later Than 12-31-99
$100,000 Due No Later Than 6-30-00
$100,000 Due No Later Than 9-30-00
$100,000 Due No Later Than 12-31-00
$100,000 Due No Later Than 6-30-01
<PAGE>
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
NOTE 5 - CONVERTIBLE DEBENTURE
On June 14, 1999 the Company issued $1,000,000 in Convertible Debentures in
exchange for $1,000,000 in cash. The agreement, which contains a beneficial
conversion feature, stipulates that the debentures may be converted as of
the closing date at the lower of $8.50 or 80% of the fair market value of
the common stock on the conversion date resulting in the recognition of
$250,000 interest expense at closing.
The Company accounts for the debentures in accordance with EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios." Accordingly, the Company has
allocated a portion of the proceeds to additional paid-in capital equal to
the intrinsic value of the features as computed on the commitment date,
resulting in recognition on the closing date of $250,000 interest expense.
NOTE 6 - EQUITY TRANSACTIONS
SALE OF PREFERRED STOCK AND WARRANTS
-----------------------------------------
On July 13, 1999 we issued 155,000 restricted shares of our common stock for
$4.00 each to Aryeh Trading. Under this agreement, the Company is obligated
repurchase these shares for $8.25 each with a $0.25 per share per month increase
in price pursuant to an escalation clause in the agreement. These shares were
issued pursuant to Section 4(2) of the Securities Act of 1933. We believed
section 4(2) was available because there was no general solicitation or
advertising used in connection with the offering and the transaction did not
involve a public offering.
The following shares were issued in consideration other than cash:
Pursuant to various agreements we issued the following shares of our restricted
common stock:
On July 7, 1999, we issued 10,000 shares of our common stock in exchange for
Legal Services rendered for the Company. On July 19, 1999, we issued 30,000
shares of our common stock for consulting services rendered to the Company. In
July 1999 we received 50,000 shares of our common stock from a principal
stockholder in exchange for $400,000 owed to the company. These shares were
issued pursuant to Section 4(2) of the Securities Act of 1933. We believed
section 4(2) was available because there was no general solicitation or
advertising used in connection with the offering and the transaction did not
involve a public offering.
On August 3, 1999, we issued 10,000 share of our common stock in exchange for
Business Consulting Services and 10,000 shares of our common stock in
consideration for Legal Services rendered to the Company. These shares were
issued pursuant to Section 4(2) of the Securities Act of 1933. We believed
section 4(2) was available because there was no general solicitation or
advertising used in connection with the offering and the transaction did not
<PAGE>
involve a public offering.
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
The aforementioned issuances and sales were made in reliance upon the exemption
from registration contained in Section 4(2) of the Act. The purchasers of the
securities described above acquired them for their own account and not with a
view to any distribution thereof to the public. The shares which have been
issued pursuant to Section 4(2), bear legends stating that the securities may
not be offered, sold or transferred other than pursuant to an effective
Registration Statement under the Act, or an exemption from such registration
requirements. The Registrant will place stop transfer instructions with its
transfer agent with respect to all such securities.
The Company entered into several consulting agreements with various individuals
whereby the Company was to be provided with advice with regard to corporate
strategy and business development including targeting of acquisitions. The
Company advanced the consultants 490,000 shares in 1999 but minimal services as
anticipated in the consulting agreements were performed in 1999 and no services
were performed in 1998. Therefore on June 30, 1999 the consulting agreements
were rescinded and the Company offered the consultants the restricted shares at
a price of $0.25 per share resulting in a subscription receivable. The Company
expects to receive the payment in the form of invoices for prior services
rendered under the rescinded consulting agreements. As of the date of this
report invoices for $15,625 has been received. When an invoice is received, the
Company recognizes consulting expense for all shares issued based on the fair
market value of the stock on the grant date.
In July 1999, we issued 15,000 Class A convertible preferred shares and 223,881
warrants. Cranshire Capital purchased 5,000 preferred shares and 74,627
warrants for consideration of $300,010. Dotcom Fund purchased 3,000 preferred
shares and 44,776 warrants for consideration of $500,010. Keyway Investments
purchased 5,000 preferred shares and 74,627 warrants for $500,010. Robert
Productions, Inc. purchased 2,000 preferred shares for consideration of
$200,010. The warrants are exercisable at any time until July 16, 2002 at an
exercise price of $10.00 per warrant. The Company relied upon the exemption from
registration provided in Section 4(2) of the Act. We believed section 4(2) was
available for the issuance of the preferred shares and warrants because there
was no general solicitation or advertising used in connection with the offering
and the transaction did not involve a public offering. As a result of accounting
for the beneficial conversion feature, the Company charged a $375,011 dividend
to retained earnings on the issuance date. (See Note 3)
During the period ended September 30, 1999 the Company issued 108,000 warrants
(i.e., stock options) to certain consultants and other service providers of the
Company.
The Company applies SFAS 123 for warrants and options issued to consultants and
other service providers. For financial statement disclosure purposes and for
purposes of valuing these stock options, the fair market value of each stock
option granted was estimated on the date of grant using the Black-Scholes
<PAGE>
Option-Pricing Model in accordance with SFAS 123 using the following
weighted-average assumptions: expected dividend yield 0%, risk-free interest
rate of 5.3%, volatility 70% and expected term of one year. Accordingly,
professional and consulting fees of
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
$413,780 was charged to operations in 1999. The deferred tax asset of $140,685
resulting from the professional and consulting fees of $413,780 was fully offset
by a valuation allowance at December 31, 1999.
A summary of the options issued to consultants as of September 30, 1999 is
presented below:
<TABLE>
<CAPTION>
Weighted
Number of Average
Options Exercise Price
--------------------------
<S> <C> <C>
Stock Options
Balance at beginning of period - $ -
Granted 108,000 $4.55
Exercised - -
Forfeited
- $ -
----------- ------------
Balance at end of period 108,000 $4.55
=========== ============
Options exercisable at end of period 108,000 $4.55
Weighted average fair value of options
granted during the period 108,000 $3.83
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------
Weighted Number
Number Average Weighted Exercisable Weighted
Range Of Outstanding At Remaining Average At Average
Exercise September 30, Contractual Exercise September Exercise
Price 1999 Life Price 30, 1999 Price
<PAGE>
<S> <C> <C> <C> <C> <C>
$ 4.00 68,000 0.67 Years $ 4.00 68,000 $ 4.00
$ 4.00 - 7.00 40,000 0.46 Years $ 5.50 40,000 $ 5.50
-------------------- --------- ---------
108,000 0.59 Years $ 4.55 108,000 $ 4.55
</TABLE>
NOTE 7 - ACQUISITIONS
------------------------
(A) Acquisitions of Subsidiaries and Subsequent Rescission
-----------------------------------------------------------
On March 18, 1999 the Company acquired IMMMU, Inc. ("IMMMU") and IMMCEL
Pharmaceuticals, Inc. ("IMMCEL"), two companies related through common
stockholders, in a transaction accounted for as a purchase. Under terms of
the agreement, 235,000 shares of the Company's common stock, $50,000 in
cash and an option agreement for shares of
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited
the Company's common stock exercisable based on stipulated Company
performance criteria were exchanged for all of the issued and outstanding
capital stock of IMMMU and IMMCEL. Subsequently, the Company entered into a
rescission agreement of the purchase. Activity from IMMMU and IMMCEL are
not part of these consolidated statements. The common stock shares are
recorded as "Common Shares Advanced" and deducted from stockholder equity
and the $50,000 is recorded in Accounts Receivable - Other. The Company
incurred a loss of $94,225 from operating the companies during 1999 which
is recorded in Accounts Receivable - Other with a reserve for 100% recorded
as bad debt.
(B) Asset Accumulation
-------------------
On May 24, 1999 the Company acquired certain assets of Ice Cold Water Co.,
Inc. ("ICW") including certain receivables, inventory, property and
equipment, a customer list and the name "Ice Cold Water" and all other
intellectual property rights associated with the name. Under terms of the
agreement, the Company acquired the assets for $20,000 in cash and a
$100,000 promissory note at 8.5% per annum which is due in four monthly
installments of $25,000 plus accrued interest, commencing June 10, 1999.
23,000 shares of the Company's common stock were reserved in an escrow
account to be released to ICW in the case of default of payments. The
Company then formed a new subsidiary, The Cooler Group and transferred
these assets into it. A balance of $30,406 remains outstanding as of
September 30, 1999.
