UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20529
FORM 10-KSB/A
(AMENDMENT NO. 2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1999
Commission File No. 0-26675
TRIMFAST GROUP, INC.
(Exact Name of Registrant as specified in its charter)
NEVADA 88-0367136
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
777 S. Harbour Island Blvd. Suite 780, Tampa, Florida 33602
(Address of principal executive offices)
(813) 275-0050
(Registrant's telephone number)
Securities registered under Section 12(b) of the Act:
Title of each class to be registered: None
Securities registered pursuant to section 12(g) of the Act:
Title of each class to be registered: Common Stock, $.001 Par Value
Name of exchange: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No
--- ---
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____Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of March 31, 2000 is $13,329,000.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
PRECEDING FIVE YEARS.
Indicate by checkmark whether the Registrant has filed all documents and
reports to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
YES________ NO__________
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock , as of the latest practicable date. As of March 31,
2000, there were 5,097,362 shares of the Company's $.001 par value common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
This Form 10-KSB contains "forward-looking statements" relating to the
Registrant which represent the Registrant's current expectations or beliefs
including, but not limited to, statements concerning Registrant's operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-KSB that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "anticipation", "intend", "could", "estimate", or
"continue" or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel and variability of quarterly results, ability of
Registrant to continue its growth strategy and competition, certain of which are
beyond the Registrant's control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in the
forward looking statements.
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PART I.
ITEM 1. DESCRIPTION OF THE BUSINESS.
(a) Business Development.
We were incorporated in the State of Nevada on February 23, 1987 as Kendrex
Systems, Inc. We engaged in several different areas of business until we began
our current operations in August 1998 with the acquisition of TrimFast, Inc.
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 merger with TrimFast, Inc. because we believed that the
nutrition and vitamin supplement field represented a business opportunity for us
and we continue to explore opportunities in this field through several wholly
owned subsidiaries.
We sell vitamins under our own product line and under licensing agreements with
various third parties. 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. In February
2000 we entered a licensing agreement with Marvel Comics which gives us the
right to market Spiderman's Children's Chewable Multi-Vitamin and Mineral
Supplements.
With the growth of the Internet, we developed an Internet site, NutritionCafe.com.
The website is designed to provide nutritional information, provide links to other
informative sites and to market and sell our products.
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.
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
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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; (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.
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.
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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 affect 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.
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On March 18, 1999, we entered into a written agreement with Aryeh Trading, Inc.,
a third party investment group and formerly 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 included to obtain capital
for the Company by buying shares from the Company and for Aryeh to purchase
other free trading shares of the Company’s common stock 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 the Company asserts that 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 and delivered for 155,000 shares on July 13, 1999.
On July 13, 1999 we issued 155,000 restricted shares of our common stock for
$4.00 each to Aryeh Trading. 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 the market
value for cash. 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 at 2555 Blackburn St.,Clearwater, Florida,
the facility from which we operate Nutrition Cafe as security against the October
22, 1999 purchase agreement. Our original commitment was at $8.25 per share. As
of December 31, 1999, we recorded a charge to additional paid-in capital for the
October 22, 1999 stock repurchase commitment for the 155,000 shares at $8.50 per
share. As of July 25, 2000, the repurchase price had increased by $1.25 since
December 31, 1999 to $9.75 per share. The additional $1.25, plus increases
thereafter, is or will be treated for financial reporting purposes as an expense
rather as a reduction of paid-in capital. Redemption accruals or payments will
not be treated as an expense for tax purposes. To date, we have not repurchased
any of the 155,000 shares. The relevant agreements are filed as Exhibits with
Amendment No. 4 to the Company’s Form 10-SB filed on June 6, 2000. See
Part II. Item 3. “Legal Proceedings.”
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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 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 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 for the shares of common stock
was valued at $4.80 per share for financial accounting purposes based on the
average quoted trading price a few days before and after the announcement of the
transaction. 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 shares is subject to
adjustment based upon the audited financial statements which are to be provided
by Nutrition Clubstores. To the extent that the Nutrition Clubstores audited
financial statements for February 29, 2000 show a net worth which is less than
85% of the unaudited financial statements, then in that event, for every $5.00
reduction or portion thereof in net worth, Seller shall be entitled to receive
one less share of common stock.
Subject to the completion of the Nutrition Clubstores audit, we anticipate
allocating the $2,886,000 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 of $65,315.
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Nutrition Clubstores are staffed point of purchase "micro-stores" or "kiosks"
located in gyms and other health clubs, carrying popular brand sports and
general nutrition supplements. The stores range in size from 8' x 8' to 12' x
12'. The stores currently carry over 300 popular, leading brand sports
nutrition products, drinks and bars. As we begin to integrate these Clubstores
with our own operations, we plan to introduce more of our products into the
product sales mix. Although there are start-up costs involved in opening any
of the kiosks, once operational, because of their small size and low overhead,
we do not anticipate that opening new kiosks will have any adverse impact on our
liquidity.
(b) Principal Products and their Markets.
NUTRITIONAL PRODUCTS.
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 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 in Canada. 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 Item 3 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.
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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 manufacturers 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 Part II. Item 3.under “Legal Proceedings-Breach of Contract.”)
However, 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 operations and financial conditions.
PRINCIPAL 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.
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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.
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. We hired Steve
Kushner as a nutritionalist consultant to the company. Mr. Kushner 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.
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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 available data of the size of our
competition. Accordingly, our competition is difficult to assess with any
preciseness.
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 in July 1999 and currently offers approximately 1,365
products including nutritional products, 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 and will be offered at our Nutritition Clubstores. 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
facilities and area to accommodate these expanded number of products and product
lines.
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In addition to offering a complete line of vitamins and supplements, the
NutritionCafe.com web page offers visitors and members 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.
There can be no assurance that our Internet site 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.
When we originally launched Nutrition Cafe, anyone wishing to purchase products
from the Nutrition Cafe 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. On January 19, 2000, we decided to
eliminate the monthly membership fee. 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 are 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
shipped via UPS ground transportation. Express delivery options are available
at an additional cost. We warehouse approximately 2,000 different products at
our warehouse facility located at 2555 Blackburn St., Clearwater, Florida, the
facility from which we operate Nutrition Cafe. See Note 8 D in the Notes to
financial statements herein. Our goal is to continue developing our distribution
infrastructure to increase efficiency and support greater customer demand.
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Marketing and Promotion.
Our marketing strategy is designed to strengthen the Nutrition Cafe. brand name,
to increase customer traffic to the NutritionCafe.com website, to build customer
loyalty, 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.
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, Dolisos America, Inc. and
Five Star Brands, Inc. manufacture most of the products for TrimFast and Body
Life Sciences.