NOTE 8 - LITIGATION
----------------------
In 1999 the Company initiated a legal proceeding against a former major customer
to collect amounts receivable from that customer aggregating approximately
$535,000 at December 31, 1998. Such receivable related to products sold to that
customer during 1998 that were voluntarily recalled by the Company, but never
returned by the customer. As of December 31, 1998, it was management's assertion
with regard to this matter that since the product was never returned to the
Company, and is believed to have been resold by the customer, a successful
outcome in favor of the Company was possible. The Company has therefore written
off $267,240 or fifty percent of the total receivable as of December 31, 1998.
Subsequent to the date of these financial statements, management does not expect
to receive any further payments of this customer and therefore decided to write
off the balance reduced by payments received during January, 1999.
In early 1999, pursuant to a voluntary arrangement with the Food and Drug
Administration, the Company's product, Revivarant, was recalled and removed from
sale. Since the time of the recall, the Company has been subject to five known
lawsuits and an additional three consumer-protection claims relating to consumer
use of the product. As of the date of this report, only one lawsuit has
specified a dollar amount, that being, $400,000 of compensatory damages and
$350,000 of punitive damages. All lawsuits have been referred by management to
the insurance carrier of our third party manufacturer, however, the Company has
received notice from the insurance carrier denying all claims. Management
intends to contest the claim denials. The Company obtained its own insurance
policy in May 1999 and believes it would not be covered under its own policy for
these prior
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
occurrences. With regard to any punitive damage claims, the Company intends to
vigorously oppose any factual basis for imposition of punitive damages based
upon research and efforts made prior to the distribution of the Revivarant
product to determine its safety. The Company's management and outside legal
counsel are unable to evaluate and determine the likely outcome of each cause of
action. Accordingly, pursuant to the Financial Accounting Standards Board,
Statement of Financial Accounting Standards No. 5, no liabilities have been
accrued as of September 30, 1999 relating to the above matters. Any future
liabilities required to be recorded pursuant to SFAS 5 will be recorded gross of
any expected insurance recovery pursuant to SAB5:Y. Any judgment or claim in
favor of a claimant could have a materially adverse effect on our results of
operations, our financial condition and liquidity, including that we may be
unable to continue in business.
The Company is subject to a cause of action premised on a Letter of Agreement
between the two parties whereby the Plaintiff alleges the Company committed to
<PAGE>
purchase 155,000 shares of the Company's common stock at a stipulated price. The
second count of the action is a mortgage foreclosure action, which is based upon
an alleged lien upon real property that is to have collateralized the Agreement.
The Company has filed a motion to dismiss the complaint because the Agreement
sued upon calls for arbitration in the event of dispute. The Company also filed
a motion to dismiss the mortgage foreclosure action since the cause of action is
premised upon documents that cannot be recorded. Discovery is beginning and no
opinion is available as to the likely result.
The Company is subject to a cause of action seeking damages and specific
performance of an agreement to purchase stock. The Agreement called for certain
shares of stock to be sold pursuant to a letter agreement. The Complaint
contains seven counts alleging cause of action for specific performance,
equitable relief, fraud, civil theft damages, and lost profits. Discovery is
beginning and settlement discussions have been on going. The Company is unable
to assess the likely outcome of this suit at this time.
An action has been commenced against the Company, by a former principal
stockholder, and other parties alleging that 600,000 shares of the Company,
previously owned by the former principal stockholder, were improperly canceled
by the Company while still validly owned by the Plaintiff. The Plaintiff has
demanded the removal of the stop transfer order from their share certificates or
alternatively the Company re-issue new share certificates. The action also
alleges a consulting agreement for which the Company has not tendered the
required consideration of 270,000 shares of the Company's common stock. The
action also seeks $100,000 for breach of fiduciary duty and $10,000,000 in
punitive damages. An adverse judgment may have an adverse affect on the
Company's results of operations and financial condition.
A lawsuit filed against the Company, its Chief Executive Officer, principal
stockholder and certain affiliates demanding an excess of $790,000 in
compensatory and punitive damages, alleges that the plaintiff had purchased
approximately 22,000 shares of the Company's common stock for approximately
$77,000, but has not received the same. As of May 3, 2000 settlement
negotiations are ongoing. An adverse judgment of this litigation may have an
adverse effect on the Company's results of operations and financial condition.
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
The Company is subject to various other lawsuits, investigations and claims
primarily relating to amounts due to vendors which, in the opinion of
management, arise in the normal course of conducting Company business.
Appropriate amounts have been accrued at September 30, 1999. In the opinion of
the Company's management, after consultation with outside legal counsel, the
ultimate disposition of such remaining proceedings will not have a materially
adverse effect on the Company's consolidated financial position or future
results of operations.
NOTE 9 - SUBSEQUENT EVENTS
------------------------------
A. Contributed Capital
On February 1, 2000 Michael Muzio contributed 500,000 shares of restricted stock
to the Company. The shares were valued at the $7.50 based on the quoted trading
price on the date of contribution.
B. Acquisition of Nutrition Clubstores, Inc.
On March 20, 2000 we acquired from Nutrition Superstores.com, Inc. all of the
issued and outstanding shares of common stock in its wholly owned subsidiary,
Nutrition Clubstores, Inc. The purchase price was $150,000 cash plus 570,000
<PAGE>
shares of our common stock valued at $4.80 per share based average quoted
trading price a few days before and after the announcement of the transaction
based on EITF 95-19 for a total of $2,886,000. In addition, for a period
beginning three months following the Closing and continuing for a period of
twelve months thereafter, the Seller shall receive a royalty equal to three
percent (3%) of the gross sales generated by the kiosks operated by Nutrition
Clubstores, Inc. The number of shares issuable to the Seller of the Nutrition
Clubstores, Inc. is subject to adjustment based upon the audited financial
statements, which are to be provided by the sellers of Nutrition Clubstores,
Inc. To the extent that the Nutrition Clubstores audited financial statements
for February 28, 2000 show a net worth which is less than 85% of the unaudited
financial statements, for every $5.00 reduction or portion thereof in net worth,
Seller shall be entitled to receive one less share of common stock.
The acquisition will be accounted for under the purchase method. Subject to the
completion of the Nutrition Clubstores audit, we anticipate allocating the
purchase price of this acquisition as follows: inventory $410,885, fixed assets
$367,848, goodwill $2,335,004 accounts payable $162,422 and notes payable
$65,315.
The goodwill balance will be amortized over 60 months. The Company will review
the audited financial statements when received and adjust our books accordingly.
The $150,000 cash used in the acquisition was advanced to the Company by the
principal stockholder. We believe the acquisition of Nutrition Clubstores will
have an immediate positive impact on the Company's cashflows and revenue stream.
Prior to our acquisition, Nutrition Clubstores had a negative cashflow of
approximately $10,000 per month. However, during our analysis of the company, we
identified several areas where we believe they were operating
TrimFast Group, Inc.
Notes to Interim Consolidated Financial Statements
As of September 30, 1999
(Unaudited)
inefficiently and implemented these changes immediately upon closing the deal.
Based on our changes Nutrition Clubstores had a positive cashflow of
approximately $5,000 for the eleven days we owned it in March. We have
continued to implement other cost cutting measures including promoting our
products in each location to increase margins and further changes to the
management structure in each location which should continue to increase the
positive cashflow each month.
C. Convertible Debenture.
On April 25, 2000 the Company entered into a convertible debenture agreement
with Gibralt U.S., Inc. a Colorado Corporation and FAC Enterprises, Inc. a
Pennsylvania Corporation for a total of $3,000,000 due July 13, 2001 with
interest at 12%. The proceeds will be used to open additional Nutrition
Clubstores and produce and air the commercial spots for our WCW Ultra Energy
Bars. On April 28, 2000 the first $1,000,000 was wired to our account.
TRIMFAST GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
<PAGE>
FINANCIAL STATEMENT PRESENTATION
The September 30, 1999 interim financial statements are presented without
comparable 1998 quarterly information. We were not publicly traded in 1998 and
systems, though adequate to address annual audit needs, were not in place to
allow for extracting reliable quarterly information. We have presented the
comparison with adjustments from the year end 1998 numbers.
RESULTS OF OPERATIONS.