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We procure raw materials from various suppliers, but we contract our finished
product production to various third party manufacturers. 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.
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.
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.
-14-
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.
Dependence on a Few Customers.
We have no significant concentration of customers.
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). The Company has applied and intends to apply for trademark
protection for several of its products. There can be no assurance that any
application that the Company may file will be approved or even if obtained, that
the use of the mark 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 so 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.
Unlike pharmaceutical products that rely on specific combinations of drugs and
chemicals, patents cannot protect herbal products. 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. There can be no assurance that a third party will not misappropriate
any of our proprietary information.
-15-
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.
-16-
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
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."
-17-
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.
-18-
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.
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.
-19-
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.
GYM KIOSKS
With the acquisition of Nutrition Clubstores in March 2000, management intends
to open up point of purchase "micro-stores" or "kiosks" located in gyms and
other health clubs, carrying popular brand sports and general nutrition
supplements. The stores will range in size from 8' x 8' to 12' x 12'. There
are currently 10 Nutrition Clubstores operating throughout the country; 5 in New
York, 2 in Florida, 1 in California, 1 in Iowa and 1 in New Hampshire. The
stores currently operate in Gold's Gyms and our initial expansion will be
targeted at various Gold's Gym's. We plan to expand by opening several stores
in the same geographic area. To date, however, we have opened no new stores.
We are currently targeting California and Florida for our initial expansion.
However, we may pursue opportunities in other parts of the country and open
kiosks in facilities other than Gold's gym. The stores currently carry over
300 popular, leading brand sports nutrition products, drinks and bars. As we
begin to integrate these Clubstores with our own operations, we plan to
introduce more of our products into the product sales mix.
BOTTLED WATER.
In May 1999, we acquired the assets of Ice Cold Water Co. Inc., a bottled
water distributor located in the Tampa, Florida area. Ice Cold Water delivers
bottled water to a base of customers in the Tampa, Florida area. We operate
this business through our wholly owned subsidiary, Cooler Group, Inc.
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.
-20-
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 systems.
-21-
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.
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.
-22-
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.
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.
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.
-23-
Year 2000 Compliance.
Our systems are Year 2000 ("Y2K") compliant. The cost of such compliance on our
part was less than $5,000. 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.
ITEM 2 PROPERTIES
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, 2003.
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 have purchased a 17,000 square foot warehouse facility in Clearwater,
Florida. The total purchase price for the property was $1.2 million. This
facility houses our Nutrition Cafe operations. See Note 8 D in the Notes to
the financial statements herein.
Item 3 Legal Proceedings.
Product Liability.
Five lawsuits and three notifications of consumer-protection claims have been
made or filed against us in connection with the sale of Revivarant, a product
containing the chemical GBL which has been determined by the Food and Drug
Administration to be unsafe for human consumption. This substance was sold
throughout the United States in health stores. Pursuant to a voluntary
agreement with the Food and Drug Administration, we have removed this product
from sale.
In an action 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 an action filed in the Circuit Court for Harrison County,
Mississippi on June 14, 1999 (Peck v. Trimfast Group, Inc.) and in a separate
action filed in the Circuit Court of Tennessee for the Thirteenth Judicial
District at Memphis on April 5, 1999 (Case No. 301672-5TD; 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. In the Jensen case, the plaintiff has requested an
unspecified amount of damages "to be proven at the time of trial, including
punitive damages." In the Peck case, the plaintiff has requested an unspecified
amount of "actual, compensatory and punitive damages." In an action filed
by Anthony Brooks against Body Life Sciences, the case is now pending in federal
court in the United States District Court for the Western District of
Tennessee as a companion case to the Clifton litigation.
-24-
In an action filed August 6, 1999 in state court in Fulton County, Georgia, Shaw
v. Body Life Sciences, TrimFast Group et al. (Case No. 99-US 156301-E) the
Plaintiff alleges personal injuries as a result of the consumption of Revivarant
and seeks unspecified damages.
We estimate that the total damages sought in these cases may be millions of
dollars in aggregate. We have retained counsel to represent our interests in
these claims, but have not had a sufficient period of time to investigate the
merits of these claims.
All of the aforementioned claims have been submitted to Royal Insurance Company
who issued a product liability policy to our third party manufacturer. In March
2000 the Company was denied coverage from Royal Insurance Company. At the
time that the alleged causes of action arose, we had no product liability
insurance in our own name. We have since obtained a policy with an effective
date of May 27, 1999. Our product liability insurance will not be available to
cover these claims, should we be found liable. As such, our business, results
of operations and financial condition could be adversely affected, if we are
found liable for these claims.
Since our product liability insurance only became effective on May 27, 1999, we
have no insurance coverage for the above mentioned claims or for future claims
relating to the sale of Revivarant. Further, we have insufficient assets
available to pay any such product liability claims. Any judgment or claim in
favor of a claimant could have a materially adverse effect our operations,
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.
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.
-25-
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. The complaint was for services rendered
in connection with the delivery of labels for our products. The Company's
position in mediation was that the labels did not meet the company's
specifications. At mediation the parties entered into a payment plan. Payments
were not made by Trimfast and a final judgment 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 $35,000.00. Kingchem was
one of our suppliers until a dispute arose about the quantity of supplies that
had been delivered to us. A default 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, its former
president, Arcobel Investment and Interwest Transfer Company, our former
transfer agent. The suit alleges, that 600,000 shares of the TrimFast stock
which was previously owned by Kay was improperly canceled by the Company 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 the 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 the Company 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. As of April 6, 2000, the Company has not
been formally served with the complaint, has not had an opportunity to retain
counsel, has not had an opportunity to review the merits of the allegations
contained therein or to discuss the facts surrounding the transactions with the
named Plaintiffs with the Company's former president, Harry Kay.
-26-
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.
The action in Pinellas County Circuit Court seeks specific performance pursuant
to an agreement for us to purchase 155,000 shares of our common stock from Aryeh.
The Plaintiff also seeks to foreclose on our warehouse facility located at
2555 Blackburn St., Clearwater, Florida, the facility from which we operate
Nutrition Cafe and in which we warehouse 2,000 products. 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. Aryeh Trading Inc. was formerly
market maker for our securities until approximately November 1, 1999.
Francois Goelo had filed an action in Hillsboro County Circuit Court (Case No.
00-1444) against TrimFast Group, Inc., Michael Muzio and certain other parties
in connection with alleged non-delivery of 22,000 shares of TrimFast and 00,000
shares of common stock of Sierra Holdings Group. The complaint, is a multi-count
complaint and included counts for breach of contract, specific performance,
fraud and civil theft. The complaint alleged that a total of $95,750($77,000 for
the TrimFast shares) was delivered as per the instructions of Mr. Muzio. The
shares of common stock that had not been delivered to Mr. Goelo, as Mr. Muzio
has advised the Company,were shares of common stock personally owned by Mr.Muzio.