December 31, 1997 and 1998 as compared to September 30, 1999
Sales for the nine months ended September 30, 1999 were $581,337 as compared to
$1,925,332 for the year ended December 31, 1998 ($1,443,999 adjusted
proportionately for the nine months ended September 30, 1998 and $22,338 as of
December 31, 1997). The significant decline in sales from 1998 to 1999 is
primarily attributable to our decision to discontinue the sale of Revivarant, a
muscle replenishment supplement, which accounted for approximately $1.4 million
of revenues during 1998. This decision was initiated by an industry wide
investigation by the Food and Drug Administration into the active ingredient in
Revivarant.
Our salaries and compensation increased from $31,633 in 1997 to $993,773 in 1998
to $505,372 for the nine months ended September 30, 1999 for several reasons.
The 1998 amount included $762,000 non-cash stock based compensation expense.
Our 1999 salaries include increased expenses of support staff. Specifically, we
added two administrative assistants, upgraded our accounting position to Chief
Financial Officer and added a salesman to our staff. In addition, during 1999 we
added two new subsidiaries, Ice Cold Water and Nutrition Cafe, which account for
approximately 40% of the increased salary reported. Moreover, the employment
market in Tampa has been highly competitive in 1999 resulting in our company
paying higher wages to all employees to retain and recruit qualified employees.
Management expected that the introduction of the IMMCEL and IMMMU product lines
would add to revenues. However, customer acceptance proved disappointing and the
prior owner, and key employee refused to honor his contractual commitments to
manage the newly added subsidiaries. As a result, we have rescinded our
agreement with the prior owners of IMMMU and IMMCEL and will focus on the
expansion of our own line of nutritional supplements. All rights title and
interest to the IMMMU/IMMCEL product lines will revert back to their prior
owners, all consideration paid or received will be returned and any profits or
losses generated from the operation on IMMMU and IMMCEL will be allocated to its
prior owners. We recorded in the "Receivable - other" account the loss from
operating IMMMU and IMMCEL for the period of time we managed those companies. We
then recorded a 100% reserve against the balance at September 30, 1999. As of
December 31, 1999, the receivable and reserve balances were written off.
Management believes that a significant boost to its revenues will be generated
from its licensing agreement with World Championship Wrestling ("WCW"), once
other wrestling stars agree to promote our energy bars. We intend to sell high
nutrition, energy bars with the WCW logo and images of the various wrestling
personalities. Both food brokers and retail stores have shown tremendous
interest in the product. Although we have made shipments to small retailers, we
anticipate that our shipments to large retailers will commence with the launch
of our national advertising campaign, which is tentatively scheduled to begin in
<PAGE>
May. While there can be no assurance that the product will meet anticipated
demand, management believes that the sale of the WCW energy bars will be a
significant source of revenues for the Company.
With the acquisition, formation and expansion of business activities during
1999, operating expenses increased significantly. Salaries and compensation
total $31,633 and $983,773 for the year ended December 31, 1997 and 1998
respectively, as compared to $505,372 for the nine months ended September 30,
1999. New employees had to be hired to handle the increased business activities
of the Company.
For the nine months ended September 30, 1999, we recorded $1,467,900 in
professional fees. A significant portion of this amount is non-cash expense,
representing the issuance of common stock to certain professionals in exchange
for professional services. Management anticipates that professional fees will
decline significantly in the future.
Selling general and administrative expenses were $92,565 and $423,289 for the
years ended December 31, 1997 and December 31, 1998 respectively, as compared to
$623,451 for the nine months ended September 30, 1999. Approximately $175,000 of
this increase was attributable to advertising for NutritionCafe.
Approximately $250,000 of the interest expense of $354,569 is attributable to
the intrinsic value of the convertible debenture executed by the Company.
Net loss for the year ended December 31, 1997 was $151,846. Net loss for the
year ended December, 31 1998 was $739,974. Loss before income taxes for the
year ended December 31, 1998 was $719,374. We have generated a net loss of
$3,478,802 for the nine months ended September 30, 1999 or net loss of $0.87 per
share.
LIQUIDITY AND CAPITAL RESOURCES.
December 31, 1997 & 1998 as compared to September 30, 1999.
Total cash and cash equivalents as of September 30, 1999 were $100,312 as
compared to $120,938 as of December 31, 1998 and $17,658 as of December 31,
1997, a decline of approximately 17% from the period ending December 31, 1998 to
the period ending September 30, 1999.
Trade receivables were $4,889 at December 31, 1997 and $357,889 at December 31,
1998, including $267,240 related to Cutting Edge that was subsequently written
off, but declined to $318,407 for the period ending September 30, 1999. Our 1998
trade receivables also included $11,745 related to IMMMU and IMMCEL, an amount
for which we maintained adequate receivables and was fully reserved to cover an
allowance for bad debt.
We recorded $503,839 in bad debt expense in December 1998, $267,240 of which was
due to unknown financial difficulties experienced by Cutting Edge. The bad debt
expense of $267,240 attributable to Cutting Edge represented 50% of the
receivable balance due from Cutting Edge at December 31, 1998 and was due to the
Cutting Edge's failure to return product we sold them. We recorded the bad
debt expense relating to Cutting Edge in December 1998 and ceased doing business
with them at that time. In addition, the bad debt expense was due to the
bankruptcy of another customer, Dynamic Health Concepts. During 1998 a total of
two (2) customers, Cutting Edge and Dynamic Health Concepts, accounted for
approximately seventy-two percent (72%) of our sales.
<PAGE>
Our decision to pull Revivarant from the market impacted our short-term income
potential due to the large percent of 1998 revenues from this product. During
1999 we have made several decisions, which we believe will help replace the lost
revenue. Specifically, we developed our Max Impact line of supplements and
packaged them in a daily package of three pills each, which are marketed to
convenience stores.
Additionally, we signed an agreement with the WCW to produce and market the
ultra energy bars, which include the likenesses of Hulk Hogan, Bill Goldberg and
Randy "Macho Man" Savage. Additionally, during 1999 we increased our usage of
outside brokers for sales to independent retail locations and hired sales
personnel for direct marketing to our target industries. The result of these
changes has been the elimination of our reliance on a few large customers for
our revenue. We believe these changes will position us for increased revenues in
the near future.
Inventory was $23,699 at December 31, 1997, increased to $188,737 at December
31, 1998 and to $377,270 at September 30, 1999. This increase in inventory is
attributable to the launch of Nutrition Cafe and the inventory that we are
required to carry to meet customer orders.
Total current assets were $46,246 at December 31, 1997 and $679,309 at December
31, 1998 and increased approximately 40% to $1,308,267 at September 30, 1999
Property and equipment increased from $5,481 on December 31, 1997 to $33,403 on
December 31, 1998 and to $1,459,270 on September 30, 1999. This increase is due
primarily to our purchase of the facility, which houses our warehouse operations
for Nutrition Cafe, and the equipment purchased to operate this facility. The
$228,705 attributable to software development represents our investment in the
Nutrition Cafe website software.
We also experienced a significant increase in liabilities. Accounts payable
increased from $14,873 on December 31, 1997 to $625,767 on December 31, 1998 and
to $926,612 on September 30, 1999. In addition, we issued a convertible debt
instrument in the amount of $1,000,000 in 1999. The proceeds raised from this
debt offering were used to purchase the warehouse facility.
Management believes that we have sufficient revenue and reserves to finance
ongoing business activities.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
-------------------------------------
FINANCIAL STATEMENTS
--------------------
AS OF DECEMBER 31, 1998
-----------------------
(CONSOLIDATED) AND 1997
------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONTENTS
--------
PAGES 1 - 2 INDEPENDENT AUDITORS' REPORT
PAGE CONSOLIDATED BALANCE SHEET
3 AS OF DECEMBER 31, 1998
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 (CONSOLIDATED) AND FOR THE
PERIOD FROM APRIL 27, 1997 (INCEPTION TO
PAGE 4 DECEMBER 31, 1997
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR
THE YEAR ENDED DECEMBER 31, 1998 (CONSOLIDATED)
AND FOR THE PERIOD FROM APRIL 27, 1997
PAGE 5 (INCEPTION) TO DECEMBER 31, 1997
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1998 (CONSOLIDATED) AND FOR THE
PERIOD FROM APRIL 27, 1997 (INCEPTION) TO
PAGES 6 - 7 DECEMBER 31, 1997
NOTES TO FINANCIAL STATEMENTS AS
PAGES 8 - 24 OF DECEMBER 31, 1998 AND 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of:
Trimfast Group, Inc.