The Plaintiff sought delivery of the shares of common stock pursuant to the
agreement and sought compensatory and punitive damages in excess of $790,000. On
May 3, 2000 plaintiff offered to settle this matter whereby Mr. Muzio would pay
$95,750 and transfer to the plaintiff 20,000 shares of TrimFast common stock. In
addition, the settlement offer provided that the parties will enter into a joint
stipulation for dismissal of the action and execution of a general release. We
subsequently signed a written settlement agreement with Mr. Goelo and Mr. Muzio,
and Mr. Goelo has released the other parties, including the Company, from all
liabilities or obligations. As part of this settlement, the litigation was
dismissed and the Company was not required to make any payment, or give any
shares, to Mr. Goelo.
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.
-27-
Other.
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 4. Submission of Maters to a Vote of Security Holders
There were no votes submitted during the fourth quarter of the fiscal year
to a vote of the Registrant's security holders, through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information
Our common stock is currently traded on the National Quotation Service Inc.'s
"Pink Sheets" under the symbol "TRIM." As of March 31, 2000, there were
5,097,362 common shares and 15,000 Convertible Preferred Class A 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
1999 business activities reflected throughout this registration statement.
High Bid Low Bid
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 9.187 7.06
Quarter Ended December 31, 2000 7.31 4.00
2000
Quarter Ended March 31 2000 7.25 3.50
Quarter Ended June 30, 2000 3.875 1.0469
Quarter ending September 30, 2000 2.84 0.7969
(to August 21, 2000)
Such market quotations reflect the high bid and low prices as reflected by the
OTCBB 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 & Co., Inc.; and Knight
Securities, L.P. Trading in our Common Stock may be sporadic.
(b) Holders
As of March 31, 2000 there were approximately 196 holders of record of our
common stock.
(c) 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. Any decisions as to
future payment of dividends will depend on our earnings and financial position
and such other factors, as the Board of Directors deems relevant.
-28-
(d) 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 he 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 rate.
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, and
the shares were not purchased for distribution or resale by Aryeh. Under
agreements dated October 22, 1999 and November 10, 1999 the Company is obligated
to repurchase these shares. To date none of the 155,000 shares have been
repurchased. See Part II, Item 3, entitled “Legal Proceedings-Breach of
Contract” We believe Section 4(2)under the Securities Act of 1933 provides
an exemption for each and every such private offering.
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
-29-
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.
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.
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.
-30-
In June 1999, we issued a total of $1,000,000 in convertible debentures to
CalpII 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 Series A convertible preferred shares for $100 per
share and 223,881 warrants.The warrants are exercisable at $10.31 per share,vest
immediately, and expire on July 16, 2002. 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.
Commencing April 25, 2000, we have received notices 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 15,000 preferred shares issued
to these investors. The investors seek $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 (See Item. 8 entitled
“Description of Securities” under the heading “PREFERRED STOCK-
Redemption”as set forth in the Company’s Form 10-SB/A as filed on or
about August 24, 2000) applies unless the Company performs as required under its
agreements with the holders, including registering the Common Stock issuable
upon conversion by the holders. The Company has not filed the registration
statement, as and when required. The Company is also required to cause a
registration statement covering the shares to be declared effective before
November, 2000. The Company is unable to pay the redemption price at this time.
The Company’s funds are insufficient to redeem the preferred stock and also
thereafter provide for the payment of all of its creditors, and therefore the
present default situation is expected to continue at least until a registration
statement is filed and declared effective as required of the Company under these
Series A Preferred Stock registration rights. Until this redemption price shall
have been paid by the Company, the holders who have demanded redemption will
continue to have the ability to convert their shares of Preferred Stock into
previously unissued shares of TrimFast common stock. The Company issued 15,000
shares of Series A Convertible Preferred Stock for $100 per share, and each is
convertible any time after the issuance date at the face amount divided by the
lesser of (a) $8.5938 or (b) 80% of the market price of the common stock as
defined in the Agreement, which is defined based on a relevant average during a
period before a given conversion date. The redemption notices were given
commencing April 25, 2000. Therefore,the Company has decided that it will in its
June 30, 2000 financial reports reclassify the preferred stock as a short-term
liability in light of the present demands for redemption,and reduce stockholders
’ equity by about $1,875,000, which is the amount of its redemption
obligation at the date of the balance sheet, plus all accrued dividends and
liquidated damages accrued, as required according to Rules 5-02.28 of Regulation
S-X and SAB Topic 3C. The redemption rights were triggered by the existence of a
triggering event,as defined by the Certificate of Designations, Preferences and
Rights for such preferred shares,and therefore 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.
The Company has defaulted under the Registration Rights that belong to the holders
of the outstanding Preferred Stock, and this default will continue so long as the
Company (a) has failed to file a registration statement covering the Common Stock
issuable upon conversion of the Preferred Stock or (b) fails to have a
registration statement declared effective by the Securities and Exchange Commission.
While the default continues, Company shall automatically be subjected to penalties.
The Company for each month or partial month while the default is continuing shall
be required to make a payment to the holder. We cannot predict when a registration
statement will be filed and be declared effective. The Registration Rights Agreement
is filed as Exhibit 10.11 to the Company’s Form 10-SB/A amendment number 5
filed on or about August 24, 2000. The Preferred Share Agreement is filed as Exhibit
4.4 to the Company’s Form 10-SB/A filed on December 23, 1999.
The amount payable on redemption of one share is $125 multiplied by the number of
shares redeemed (which is 15,000 shares, or $1,875,000), plus accrued dividends to
the date of redemption, at the rate of $8.00 per share per year from June 1999, plus
applicable liquidated damages. Liquidated damages accrue under the Registration
Rights Agreement and under the Series A Preferred Share Agreement.
If the Company violates any provision of or fails to fulfill any of its obligations
or duties to the holders of outstanding Preferred Stock, other than the Registration
Rights Agreement, the Company agrees to pay liquidated damages to each Buyer
following the occurrence of such violation in an amount determined by multiplying (i)
$2.00 per Preferred Share then held by such Buyer by (ii) the percentage derived by
dividing (A) the actual number of days elapsed from the last day of the date of the
Company Violation or the prior 30-day period, as applicable, to the day such Company
Violation has been completely cured by (B) 30, in cash, or at the Buyer's option, in
the number of shares of Company common stock equal to the quotient of (v) the dollar
amount of the Liquidated Damages on the Payment Date (as defined below) divided by
(w) the closing bid price of the Company's common stock as of the date of the Company
Violation (as quoted in the Principal Market or the market or exchange where the
Company's common stock is then traded). The Liquidated Damages payable pursuant
hereto shall be payable within five (5) business days from the end of the calendar
month commencing on the first calendar month in which the Company’s violation
occurs. In the event the Buyer elects to receive the Liquidated Damages amount in
shares of Company common stock, such shares shall also be considered Conversion
Shares and shall have the registration rights set forth in the Registration Rights
Agreement.