We have audited the accompanying balance sheet of TrimFast Group, Inc. and
Subsidiaries as of December 31, 1998 (consolidated) and the related statements
of operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1998 (consolidated) and for the period from April 27, 1997
(inception) to December 31, 1997. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits 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 TrimFast Group, Inc. and
Subsidiaries as of December 31, 1998 (consolidated) and the results of their
operations and their cash flows for the year ended December 31, 1998
(consolidated) and for the period from April 27, 1997 (inception) to December
31, 1997 in conformity with generally accepted accounting principles.
As more fully described in Note 14, subsequent to the issuance of the Company's
1998 consolidated financial statements and our report thereon dated June 10,
1999 (except for Notes 13(G), 13(H), 13(D), 7(C), 13(B) and 13(A) as to which
the dates are June 14, 1999, July 16, 1999, July 30, 1999, November 29, 1999,
October 22, 1999 and October 23, 1999, respectively, we became aware that the
1998 consolidated financial statements did not include certain non-cash stock
based compensation expense. In our original report, we expressed an unqualified
opinion on the 1998 consolidated financial statements, and our opinion on the
revised consolidated financial statements, as expressed herein, remains
unqualified.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
June 10, 1999 (Except for Notes 13(G), 13(H), 13(D), 7(C),
13(B), 13(A), paragraphs 2 and 3 of Note 7(D) and Note 8(C) as to which
the dates are June 14, 1999, July 16, 1999, July 30, 1999,
November 29, 1999, October 22, 1999 and October 23, 1999,
March 10, 2000 and April 27, 2000, respectively.)
1
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
-----------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS
Cash $105,641
Short-term investments 15,297
Accounts receivable 357,889
Due from employees 5,800
Inventory 188,737
----------
Total Current Assets 673,364
----------
PROPERTY AND EQUIPMENT - NET 33,403
OTHER ASSETS
Due from affiliate 5,945
Rent deposit 10,619
Cash surrender value of life insurance 8,107
----------
Total Other Assets 24,671
----------
TOTAL ASSETS $731,438
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $625,767
Notes and loans payable 72,100
Income taxes payable 20,600
----------
Total Current Liabilities 718,467
----------
TOTAL LIABILITIES 718,467
----------
STOCKHOLDERS' EQUITY
Preferred Stock, Class A, $0.01 par value;
20,000,000 shares authorized;
none issued and outstanding -
Preferred Stock, Class B, $0.01 par value;
20,000,000 shares authorized;
none issued and outstanding -
Common stock, $0.001 par value; 100,000,000
shares authorized; 2,260,775 shares issued
and outstanding 2,260
Common stock to be issued (77,881 shares) 78
Additional paid-in capital 925,987
Accumulated deficit (891,820)
Less cost of treasury stock (5,500 shares) (23,534)
----------
Total Stockholders' Equity 12,971
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 731,438
========================================================================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM APRIL 27, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997
------------------------------------
(CONSOLIDATED)
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $1,925,332 $22,338
COST OF SALES 567,472 9,625
----------- -----------
GROSS PROFIT 1,357,860 12,713
----------- -----------
OPERATING EXPENSES
Executive compensation 963,077 31,633
Salaries 20,696 -
Commissions 41,700 -
Depreciation expense 10,498 230
Professional fees 49,511 9,245
Bad debt expense 503,839 11,226
Selling, general and administrative expenses 423,289 92,565
Travel and entertainment 64,187 19,660
----------- -----------
Total Operating Expenses 2,076,797 164,559
----------- -----------
LOSS FROM OPERATIONS (718,937) (151,846)
----------- -----------
OTHER INCOME (EXPENSE)
Realized gain on sale of trading securities - net 1,905 -
Unrealized gain on trading securities - net 922 -
Interest expense (3,264) -
----------- -----------
Total Other Income (Expense) (437) -
----------- -----------
LOSS BEFORE INCOME TAXES (719,374) (151,846)
FEDERAL AND STATE INCOME TAXES 20,600 -
----------- -----------
NET LOSS $ (739,974) $ (151,846)
=========== ===========
NET LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.43) $ (0.12)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC AND DILUTED 1,710,860 1,286,625
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONSOLIDATED)
AND FOR THE PERIOD FROM APRIL 27, 1997 (INCEPTION)
TO DECEMBER 31, 1997
--------------------
COMMON STOCK AND
COMMON STOCK TO ADDITIONAL
BE ISSUED PAID-IN ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 1,286,625 $ 1,287 $ (287) $ - $ - $ 1,000
Net loss 1997 - - - (151,846) - (151,846)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,286,625 1,287 (287) (151,846) - (150,846)
Issuance of common stock for cash 63,924 64 187,736 - - 187,800
Issuance of common stock to related
party in exchange for $40,000 debt 19,500 19 39,981 - - 40,000
Recapitalization:
HLHK equity at August 12, 1998 817,749 818 441,083 (1,122,218) - (680,317)
Reclassification pursuant to
recapitalization - - (1,122,218) 1,122,218 - -
Common stock issued to employees 500 - - - - -
Common stock issued to attorney
for services 5,000 5 (5) - - -
Common stock issued in exchange
for debt of HLHK principal stockholder 75,000 75 491,123 - - 491,198
Issuance of common stock in exchange
for stockholder loans 70,358 70 126,574 - - 126,644
Compensation to principal stockholder - - 762,000 - - 762,000
Purchase of treasury stock at cost - - - - (23,534) (23,534)
Net income 1998 - - - (739,974) - (739,974)
------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 2,338,656 $2,338 $ 925,987 $(891,820) $(23,534) $ 12,971
========================================================================================================================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM APRIL 27, 1997
(INCEPTION) TO DECEMBER 31, 1997
--------------------------------
(CONSOLIDATED)
1998 1997
--------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(739,974) $(151,846)
Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:
Depreciation 10,498 230
Bad debt expense 503,839 11,226
Unrealized gain on short-term investments (922) -
Stock based compensation 762,000 -
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable (856,839) (16,115)
Inventory (165,038) (23,699)
Increase (decrease) in:
Accounts payable and accrued expenses 496,181 14,873
Income taxes payable 20,600 -
--------------------------------------------------------------------------
Total adjustments 770,319 (13,485)
--------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 30,345 (165,331)
--------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments (14,375) -
Advances to employees (5,800) -
Purchases of property and equipment (37,821) (5,711)
Advances to affiliate (5,945) -
Rent deposit (8,119) (2,500)
Cash surrender value of life insurance (8,107) -
--------------------------------------------------------------------------
Net cash used in investing activities (80,167) (8,211)
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholder/officer (18,436) 150,200
Due to related party - 40,000
Proceeds from borrowings 1,975 -
Proceeds from issuance of common stock 177,800 1,000
Purchase of treasury stock (23,534) -
--------------------------------------------------------------------------
Net cash provided by financing activities 137,805 191,200
--------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 87,983 17,658
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 17,658 -
--------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR $105,641 $17,658
==========================================================================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
AND FOR THE PERIOD FROM APRIL 27, 1997
(INCEPTION) TO DECEMBER 31, 1997
--------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
-------------------------------------------------
AND FINANCING ACTIVITIES:
----------------------------
On August 12, 1998 HLHK World Group, Inc. acquired one hundred percent of
the issued and outstanding common stock of Trimfast, Inc. in a transaction
accounted for as a recapitalization of Trimfast, Inc. HLHK subsequently
changed its name to Trimfast Group, Inc. (See Note 12)
On August 12, 1998, concurrent with the HLHK stock exchange discussed
above, the prior principal stockholder of HLHK received 75,000 shares of
common stock in exchange for $491,198 of amounts owed to him by HLHK.
Effective December 1998, the principal stockholder of the Company exchanged
$126,644 of loans due to him and his wholly-owned affiliates for 70,357
shares of common stock of the Company valued at a market price of $1.80 per
share based upon the trading price of the common stock at the exchange
date.
During July 1998, the Company issued 19,500 shares of common stock to an
individual related party in exchange for a loan payable of $40,000
resulting in a price paid per share of $2.05 at the exchange date.
See accompanying notes to financial statements.