-31-
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 believe section 4(2) was
available because there was no general solicitation or advertising used in the
transaction did not involve a public offering. The Company believes that the
exemption under Section 4(2) was available for this private placement.
On April 25, 2000 the Company entered into two convertible debenture agreements,
with Gibralt U.S., Inc., a Colorado Corporation and FAC Enterprises, Inc. a
Pennsylvania Corporation, each providing for the sale of $500,000 of its
convertible debentures due July 13, 2001 with interest at 12%. This sale was
part of a private placement in which the Company intends to sell an aggregate
of $3,000,000 of debentures, but no assurance is made that we will be able to
do so. The proceeds will be used to open additional Nutrition Clubstores and
produce and broadcast the commercial spots for our WCW Ultra Energy Bars. On
April 28, 2000 we received the first $1,000,000. The outstanding principal
amount of debentures is convertible at the option of the holder into the
Company’s Common Stock at the lower of (I) Two and 50/100 Dollars ($2.50)
per share; or (ii) seventy-five percent (75%) of the closing bid price of the
Company’s publicly traded common stock on the Closing Date. As to the
Closing on April 28, 2000, the conversion price is therefore about $2.00 per
share for the first $1,000,000 of debentures. No later than June 9, 2000, the
Company was required to fi1e a registration statement on Form S-2 under the
Securities Act and under all applicab1e Blue Sky laws covering the Common Stock.
By August 26, 2000, the Company is required to have caused such registration
statement to be declared effective by the SEC, all at the Company's sole cost
and expense. Because the Company (a)has failed to file a registration statement
covering the Common Stock issuable upon conversion of the Convertible Debentures,
within 45 days of the first Closing Date and (b) in the event the Company fails
to have a registration statement declared effective by the Securities and Exchange
Commission within 120 days of the first Closing Date, Company shall automatically
be subjected to penalties. The Company for each month or partial month while the
default is continuing shall either: (a) Make a payment of Fifty Thousand Dollars
($50,000) to the Purchaser; or (b) deliver Twenty Thousand (20,000) shares of the
Company’s common stock to the Purchaser, whichever the Purchaser elects.
The purchasers in the aggregate therefore, may receive up to One Hundred
Thousand Dollars ($100,000) in cash per month commencing June 9, 2000. We cannot
predict when a registration statement will be filed and be declared effective.
As of August 9, 2000, the liquidated damages amounted to $200,000, in cash, or
80,000 shares of Common Stock. We have granted the purchasers a security
interest in all of the 500,000 shares of common stock of Insiderstreet.com (NSDR)
that our Company owns to secure our obligations to the debentureholders. The
Company believes that the exemption under Section 4(2) was available for this
private placement.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
RESULTS OF OPERATIONS.
Sales for the twelve months ended December 31, 1999 were $631,388 as compared to
$1,925,332 for the year ended December 31, 1998. Cost of sales were $396,072 as
compared to $567,472 resulting in a gross profit for 1999 of $235,316 as
compared to $1,357,860 for 1998. Our Gross profit margin in 1998 was
approximately 70% of sales as compared to a gross profit margin of approximately
37.2% in 1999 The significant decline in sales 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. With the
discontinuance of Revivarant, the Company had to change its product mix. The
change in product mix resulted in a significant decline in our margins.
Management hopes to identify and concentrate on those products which generate
maximum revenues and margins.
The significant increase in inventory was required to meet product demand on the
Nutrition Cafe website. We have also increased inventory levels to meet
anticipated demands for our WCW Ultra Energy Bars and the likely demand which
will be generated from product sale as we incorporate Nutrition Clubstores into
our operations. While it is impossible to determine with any degree of
certainty whether management has accurately forecast demand, management believes
that inventory levels are adequate to meet demand without being excessive and to
better insure that inventory levels remain in line with anticipated demand,
management intends to evaluate inventory quarterly for obsolete products and
write down as necessary.
-32-
Although compensation increased from $983,773 to $1,094,575 in 1999,
approximately $762,000 of the 1998 amount represents compensation income
attributable to Mr. Muzio attributable to his purchase of shares of the
Company's common stock from its former president and affiliate, Harry Kay.
Excluding this non-cash expense item compensation expense increase nearly five
fold as a result of several factors. Until August 1998 we operated as a
privately held company and not as a consolidated entity., As a result, the
salaries for 1998 consisted of our president/chief executive officer Michael
Muzio and our executive vice president, G. Vosler. Our 1999 salaries included a
full year of salaries for Mr. Muzio, Mr. Vosler as well as an increased number
of support 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. In addition, approximately $500,000 of compensation
expense is non-cash relating to common stock issued to employees for services.
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.
During 1999 the company acquired the IMMCEL and IMMMU product lines. 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 had to rescind this Agreement. Any profits or
losses generated from the operation on IMMMU and IMMCEL have been allocated to
its prior owners. We recorded in the "Receivable - other" to account for the
loss of approximately $88,000 from operating IMMMU and IMMCEL for the period of
time we managed those companies. We believe that the amount is not
collectible and have therefore written off as of December 31, 1999.
Management believes that additional revenues will be generated from its
licensing agreement with World Championship Wrestling ("WCW"). 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 and we have shipped our energy bars to
several large distributors. However, technical difficulties in producing the
advertising campaign has delayed the launch of the product. The company
intended to feature three of the WCW wrestlers on the energy bars and develop an
advertising campaign featuring one of the wrestlers. As of May 2, 2000, our
WCW energy bars included the three wrestling figures, Hulk Hogan, Randy "Macho
Man" Savage and Bill Goldberg. Our advertising campaign featured Bill Goldberg
who was injured. It is unlikely Mr. Goldberg 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 acceptable terms.
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.
Management believes that the company will be able to generate additional
revenues through the sale of vitamins under its licensing agreement with Marvel
comics and with the growth of its point of purchase kiosks in national health
clubs and gyms. However, there can be no assurance of the market acceptance of
these products or that the company will be able to sell these products in a
profitable matter.
-33-
For the year ended December 31, 1999, we recorded $5,513,080 in professional
fees and consulting as compared to $49,511 in 1998. The increase in
professional fees can be attributable to the growth of the company over the past
year and the fact that TrimFast Inc. was previously a privately held company.