6
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
-----------------------------------------------------------------------------
(A) Description of Business
------------------------------
Trimfast Group, Inc. (the Company) formerly known as HLHK World Group,
Inc.(HLHK) is a Nevada corporation that through its subsidiaries, develops,
markets and sells dietary supplements. The Company's subsidiaries Trimfast,
Inc. and Body Life Sciences, Inc. were incorporated in the State of Florida
on April 28, 1997 and September 4, 1998, respectively. Trimfast, Inc. is
considered a predecessor pursuant to the acquisition discussed below.
On August 12, 1998 HLHK World Group, Inc. acquired one hundred percent of
the issued and outstanding common stock of Trimfast, Inc. in a transaction
accounted for as a recapitalization of Trimfast, Inc. HLHK subsequently
changed its name to Trimfast Group, Inc. (See Note 12).
(B) Basis of Presentation and Principles of Consolidation
----------------------------------------------------------------
The 1998 consolidated financial statements include the accounts of Trimfast
Group, Inc. and its subsidiaries Trimfast, Inc. and Body Life Sciences,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. The 1997 financial statements include the
accounts of Trimfast, Inc., the predecessor company.
(C) Use of Estimates
-----------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reported period.
Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
---------------------------------
For purposes of the cash flow statement, the Company considers all highly
liquid investments with original maturities of three months or less at time
of purchase to be cash equivalents.
(E) Short-Term Investments
----------------------------
The Company's policy is to invest in various equity or debt instruments.
The Company accounts for such investments in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities." ("SFAS 115")
Management determines the appropriate classification of its investments at
the time of acquisition and reevaluates such determination at each balance
<PAGE>
sheet date. Trading securities are carried at fair value, with unrealized
trading gains and losses included in earnings. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.
Investments classified as held-to-maturity are carried at amortized cost.
In determining realized gains and losses, the cost of the securities sold
is based on the specific identification method.
(F) Inventories
----------------
Inventories consist principally of consumable finished goods and raw
materials and are stated at lower of cost or market determined on the
first-in, first-out method. The Company performs an inventory review on an
annual basis and disposes of any inventory that is past its expiration
date. The related inventory value is written down accordingly.
(G) Property and Equipment
-----------------------------
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures from maintenance and repairs are charged to expense as
incurred. Depreciation is provided using the double-declining balance
method over the estimated useful life of the assets from five to seven
years.
(H) Revenue Recognition
-------------------------
The Company recognizes income from sale of products at the time of
delivery.
(I) Income taxes
------------------
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109.
"Accounting for Income Taxes" ("Statement No. 109"). Under Statement No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(J) Earnings Per Share Data
-------------------------------
Basic net income (loss) per common share is computed based on the weighted
average common shares outstanding and diluted net income per common share
is computed based upon the weighted average common shares and common stock
equivalents outstanding during the year as defined by Statement of
<PAGE>
Financial Accounting Standards, No. 128, "Earnings Per Share". All share
amounts have been retroactively restated to reflect the recapitalization
and the 1-for-10 reverse stock split. The 817,749 shares originally to HLHK
stockholders are considered outstanding from the acquisition date. There
were no dilutive common stock equivalents outstanding at December 31, 1998,
and 1997.
(K) Advertising Costs
-----------------------
In accordance with the Accounting Standards Executive Committee Statement
of Position 93-7, ("SOP 93-7") costs incurred for producing and
communicating advertising are expensed when incurred.
(L) New Accounting Pronouncements
------------------------------------
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements. Statement No. 133 as amended by Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities"
establishes accounting and reporting standards for derivative instruments
and related contracts and hedging activities. This statement is effective
for all fiscal quarters and fiscal years beginning after June 15, 2000. The
Company believes that its future adoption of these pronouncements will not
have a material effect on the Company's financial position or results of
operations.
NOTE 2 - SHORT-TERM INVESTMENTS
-----------------------------------
The Company's short-term investments, purchased principally for the purpose
of selling them in the near future, as defined under SFAS 115, are
comprised of equity securities, all classified as trading securities, which
are carried at their fair value are based upon the quoted market prices of
those investments at December 31, 1998. Accordingly, net realized and
unrealized gains and losses on trading securities are included in net
earnings.
The composition of short-term investments at December 31, 1998 is as
follows:
Fair
Cost Value
---- -----
Common stock $14,375 $15,297
------- -------
Short-term investments $14,375 $15,297
======= =======
Investment income for the year ended December 31, 1998 consisted
of the following:
Net realized gains on the
sale of trading securities $ 1,905
Net unrealized holding gains 922
--------
$ 2,827
========
NOTE 3 - ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
---------------------------------------------------------
During 1998 the Company wrote off 100% accounts receivable totaling
$202,112 from a customer who filed for bankruptcy and 50% of the receivable
or $267,240 from another customer relating to a voluntary recall of a
Company product. These two customers accounted for approximately 60% and
12% of revenues in 1998 (See Note 7(D)). The remaining accounts receivable
consists of another $267,240 due from the one customer discussed above, and
$90,649 due from various other customers, none of which are considered
individually significant.
NOTE 4 - PROPERTY AND EQUIPMENT
------------------------------------
Property and equipment at December 31, 1998 consisted of the following:
Automobiles $ 33,475
Furniture and fixtures 7,900
Equipment 2,756
----------
$ 44,131
Less accumulated depreciation (10,728)
----------
$ 33,403
==========
Depreciation expense for the years ended December 31, 1998 and 1997 was
$10,498 and $230, respectively.
NOTE 5 - INCOME TAXES
-------------------------
Income tax expense (benefit) for the year ended December 31, 1998 is
summarized as follows:
Current:
Federal $ 17,100
State 3,500
Deferred:
Federal 1,391
State 149
Change in valuation allowance (1,540)
-----------
Income tax expense (benefit) $ 20,600
===========
7
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
--------------------------------
The Company's tax expense differs from the "expected" tax expense for the
year ended December 31, 1998 (computed by applying the Federal Corporate
tax rate of 34 percent to income (loss) before taxes), as follows:
Computed "expected" tax expense $ (244,587)
State income tax - net of federal
tax benefit 2,312
Non-deductible expenses 262,794
Effect of non-consolidated losses
and other 4,043
Benefit of surtax exemption (3,962)
-----------
$ 20,600
===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31, 1998 are as
follows:
Deferred tax liabilities:
Unrealized gains $ (346)
Total deferred tax liabilities (346)
Deferred tax assets:
Depreciation 1,886
Stock based compensation 259,080
-----------
Total gross deferred tax assets 260,966
-----------
Less valuation allowance (260,620)
-----------
Net deferred tax asset (liability) $ -
===========
There was no valuation allowance at January 1, 1998. The net change in the
valuation allowance during the year ended December 31, 1998 was an increase
of approximately $260,620.
Prior To August 12, 1998, acquisition of Trimfast, Inc. by HLHK, Trimfast,
Inc. was an "S" corporation for income tax purposes. During the
pre-acquisition period no income taxes were payable by the corporation as
the shareholders were responsible for reporting the results of the
operations on their individual income tax returns. For this reason, no
pre-acquisition losses are available to be carried forward at the corporate
level. Effective with the acquisition date, the Company's status as an "S"
corporation was terminated.
HLHK NOL's became limited to zero under the provisions of IRS code section
382 because there was an ownership change and all of the assets and former
lines of business were disposed of. Only the corporate shell was purchased
for the price of assuming certain liabilities.
NOTE 6 - NOTES AND LOANS PAYABLE
--------------------------------------
At December 31, 1998, the Company has three notes payable with individual
lenders in the amounts of $20,000, $25,125 and $25,000. The following
schedule reflects notes and loans payable to non-related parties at
December 31, 1998:
Notes payable to individual
lenders in the amounts of $20,000,
$ 25,000 and $ 25,125, currently due,
interest at 12% per annum $ 70,125
Other loans payable, currently due 1,975
--------
$ 72,100
=========
8
<PAGE>
Accrued interest of $15,923 on the notes and loans payable has been
included in accrued expenses at December 31, 1998. All principal and
accrued interest for $50,125 of the notes were exchanged for an aggregate
40,000 shares of common stock in 1999 resulting in a price per share of
$1.25.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
-------------------------------------------
(A) Year 2000 Issues
-----------------------
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The
"Year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit
year to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail.
The Company uses a standard off the shelf accounting software package for
all of its accounting requirements. Management has contacted the software
vendor and confirmed that the accounting software is Year 2000 compliant.
Management has contacted its primary vendors has not identified any Year
2000 compliance issues with those vendors. Costs of investigating Year 2000
compliance issues have not been material to date. As a result, management
believes that the effect of investigating and resolving Year 2000
compliance issues will not have a material effect on the Company's future
financial position or results of operations.
(B) Lease Agreements
----------------------
The Company leases a corporate office facility in Tampa, office equipment,
and two automobiles under operating leases. The leases have remaining terms
varying from the years 1999 through 2002.
Future minimum lease payments for the operating leases are as follows at
December 31, 1998:
Years
-----
Ending Amount
------ ------
1999 $ 39,393
2000 40,407
2001 26,708
2002 8,302
---------
$ 114,810
==========
Rent expense for 1998 and 1997 aggregated $31,885 and $9,263, respectively.
(C) Consulting Agreements and Stock Issued To Vendors
------------------------------------------------------------
On October 9, 1998 the Company entered into a consulting agreement with an
individual whereby the Company will be provided with advice with regard to
corporate strategy and business development and such other matters as
agreed upon between the parties from time to time.
As consideration for the consulting services provided, the Company shall
issue 20,000 shares of common stock to the consultant (See Note 8(B)).
Subsequent to October 9, 1998, the consultant did not substantially perform
the consulting services anticipated in the agreement and therefore no
shares where issued to the consultant. However, on February 9, 1999, the
consultant was issued 20,000 shares of common stock pursuant to an earlier
June 1998 common stock subscription agreement which stipulated the
subscriber may purchase up to 20,000 shares at $0.10 per share. The Company
received the $2,000 payment in June 1998.
On December 14, 1998 the Company entered into a two year consulting
agreement with an individual whereby the Company will be provided with
advice with regard to corporate strategy and business development including
targeting of acquisitions. As consideration for the services provided the
Company shall issue 50,000 free trading common shares pursuant to
Regulation D, Rule 504 and 250,000 common shares restricted under Rule 144
(See Note 8(B)). In addition, the Company shall provide the consultant with
a $1,000 per month expense account. The Company advanced the consultant
300,000 shares in January and February 1999 but a minimal amount of
services delineated by the consulting agreement were performed in 1999 and
no services were performed in 1998. Therefore on June 30, 1999 the
consulting agreement was rescinded and the Company offered the consultant
the 300,000 restricted shares at a price of $0.25 per share resulting in a
subscription receivable of $75,000. The Company expects to receive the
payment in the form of an invoice for prior services rendered under the
rescinded consulting agreement. As of the date of this report, an invoice
or payment has not been received. The amount is recorded as subscriptions
receivable until an invoice or payment is received. If an invoice is
received, the Company will recognize consulting expense for all shares
issued based upon the fair market value of the stock on the grant date.
On December 18, 1998 the Company entered into a two year consulting
agreement with a consulting organization whereby the Company will be
provided with advice with regard to corporate strategy and business
development including targeting of acquisitions. As consideration for the
services provided the Company shall issue 100,000 free trading common
shares pursuant to Regulation D, Rule 504 and 350,000 common shares
restricted under Rule 144 (See Note 8(B). In addition, the Company should
make monthly payments of $2,500 to the consulting organization. The Company
advanced the consultant 275,000 shares in January 1999 but a minimal amount
of services delineated by the consulting agreement were performed in 1999
and no services were performed in 1998. Therefore on June 30, 1999 the
consulting agreement was rescinded and the Company offered the consultant
the 300,000 restricted shares at a price of $0.25 per share resulting in a
subscription receivable of $68,750. The Company expects to receive the
payment in the form of on invoice for prior services rendered under the
rescinded consulting agreement. As of the date of this report, an invoice
or payment has not been received. The amount is recorded as subscriptions
receivable until an invoice or payment is received. If an invoice
is received the Company will recognize a consulting expense based upon the
fair market value of the stock on the grant date.
Subsequent to year-end, the Company entered into various additional
consulting agreements whereby common stock will be issued as consideration.
Services under the consulting agreements entered into in both 1998 and 1999
are being performed generally for two year periods and accordingly,
consulting expense is being recognized in 1999 and in any subsequent
service period based upon the fair market value of the common stock issued
in accordance with SFAS 123 since that value is more reliably measurable
(See Note 13 (F)). The Company also periodically issues common stock as
payment to vendors and records such issues at the fair market value of the
common stock. For the period from January 1, to November 29, 1999
(unaudited) the Company issued approximately 601,300 restricted shares of
common stock for consulting services and as payment to vendors valued for
financial accounting purposes at a fair market value of approximately
$4,194,000 based upon the quoted trading price of the stock on the grant
dates.
(D) Litigation
---------------
In 1999, the Company initiated a legal proceeding against a former major
customer to collect amounts receivable from that customer aggregating
approximately $535,000 at December 31, 1998. Such receivable related to
products sold to that customer during 1998 that were voluntarily recalled
by the Company, but never returned by the customer. It is management's
assertion with regard to this matter that since the product was never
returned to the Company, and is believed to have been resold by the
customer, a successful outcome in favor of the Company is possible. The
Company has written off $267,240 or fifty percent of the total receivable
(See Note 3).
In early 1999, pursuant to a voluntary arrangement with the Food and Drug
Administration, the Company's product, Revivarant, was recalled and removed
from sale. Since the time of the recall, the Company has been subject to
six known lawsuits and claims relating to consumer use of the product. As
of the date of this report, only one lawsuit has specified a dollar amount,
that being, $400,000 of compensatory damages and $350,000 of punitive
damages. The Company contends that it is covered for product liability of
$1,000,000 per occurrence and up to $2,000,000 in the aggregate under the
policy of its third party manufacturer. The Company did not obtain its own
policy until May 1999 and believes it would not be covered under its own
policy for these prior occurrences. All lawsuits are being referred by
management to the insurance carrier. With regard to any punitive damage
claims, the Company intends to vigorously oppose any factual basis for
imposition of punitive damages based upon research and efforts made prior
to the distribution of the Revivarant product to determine its safety.
Since the lawsuits and claims have been made fairly recently, the Company's
management and outside legal counsel are unable to evaluate and determine
the likely outcome of each cause of action. Accordingly, pursuant to the
Financial Accounting Standards Board, Statement of Financial Accounting
Standards No. 5, no liabilities have been accrued as of December 31, 1998
relating to the above matters. Any future liabilities required to be
recorded pursuant to SFAS 5 will be recorded gross of any expected
insurance recovery pursuant to SAB 5:Y.
In March 2000, the Company received notice from the insurance carrier of
its third party manufacturer that it is denying all claims. The related
litigation may have a material adverse effect on the Company's results of
operations and financial condition.
The Company is subject to various other lawsuits, investigations, and
claims which, in the opinion of management, arise in the normal course of
conducting Company business. Several cases have been settled during 1999
and appropriate amounts have been accrued at December 31, 1998. In the
opinion of the Company's management after consultation with outside legal
counsel, the ultimate disposition of such remaining proceedings will not
have a materially adverse effect on the Company's consolidated financial
position or future results of operations. All litigation may have a
material adverse effect on the Company's results of operation and financial
conditions.
NOTE 8 - STOCKHOLDERS' EQUITY
---------------------------------
(A) Authorized Shares
-----------------------
The Company has authorized 100,000,000 shares of common stock, $0.001 par
value; 20,000,000 shares of Class A Preferred Stock, $0.01 par value; and
20,000,000 shares of Class B Preferred Stock, $0.01 par value. The
preferred stock shall have such rights and preferences as determined by the
Board of Directors.
(B) Reverse Stock Split and Retroactive Restatement of Per Share Data
---------------------------------------------------------------------------
On December 8, 1998, effective for stockholders of record on December 20,
1998, the Company's Board of Directors approved a one-for-ten reverse split
of its shares of issued and outstanding common stock. All share quantities
and per share data in these financial statements for the years ended
December 31, 1998 and 1997 have been retroactively restated to reflect the
reverse stock split as well as the recapitalization discussed in Note 12.