A significant portion of this line item expense (approximately 83%) is a
non-cash expense, representing the issuance of common stock to certain
professionals in exchange for professional services. We contracted with
consultants and professionals in order to assist us in the formulation and
development of new product lines in 1999. We also issued shares of our common
stock for legal services, assistance in starting our website and accounting
consultants who were engaged to assist us with the formalization of our
accounting systems. Management anticipates that professional fees will decline
significantly in the future.
Selling general and administrative expenses were $423,289 for the year ended
December 31, 1998 as compared to $868,810 for the year ended December 31, 1999.
Approximately $175,000 of this increase was attributable to advertising for
Nutrition
Cafe.
We recorded $503,839 in bad debt expense in December 1999. 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 them. In December 1998, we recorded the bad debt expense
relating to Cutting Edge and ceased doing business with them at that time.
Approximately $250,000 of the interest expense of $302,408 is attributable to
the intrinsic value of the convertible debenture executed by the Company.
Net loss for the year ended December, 31 1998 was $739,974 and net loss per
share was $0.43. As compared to a net loss of $8,352,908 for 1999 and a net
loss per share of $2.02.
LIQUIDITY AND CAPITAL RESOURCES.
December 31, 1999 as compared to December 31, 1998
Total cash and cash equivalents as of December 31, 1999 were $44,264, as
compared to $120,938 as of December 31, 1998, a decline of approximately 63%.
Trade receivables declined from $357,889 to $88,281. Inventory increased from
$188,737 to $281,313. 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 decreased approximately 33%, from $673,364 to $456,715
Property and equipment increased from $33,403 to $1,417,381. 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 $210,814 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 $625,757 to $718,362, and we issued a convertible debt instrument
in the amount of $1,000,000. The proceeds raised from this debt offering were
used to purchase the warehouse facility.
Commencing April 25, 2000, we have received notices 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 15,000 preferred shares issued to
these investors. The investors seek $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 (See Item. 8 entitled
"Description of Securities" under the heading "PREFERRED STOCK-Redemption" as
set forth in the Company's Form 10-SB/A as filed on or about August 24, 2000)
applies unless the Company performs as required under its agreements with the
holders, including registering the Common Stock issuable upon conversion by the
holders. The Company has not filed the registration statement, as and when
required. The Company is also required to cause a registration statement
covering the shares to be declared effective before November, 2000. The Company
is unable to pay the redemption price at this time. The Company's funds are
insufficient to redeem the preferred stock and also thereafter provide for the
payment of all of its creditors, and therefore the present default situation is
expected to continue at least until a registration statement is filed and
declared effective as required of the Company under these Series A Preferred
Stock registration rights. Until this redemption price shall have been paid by
the Company, the holders who have demanded redemption will continue to have the
ability to convert their shares of Preferred Stock into previously unissued
shares of TrimFast common stock. The Company issued 15,000 shares of Series A
Convertible Preferred Stock for $100 per share,and each is convertible any time
after the issuance date at the face amount divided by the lesser of (a) $8.5938
or (b) 80% of the market price of the common stock as defined in the Agreement,
which is defined based on a relevant average during a period before a given
conversion date. The redemption notices were given commencing April 25, 2000.
Therefore, the Company has decided that it will in its June 30, 2000 financial
reports reclassify the preferred stock as a short-term liability in light of
the present demands for redemption, and reduce stockholders' equity by about
$1,875,000, which is the amount of its redemption obligation at the date of the
balance sheet, plus all accrued dividends and liquidated damages accrued, as
required according to Rules 5-02.28 of Regulation S-X and SAB Topic 3C. The
redemption rights were triggered by the existence of a triggering event, as
defined by the Certificate of Designations, Preferences and Rights for such
preferred shares, and therefore 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.
The Company has already defaulted under the Registration Rights that belong to
the holders of the outstanding Preferred Stock, and this default will continue
so long as the Company (a) has failed to file a registration statement covering
the Common Stock issuable upon conversion of the Preferred Stock or (b) fails
to have a registration statement declared effective by the Securities and
Exchange Commission. While the default continues, Company shall automatically
be subjected to penalties. The Company for each month or partial month while
the default is continuing shall be required to make a payment to the holder.
We cannot predict when a registration statement will be filed and be declared
effective. The Registration Rights Agreement is filed as Exhibit 10.11 to the
Company's Form 10-SB/A amendment number 5 filed on or about August 24, 2000.
The Preferred Share Agreement is filed as Exhibit 4.4 to the Company's Form
10-SB/A filed on December 23, 1999.
The amount payable on redemption of one share is $125 multiplied by the number
of shares redeemed (which is 15,000 shares, or $1,875,000), plus accrued
dividends to the date of redemption, at the rate of $8.00 per share per year
from June 1999, plus applicable liquidated damages. Liquidated damages accrue
under the Registration Rights Agreement and under the Series A Preferred Share
Agreement.
If the Company violates any provision of or fails to fulfill any of its
obligations or duties to the holders of outstanding Preferred Stock, other
than the Registration Rights Agreement, the Company agrees to pay liquidated
damages to each Buyer following the occurrence of such violation in an amount
determined by multiplying (i)$2.00 per Preferred Share then held by such Buyer
by (ii) the percentage derived by dividing (A) the actual number of days
elapsed from the last day of the date of the Company Violation or the prior
30-day period, as applicable, to the day such Company Violation has been
completely cured by` (B) 30, in cash, or at the Buyer's option, in the number
of shares of Company common stock equal to the quotient of(v)the dollar amount
of the Liquidated Damages on the Payment Date (as defined below) divided by
(w) the closing bid price of the Company's common stock as of the date of the
Company Violation (as quoted in the Principal Market or the market or exchange
where the Company's common stock is then traded). The Liquidated Damages
payable pursuant hereto shall be payable within five (5) business days from
the end of the calendar month commencing on the first calendar month in which
the Company's violation occurs. In the event the Buyer elects to receive the
Liquidated Damages amount in shares of Company common stock, such shares shall
also be considered Conversion Shares and shall have the registration rights
set forth in the Registration Rights Agreement.
Additionally, on July 13, 1999 we issued 155,000 restricted shares of our
common stock for $4.00 each to Aryeh Trading. 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 the market value for cash. 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 at 2555 Black Burn St., Clearwater, Florida, the facility from which
we operate Nutrition Cafe and in which we warehouse 2,000 products as security
against the October 22, 1999 purchase agreement.Our original commitment was at
$8.25 per share. As of December 31, 1999, we recorded a charge to additional
paid-in capital for the October 22, 1999 stock repurchase commitment for the
155,000 shares at $8.50 per share. As of July 25, 2000, the repurchase price
had increased by $1.25 since December 31, 1999 to $9.75 per share. The
additional $1.25, plus increases thereafter, is or will be treated for
financial reporting purposes as an expense rather as a reduction of paid-in
capital. Redemption accruals or payments will not be treated as an expense for
tax purposes. To date, we have not repurchased any of the 155,000 shares. The
relevant agreements are filed as Exhibits with Amendment No. 4 to the
Company's Form 10-SB filed on June 6, 2000. See Part II. Item 3. "Legal
Proceedings-Breach of Contract."