(C) Repurchase of Outstanding Common Stock By Principal Stockholder
---------------------------------------------------------------------------
On December 8, 1998 the Company's Chairman, CEO and principal stockholder,
purchased all 508,313 shares of the Company's outstanding common stock held
beneficially by the prior principal stockholder of HLHK (See Note 12) for
$150,000. In accordance with SFAS 123, the Company recognized $762,000
compensation expense for the difference between the $1.80 quoted trading
price of the common stock and the $.30 purchase price.
(D) Acquisition and Stock Exchange
--------------------------------------
In August 1998, prior to the acquisition of Trimfast, Inc. by HLHK World
Group, Inc., Trimfast, Inc. acquired all of the issued and outstanding
common stock of Trimfast Holdings, Inc., affiliated through common control,
by issuing eleven shares of Trimfast, Inc. for every ten shares of Trimfast
Holdings, Inc. Trimfast Holdings, Inc. was an inactive company whose only
asset at that time was $177,800 in cash and whose only expense was a
$10,000 consulting expense for which common stock was issued. The
acquisition was recorded as a combination of entities under common control
similar to the pooling method of accounting and accordingly the financial
statements for the period presented have been restated to include the
accounts of Trimfast Holdings, Inc.
(E) Conversion of Debt to Equity
-------------------------------------
During July 1998, the Company issued 19,500 shares of common stock to an
individual related party in exchange for a loan payable of $40,000,
resulting in a price paid per share of $2.05 at the exchange date.
(F) Conversion of Principal Stockholder's Debt to Equity
---------------------------------------------------------------
In December 1998, $126,644 of amounts due to the principal stockholder were
converted to common stock at the fair value of the stock on December 1,
1998, which was $1.80 per share (See Note 10).
(G) Common Stock to be Issued
----------------------------------
The Company underissued 7,524 fully paid shares of common stock of the
Company to certain stockholders of Trimfast, Inc. as a result of the August
12, 1998 reorganization and has not yet issued 70,357 shares of common
stock to its principal stockholder in exchange for $126,644 of amounts due
to that stockholder. The total shares to be issued of 77,881 are shown as
common stock to be issued at December 31, 1998.
NOTE 9 - CONCENTRATIONS
--------------------------
(A) Supplier Concentration
----------------------------
The Company procures raw materials from various suppliers but contracts the
production of finished products to one primary third party manufacturing
company. Since December 31, 1998 the Company has contracted with other
production facilities for several of its products and believes that many
alternative third party production facilities are available should the need
arise.
(B) Customer Concentration
----------------------------
During 1998, approximately 60% of consolidated revenues was derived from
one customer and 12% was derived from one other customer (See Note 3).
NOTE 10 - RELATED PARTIES
-----------------------------
The Company periodically advances funds to the principal stockholder and
affiliates of the principal stockholder, pays certain expenses of the
principal stockholder, and borrows from the principal stockholder. The
advances to affiliates are shown as due from affiliate at December 31, 1998
and the net effect of transactions with the principal stockholder are shown
as due to stockholder/officer at December 31, 1997. All net amounts due to
the principal stockholder were converted to common stock in December 1998.
(See supplemental disclosure of non-cash investing and financing activities
in cash flow statement.)
The Company received an advance of $40,000 from an individual during 1997
which was recorded as due to related party at December 31, 1997 (see Note
8(E)). During 1998 the Company issued 19,500 shares of common stock to that
same individual in exchange for the $40,000 payable.
NOTE 11 - OPERATING AGREEMENTS
----------------------------------
The Company enters into wholesaler and broker agreements whereby the
wholesalers and brokers are appointed the Company's sole and exclusive
wholesaler and broker within a specified geographic territory for certain
stipulated products. In general, under the agreements, the wholesalers and
brokers have the right to purchase, sell, promote, advertise, and deliver
the stipulated products. Broker agreements allow for broker commissions
while wholesaler agreements allow for the purchase of product by
distributors at a discount. The agreements generally may be terminated by
either party with 60 days notice to the other party.
NOTE 12 - ACQUISITION AND RECAPITALIZATION
-----------------------------------------------
Under a Stock Exchange Agreement (the Agreement) consummated on August 12,
1998, HLHK World Group, Inc., a non-reporting public shell, acquired one
hundred percent of the issued and outstanding common stock of Trimfast,
Inc. in exchange for 1,370,049 shares of the $0.001 par value common stock
of HLHK. Under the terms of the Agreement, the Trimfast, Inc., shares were
exchanged at a ratio of three shares of HLHK common stock for each share of
Trimfast, Inc. common stock. As a result of the exchange, the Company
became a wholly-owned subsidiary of HLHK and the stockholders of Trimfast,
Inc. became stockholders of approximately 60.42% of HLHK which represented
1,370,049 shares of the total 2,268,298 issued and outstanding just
subsequent to the exchange (Approximately 82% after repurchase agreement
discussed in Note 8(C)). Generally Accepted Accounting Principles require
that the Company whose shareholders retain a majority interest in a
combined business be treated as the acquiror for accounting purposes.
Therefore, the exchange was treated as an acquisition of HLHK by Trimfast,
Inc. and a recapitalization of Trimfast, Inc. The Company's consolidated
financial statements immediately following the acquisition were as follows:
(1) The Balance Sheet consists of Trimfast, Inc.'s net assets at historical
cost and HLHK's net assets at historical cost and (2) the Statement of
Operations includes Trimfast, Inc.'s operations for the period presented
and HLHK's operations from the date of acquisition. On September 4, 1998
the Company filed an amendment to its articles of incorporation to (i)
change its name from HLHK to Trimfast Group, Inc. and (ii) authorize
20,000,000 shares each of Class A and Class B Preferred Stock, $0.01 par
value.
NOTE 13 - SUBSEQUENT EVENTS
-------------------------------
(A) Acquisitions
-----------------
On March 18, 1999, the Company acquired IMMMU, Inc. ("IMMMU") and IMMCEL
Pharmaceuticals, Inc. ("IMMCEL"), two companies unrelated to the Company
but related to each other through common stockholders, in a transaction
accounted for as a purchase. Under terms of the agreement, 235,000 shares
of the Company's common stock, $50,000 in cash and an option agreement for
shares of the Company's common stock exercisable based on stipulated
Company performance criteria were exchanged for all of the issued and
outstanding capital stock of IMMMU and IMMCEL. The 235,000 common shares
issued were valued at the trading price on the consummation date resulting
together with the other consideration in a purchase price of $975,312.
IMMMU and IMMCEL are manufacturers of nutritional supplements primarily
marketed to pharmacies, supermarkets, and discount stores. In connection
with the acquisitions, the Company entered into a five year employment
agreement, renewable in one year increments, with a former stockholder of
IMMMU and IMMCEL whereby the former stockholder will be employed as the
Chief Executive Officer of IMMMU and IMMCEL and serve on the Board of
Directors of the Company. The former stockholder will receive an annual
salary of $75,000 and a bonus based on stipulated performance criteria. The
employment agreement may be terminated by the Company if IMMMU and IMMCEL
have two consecutive non-profitable fiscal quarters as defined in the
agreement. On October 23, 1999, effective October 31, 1999, the Company and
former stockholders of IMMMU and IMMCEL executed a rescission agreement for
the above acquisitions to make the parties whole.
On May 24, 1999 the Company acquired certain assets of Ice Cold Water Co.,
Inc. ("ICW") including certain receivables, inventory, property and
equipment, a customer list and the name "Ice Cold Water" and all other
intellectual property rights associated with the name. Under terms of the
agreement, the Company acquired the assets for $20,000 in cash and a
$100,000 promissory note at 8.5% per annum which is due in four monthly
installments of $25,000 plus accrued interest, commencing June 10, 1999.
(B) Agreement with Investment Group
---------------------------------------
On March 18, 1999 the Company entered into an agreement (the "Agreement")
with a third party investment group (the "investment group") whereby the
investment group will purchase (i) common shares of the Company in the open
market having an aggregate value of no less than $300,000, and (ii) 300,000
common shares from the Company at a price of $4.00 per share according to a
stipulated schedule based on the average market price of the outstanding
shares. The Agreement was contingent upon the consummation of the
acquisition of IMMMU and IMMCEL, discussed above. As of October 1999 the
investment group had purchased 155,000 shares of common stock from the
Company at $4.00 per share. On October 22, 1999 the Company executed an
agreement with the investment group to repurchase the 155,000 shares at a
price of $8.25 per share on a scheduled basis through December 15, 1999 as
stipulated in the agreement. Any of the 155,000 shares purchased after
December 15, 1999 shall be increased on a basis of $0.25 every two-weeks as
stipulated in the agreement. The quoted market price on October 22, 1999
was approximately $7.00 per share. The cost of the repurchase will be
charged to treasury stock.