Despite these significant losses, Management believes that we have sufficient
revenue and reserves to finance ongoing business activities for the 12 months
ending December 31, 2000. However, any judgment or claim in favor of a claimant
regarding Revivarant could have a materially adverse effect on our operations,
including that we may be unable to continue in business.
GENERAL.
Due to our lack of revenues and no business plan, our management sought out an
acquisition candidate and, on August 11, 1998, acquired all of the issued and
outstanding shares of common stock of Trimfast, Inc., a company engaged in the
nutraceutical business.
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.
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 closed to us. We received a significant capital infusion through
the issuance of our common stock in private placements and borrowed funds from
private lenders.
-34-
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. Should the Company determine additional
financing is necessary, the additional financing will be to expand current or
proposed operations.
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) day notice we may redeem the debenture in whole or in part
at any 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 the holder would have received upon the conversion of that
portion of the Debenture. being redeemed.
Item 7. Financial Statements
Financial Statements contained in this report
Consolidated Balance Sheet As of December 31, 1999
Consolidated Statements of Operations For The Years Ended December 31
1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity For The Years
Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999
and 1998
Notes to Consolidated Financial Statements As of December 31, 1999
-35-
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
-36-
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
TRIMFAST GROUP, INC. AND SUBSIDIARIES
CONTENTS
--------
PAGE 1 - 2 INDEPENDENT AUDITORS' REPORT
PAGE 3 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED
PAGE 4 DECEMBER 31, 1999 AND 1998
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
PAGES 5 - 6 DEFICIENCY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
PAGES 7 - 8 ENDED DECEMBER 31, 1999 AND 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF
PAGES 9 - 31 DECEMBER 31, 1999 AND 1998
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of:
Trimfast Group, Inc.
We have audited the accompanying consolidated balance sheet of TrimFast Group,
Inc. and Subsidiaries as of December 31, 1999 and the related consolidated
statements of operations and comprehensive income (loss), changes in
stockholders' deficiency and cash flows for the years ended December 31, 1999
and 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TrimFast Group, Inc.
and Subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has suffered losses from operations and has a
working capital deficiency. As discussed in Note 8 (D) to the financial
statements, the Company is subject to several legal actions with regard to a
product recall whereby uncertainties exist regarding related contingent
liabilities. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 15. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
As more fully described in Note 17, subsequent to the issuance of the Company's
1999 and 1998 consolidated financial statements and our report thereon dated
March 10, 2000, we became aware that the 1998 consolidated financial statements
did not include certain non-cash stock based compensation expense, and that the
1999 consolidated financial statements did not include a stock repurchase
commitment liability. In addition, the 1999 consolidated financial statements
included a discount on restricted common stock for purposes of valuation
<PAGE>
relating to stock based consulting and professional fee expense when no discount
should have been taken. In our original report we expressed an unqualified
opinion with a going concern uncertainty on the 1999 and 1998 consolidated
financial statements, and our opinion on the revised consolidated financial
statements, as expressed herein, remains unqualified with a going concern
uncertainty.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
March 10, 2000 (except for paragraph 3 of Note 9(I) as to which the
date is April 25, 2000 and paragraph 4 of Note 8 (C),
paragraph 7 of Note 8(D), and Note 15 as to which the
date is May 3, 2000)
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
-----------------
ASSETS
------
CURRENT ASSETS
Cash $ 35,858
Short-term investments 8,406
Accounts receivable, net 88,281
Prepaid expenses 42,857
Inventory 281,313
------------
Total Current Assets 456,715
------------
PROPERTY AND EQUIPMENT - NET 1,417,381
------------
INTANGIBLE ASSETS
Goodwill, net 52,754
Software, net 210,814
------------
Total Intangible Assets 263,568
------------
OTHER ASSETS
Due from affiliate 279,250
Rent deposit 15,200
Cash surrender value of life insurance 12,636
------------
Total Other Assets 307,086
------------
TOTAL ASSETS $ 2,444,750
------------ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 718,362
Notes and loans payable 76,475
Due to principal stockholder 142,200
Income taxes payable 20,600
Stock repurchase commitment 1,317,500
------------
Total Current Liabilities 2,275,137
------------
CONVERTIBLE DEBENTURES 1,000,000
------------
TOTAL LIABILITIES 3,275,137
----------------- ------------
STOCKHOLDERS' DEFICIENCY
Preferred stock, Class A, $0.01 par value; 20,000,000 shares
authorized; 15,000 Convertible issued and outstanding 150
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; 4,501,682 shares issued and outstanding 4,501
Common stock to be issued, $0.001 par value, 20,000 shares 20
Additional paid-in capital 9,399,109
Accumulated deficit (9,646,805)
Other comprehensive loss (21,737)
------------
(264,762)
Less subscriptions receivable (90,625)
Less shares issued as a security deposit (475,000)
------------
Total Stockholders' Deficiency (830,387)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,444,750
---------------------------------------------- ============
See accompanying notes to financial statements
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
1999 1998
------------ -----------
NET SALES $ 631,388 $1,925,332
COST OF SALES 396,072 567,472
------------ -----------
GROSS PROFIT 235,316 1,357,860
------------ -----------
OPERATING EXPENSES
Compensation 1,094,575 983,773
Commissions 5,235 41,700
License fees 107,143 -
Depreciation 69,808 10,498
Amortization 8,403 -
Professional and consulting fees 5,513,080 49,511
Bad debt 293,977 503,839
Selling, general and administrative 868,788 423,289
Travel and entertainment 149,908 64,187
------------ -----------
Total Operating Expenses 8,110,917 2,076,797
------------ -----------
LOSS FROM OPERATIONS (7,875,601) (718,937)
------------ -----------
OTHER INCOME (EXPENSE)
Realized gain (loss) on sale of securities - net (1,957) 1,905
Unrealized gain on trading securities - net - 922
Gain on sale of equipment 2,250 -
Write-off of leasehold improvements (2,476) -
Interest expense (302,408) (3,264)
------------ -----------
Total Other (Expense) (304,591) (437)
------------ -----------
LOSS BEFORE INCOME TAXES (8,180,192) (719,374)