(C) Formation of New Division
---------------------------------
On April 21, 1999, the Company formed a new division of Trimfast Group,
Inc. doing business as NutritionCafe.com. NutritionCafe.com is an internet
web site business established to (i) provide nutrition information, (ii)
provide portal links to other information sites and (iii) market and sell
at a discount the Company's products and products of other nutrition
product companies for which the Company acts as a distributor.
(D) Lease and Purchase Option of Facility
-----------------------------------------------
In connection with the formation of its new division, NutritionCafe.com, on
April 8, 1999 the Company entered into a lease/purchase option agreement
for a facility, which will be used for the operations of NutrionCafe.com.
The lease calls for rental payments of $8,000 per month and is effective
for the period from May 15, 1999 through June 30, 2000. In addition, the
Company paid $100,000 in cash as non-refundable consideration for a
purchase option on the premises. The purchase price shall be for the sum of
$1,200,000 with full credit for the $100,000 option monies paid. The option
must be exercised by June 30, 2000. On July 30, 1999, the Company exercised
its purchase option.
(E) Issuance of Warrants
---------------------------
In May 1999, the Company issued 40,000 warrants to purchase common stock to
two unrelated parties in exchange for services performed relating to
raising debenture capital. The exercise prices and expiration dates for
exercise of the warrants are as follows:
Quantity Exercise Price Expiration Date
-------- --------------- ----------------
10,000 $4.00 May 12, 2000
10,000 $4.00 May 12, 2000
10,000 $7.00 May 13, 2000
10,000 $7.00 May 13, 2000
Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting
for Stock Based Compensation" ("SFAS 123"), the fair market value of the
warrants aggregating $139,000 was charged to expense in 1999, the period
the services were performed.
For financial statement disclosure purposes the fair market value of each
option granted was estimated on the date of grant using the Black-Scholes
Option-Pricing Model in accordance with SFAS 123 using the following
weighted-average assumptions: expected dividend yield 0% risk-free interest
rate of 5.3%, volatility of 70% and expected term of one year.
(F) Private Placement
-----------------------
From January through April 5, 1999, the Company issued common stock
pursuant to Regulation D, Rule 504 of the Securities Act of 1933, as
amended. The Company issued 558,000 shares for aggregate cash proceeds of
approximately $1,009,000 and 262,950 shares for consulting services valued
for financial accounting purposes at approximately $730,000 based upon the
trading price of the common stock on the date of consulting contract. (See
Note 7 (C)).
(G) Convertible Debentures
----------------------------
On June 14, 1999, the Company issued $1,000,000 of convertible debentures
due on June 14, 2002. The debentures contain a beneficial conversion
feature whereby the holder is entitled to convert the face amount of the
debenture, plus accrued interest, as of the closing date into common stock
of the Company at the lesser of (a) 80% of the 5 day average closing bid
price for the 5 consecutive trading days prior to the conversion date or
(b) $8.50. The debentures also contain a mandatory 36-month conversion
feature at the end of which all debentures outstanding will be
automatically converted.
The Company accounts for the debentures in accordance with EITF 98-5
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios." Accordingly, the Company has
allocated a portion of the proceeds to additional paid-in capital equal to
the intrinsic value of the features as computed on the commitment date,
resulting in recognition on the closing date of $250,000 interest expense.
(H) Convertible Preferred Stock and Common Stock Warrants
----------------------------------------------------------------
On July 16, 1999, pursuant to a securities purchase agreement (the
"Agreement") the Company issued 15,000 shares of Series A Convertible
Preferred Stock and 223,881 warrants to purchase common stock to four
investors for a total aggregate selling price of $1,500,040. The debentures
contain a beneficial conversion feature whereby the stock is convertible
any time after the issuance date at the lesser of (a) $8.5938 or (b) 80% of
the market price of the common stock as defined in the Agreement. The
preferred stock entitles the holder to receive on each July 1, and January
1, commencing January 1, 2000 cumulative dividends at 8% per annum computed
on the basis of $100 per preferred stock. At the Company's option, the
dividends may be paid in cash or the Company's common stock. The warrants
are exercisable at $10.31 per share, vest immediately and expire on July
16, 2002. As a result of accounting for the beneficial conversion feature,
the Company charged a $375,011 dividend to retained earnings on the
issuance date.
A total of 750,000 shares of the Company's authorized common stock have
been reserved for issuance upon conversion of the preferred stock and
exercise of the warrants.
Note 14 - RESTATEMENT
------------------------
Subsequent to the issuance of the Company's 1998 consolidated financial
statements, management became aware that non-cash stock based compensation
of $762,000 resulting from a principal stockholder transaction was not
included in the statement of operations in 1998. The inclusion of this item
in the revised 1998 consolidated financial statements has the effect of
changing net income of $22,026 to a net loss of $739,974 and changing
earnings per share of $0.01 to loss per share of $0.43.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
/s/ Michael Muzio
----------------------------------------
By: Michael Muzio, President
Date: June 5, 2000
<PAGE>
EXHIBIT INDEX
--------------------------------------------------------------------------------
Exhibit # Description Page Number
--------------------------------------------------------------------------------
2.1 Kendrex and HLHK Merger (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 2.1)
--------------------------------------------------------------------------------
2.2 Trimfast, Inc. Acquisition (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 2.2)
--------------------------------------------------------------------------------
2.3 Rescission of IMMMU and IMMCEL Acquisitions N/A
(Incorporated by reference as filed in Form
10-SB/A filed on 12/23/99 as Exhibit 2.3)
--------------------------------------------------------------------------------
3.1 Articles of Incorporation (Incorporated by N/A
reference as filed in Form 10-SB filed on
7/12/99 as Exhibit 3.1)
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
3.2 Bylaws (Incorporated by reference as filed in N/A
Form 10-SB filed on 7/12/99 as Exhibit 3.2)
--------------------------------------------------------------------------------
4.1 Specimen Share Certificate (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 4.1)
--------------------------------------------------------------------------------
4.2 Debenture Agreement (Incorporated by reference N/A
as filed in Form 10-SB filed on 7/12/99 as
Exhibit 4)
--------------------------------------------------------------------------------
4.3 Warrant Agreement (Incorporated by reference N/A
as filed in Form 10-SB/A filed on 12/23/99 as
Exhibit 4.3)
--------------------------------------------------------------------------------
4.4 Preferred Share Agreement (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 4.4)
--------------------------------------------------------------------------------
4.5 Series A Certificate of Designations, N/A
Preferences and Rights
--------------------------------------------------------------------------------
10.1 Lease Option Agreement (Incorporated by N/A
reference as filed in Form 10-SB filed on
7/12/99 as Exhibit 10)
--------------------------------------------------------------------------------
10.2 WCW Agreement E-60
--------------------------------------------------------------------------------
10.3 Venture Direct Worldwide Agreement N/A
(Incorporated by reference as filed in Form
10-SB/A filed on 12/23/99 as Exhibit 10.3)
--------------------------------------------------------------------------------
10.4 Distribution Agreement (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 10.4)
--------------------------------------------------------------------------------
10.5 Convertible Debenture Subscription Agreement E-74
--------------------------------------------------------------------------------
10.6 Aryeh Trading Agreement dated March 18, 1999 E-91
--------------------------------------------------------------------------------
10.7 Aryeh Trading Agreement dated March 30, 1999 E-93
--------------------------------------------------------------------------------
10.8 Aryeh Trading Agreement dated October 22, 1999 E-96
--------------------------------------------------------------------------------
10.9 Aryeh Trading Agreement dated November 10, 1999 E-97
--------------------------------------------------------------------------------
10.10 Stock Exchange Agreement- Nutrition Clubstores
(Incorporated by reference as filed in Form 8-K N/A
filed on 5/12/00)
--------------------------------------------------------------------------------
21 Subsidiaries of Registrant (Incorporated by N/A
reference as filed in Form 10-SB/A filed on
12/23/99 as Exhibit 21)
--------------------------------------------------------------------------------
27 Financial Data Schedule E-98
--------------------------------------------------------------------------------
<PAGE>