FEDERAL AND STATE INCOME TAXES - 20,600
------------ -----------
LOSS BEFORE EXTRAORDINARY ITEMS (8,180,192) (739,974)
EXTRAORDINARY ITEM
Loss on extinguishment of debt (150,979) -
------------ -----------
NET LOSS (8,331,171) (739,974)
OTHER COMPREHENSIVE LOSS, NET OF TAX
Unrealized loss on available-for-sale securities - net (21,737) -
------------ -----------
COMPREHENSIVE LOSS $(8,352,908) $ (739,974)
================== ============ ===========
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (2.02) $ (0.43)
============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 4,119,893 1,710,860
============ ===========
See accompanying notes to financial statements.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
---------------------------------------------------
ACCUMULATED SHARES
OTHER ISSUED AS
ADDITIONAL COMPRE- SUBSCRIP- A
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED HENSIVE TIONS SECURITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS RECEIVABLE DEPOSIT
------ ------- --------- ------- ------------ ------------ ---- ----------- --------
Balance, December31,
1997 $ - 1,286,625 $ 1,287 $ (287) $ (151,846) $ - $ -
Issuance of common stock
for cash - - 63,924 64 187,736 - - - -
Issuance of common
stock to related party in
exchange for $40,000 debt - - 19,500 19 39,981 - - - -
Recapitalization:
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 loss 1998 - - - - - (739,974) - - -
------ ------- --------- ------- ------------ ------------ ---- ----------- --------
Balance, December 31, 1998 - - 2,338,656 2,338 925,987 (891,820) - - -
TREASURY
STOCK TOTAL
---------- ----------
Balance, December31,
1997 $ - $(150,846)
Issuance of common stock
for cash - 187,800
Issuance of common
stock to related party in
exchange for $40,000 debt - 40,000
Recapitalization:
HLHK equity at August
12, 1998 - (680,317)
Reclassification
pursuant to
recapitalization - -
Common stock issued to employees - -
Common stock
issued to attorney for
services - -
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 loss 1998 - (739,974)
---------- ----------
Balance, December 31, 1998 (23,534) 12,971
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
---------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL COMPRE- SUBSCRIP-
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED HENSIVE TIONS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS RECEIVABLE
------ ------- ---------- -------- ------------ ------------- --------- ------------
Issuance of common stock
for cash - - 1,058,005 1,058 1,659,817 - - (90,625)
Stock issued for consulting
and other professional
services - - 918,300 918 4,744,143 - - -
Issuance of common stock
to employees - - 104,900 105 500,075 - - -
Issuance of convertible
debentures - - - - 250,000 - - -
Issuance of preferred stock
option 15,000 150 - - 1,874,901 (375,001) - -
Issuance of common stock
option - - - - 413,780 - - -
Return of stock in
repayment of debt - - (50,000) (50) (399,950) - - -
Issuance of common stock
as a security deposit for
inventory line of credit - - 100,000 100 474,900 - - -
Issuance of common stock
in exchange for a loan - - 7,321 7 30,875 - - -
Issuance of common stock
in exchange for loans - - 44,500 45 242,081 - - -
Purchase and sale of
treasury stock, net - - - - - (48,803) - -
Unrealized losses on
available-for-sale securities - - - - - - (21,737) -
Commitment to repurchase
155,000 shares of treasury
stock - - - - (1,317,500) - - -
Net loss 1999 - - - - - (8,8331,171) - -
------------------------------ ------ ------- ---------- -------- ------------ ------------- --------- ------------
BALANCE DECEMBER
------------------------------
31, 1999 15,000 $ 150 4,521,682 $ 4,521 $ 9,399,109 $ (9,646,805) $(21,737) $ (90,625)
============================== ====== ======= ========== ======== ============ ============= ========= ============
SHARES
ISSUED AS A
SECURITY TREASURY
DEPOSIT STOCK TOTAL
------- -------------
Issuance of common stock
for cash - - 1,570,250
Stock issued for consulting
and other professional
services - - 4,745,061
Issuance of common stock
to employees - - 500,180
Issuance of convertible
debentures - - 250,000
Issuance of preferred stock
option - - 1,500,040
Issuance of common stock
option - - 413,780
Return of stock in
repayment of debt - - (400,000)
Issuance of common stock
as a security deposit for
inventory line of credit (475,000) - 0
Issuance of common stock
in exchange for a loan - - 30,882
Issuance of common stock
in exchange for loans - - 242,126
Purchase and sale of
treasury stock, net - 23,534 (25,269)
Unrealized losses on
available-for-sale securities - - (21,737)
Commitment to repurchase
155,000 shares of treasury
stock - - (1,317,500)
Net loss 1999 - - (8,8331,171)
------------------------------ ---------- ------- -------------
BALANCE DECEMBER
------------------------------
31, 1999 $(475,000) $ - $ (830,387)
------------------------------ ========== ======= =============
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(8,331,171) $(739,974)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 69,808 10,498
Amortization 8,403 -
Bad debt expense 293,977 503,839
Unrealized gain on short-term investments - (922)
Professional fees incurred in exchange for common stock 4,619,461 762,000
Compensation expense incurred in exchange for common stock 500,180 -
Consulting fees incurred in exchange for stock options 413,780 -
Beneficial conversion feature of convertible debentures 250,000 -
Loss on extinguishment of debt 150,979 -
Realized loss on short-term investment 1,957 -
Gain on sale of equipment (2,250) -
Write-off of leasehold improvements 2,476 -
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable (17,136) (856,839)
Prepaid expenses (42,857) -
Inventory (91,782) (165,038)
Deposit (4,581) (8,119)
Increase (Decrease) in:
Accounts payable and accrued expenses 94,499 496,181
Income taxes payable - 20,600
------------ ----------
Total adjustments 6,246,914 762,200
------------ ----------
Net cash provided by (used in) operating activities (2,084,257) 22,226
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term investments (16,803) (14,375)
Purchases of property and equipment (1,400,655) (37,821)
Purchase of software (87,755) -
Due from affiliates (673,305) -
Advances to affiliate - (5,945)
Advances to employees 5,800 (5,800)
Cash surrender value of life insurance (4,529) (8,107)
------------ ----------
Net cash used in investing activities (2,177,247) (72,048)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholder/officer 142,200 (18,436)
Proceeds from convertible debentures 1,000,000 -
Proceeds from loans payable 74,500 1,975
Proceeds from issuance of common stock 1,570,250 177,800
Proceeds from issuance of preferred stock 1,500,040 -
Payments of loans payable (70,000) -
Purchase and sale of treasury stock, net (25,269) (23,534)
------------ ----------
Net cash provided by financing activities 4,191,721 137,805
------------ ----------
INCREASE IN CASH AND CASH EQUIVALENTS (69,783) 87,983
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 105,641 17,658
------------ ----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 35,858 $ 105,641
======================================= ============ ==========
See accompanying notes to financial statements.
TRIMFAST GROUP, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
----------------------------------------------
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 14 (A))
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 70,358 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.
During 1999, the Company issued 44,500 shares of common stock to unrelated
parties in exchange for loans payable of $70,125 plus accrued interest resulting
in a loss on extinguishment of debt of $150,979.
During 1999, the Company issued 7,321 shares of common stock to an unrelated
party in exchange for the remaining unpaid balance of a loan payable plus
accrued interest of a total of $30,882.
During 1999, the Company issued 20,000 shares of common stock to an unrelated
party in exchange for the purchase of software of $126,000.
During 1999, a related party returned 50,000 shares of the Company's common
stock to settle $400,000 of liabilities owed to the Company.
During 1999, the Company issued 100,000 shares of common stock to an escrow
account as a security deposit for an inventory line of credit. These shares
were valued at $4.75 at the grant date resulting in a total value of $475,000.
During 1999, the Company recorded a stock repurchase agreement for 155,000
shares of the Company's common stock at $8.50 per share resulting in a reduction
of additional paid-in capital and a repurchase commitment of a total value of
$1,317,500.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 and other health oriented consumable products.
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 and its subsidiaries, The Cooler Group, Inc. and Nutrition Cafe,
Inc. were incorporated during 1999. 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 14 (A)).
(B) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
----------------------------------------------------------------
The consolidated financial statements include the accounts of Trimfast Group,
Inc. and its subsidiaries Trimfast, Inc., Body Life Sciences, Inc., The Cooler
Group, Inc and Nutrition Cafe, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
(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")
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
Management determines the appropriate classification of its investments at the
time of acquisition and reevaluates such determination at each balance 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 three to thirty years.
(H) SOFTWARE OBTAINED FOR INTERNAL USE
-------------------------------------------
The Company accounts for software obtained for internal use in accordance with
the Accounting Standards Executive Committee Statement of Position No. 98-1
"Accounting For the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 generally requires the capitalization of
all internal or external direct costs incurred in developing or obtaining
internal use software and expensing all internal or external costs incurred
during the preliminary project stage and the post-implementation stage. The
Company generally amortizes software developed or obtained for internal use over
an estimated life of three years.
(I) GOODWILL
-------------
Goodwill arising from the acquisition of certain assets of Ice Cold Water Co.,
Inc. (see Note 14 (C)) is being amortized on a straight-line basis over five
years.
(J) REVENUE RECOGNITION
-------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 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 recorded when the product is
shipped. To date returns of products sold have been immaterial. Therefore, no
accrual for estimated returns has been made in the accompanying financial
statements.
Sales of the Company's product offered through Trimfast, Inc. are sold utilizing
food brokers, distributors and directly to vendors. The Company uses brokers
and distributors to identify new vendors; all sales are made directly to the
vendor or distributor and brokers are informed of any sales through their
efforts. The Company's policy is to record sales and a related returns accrual
when the product is shipped. Because of this, the Company ships to, invoices,
and receives payments directly from the end user. Due to the nature of the
products offered, and customers ordering product conservatively, the Company has
not experienced any material product returns. Based on this experience, the
Company has recorded returns against current sales in the accompanying
consolidated financial statements.
Revenue for The Cooler Group, Inc. 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.
(K) 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.
(L) EARNINGS PER SHARE DATA
-------------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 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 issued to HLHK stockholders
are considered outstanding from the acquisition date. There were no dilutive
common stock equivalents outstanding at December 31, 1998. In 1999, the assumed
exercise of common stock equivalents was not utilized since the effect was
antidilutive. At December 31, 1999, there were 108,000 common stock equivalents
outstanding which could potentially dilute future earnings per share.
(M) 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.
(N) STOCK OPTIONS
-------------------
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock Based Compensation" ("SFAS 123"), the Company has elected
to account for Stock Options issued to employees under Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25") and related interpretations, and
accounts for stock options issued to consultants and for other services or goods
in accordance with SFAS 123.
(O) COMPREHENSIVE INCOME (LOSS)
----------------------------------
The Company accounts for Comprehensive Income (Loss) under the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement No. 130"). Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components, and is effective for fiscal years beginning after December 15, 1997.
The unrealized gains and losses, net of tax, resulting from the valuation of
available-for-sale securities at their fair market value at year end (see Note 1
(E)) are reported as Other Comprehensive Income (Loss) in the Statement of
Operations and as Accumulated Other Comprehensive Income (Loss) in Stockholders'
Equity and in the Statement of Stockholders' Equity.
(P) NEW ACCOUNTING PRONOUNCEMENTS
------------------------------------
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements. Statement No. 133 as amended by Statement No. 137,
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
"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.
(Q) RECLASSIFICATIONS
----------------------
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
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 available-for-sale securities, which are
reported at their fair value based upon the quoted market prices of those
investments at December 31, 1999, with unrealized losses reported in a separate
component of stockholders' equity until they are sold. Any realized gains or
losses are included in net earnings at the time of sale.
The composition of short-term investments at December 31, 1999 is as follows:
Cost Fair Value
---- ----------
Common stock $ 30,143 $ 8,406
=========== ==========
Investment expenses for the year ended December 31, 1999 consisted of the
following:
Net realized losses on the sale of available-for-sale
securities $ (1,957)
============
Unrealized losses included in other comprehensive loss for
the year ended December 31, 1999 consisted of the
following:
Net unrealized losses on available-for-sale securities $ (21,737)
============
NOTE 3 - ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
---------------------------------------------------------
Accounts receivable were as follows at December 31, 1999:
Accounts receivable $ 89,011
Allowance for doubtful accounts (730)
-----------
$ 88,281
===========
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
At December 31, 1999, approximately 7%, 8% and 13% of gross accounts receivable
were due from three customers, respectively.
During 1998, the Company wrote off 100% of 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.
During 1999, the Company received payments of $98,238 on the $267,240 balance
discussed above. The remaining balance of $169,002 was written off as a bad
debt expense.
During 1999, the Company wrote off a receivable which was related to the loss
incurred for operating Immmu/Immcel during the period between the acquisition of
Immmu/Immcel and the rescission of the same acquisition agreement (See Note
14(B)).
During 1999, the Company also wrote off $35,890 of accounts receivable
originating in 1998 due from various customers.
NOTE 4 - PROPERTY AND EQUIPMENT
------------------------------------
Property and equipment at December 31, 1999 consisted of the following:
Land $ 637,100
Building 658,863
Automobiles 68,242
Furniture and fixtures 24,737
Equipment 108,973
--------------
$ 1,497,915
Less accumulated depreciation (80,534)
--------------
$ 1,417,381
==============
Depreciation expense for the years ended December 31, 1999 and 1998 was $69,808
and $10,498, respectively.
NOTE 5 - INTANGIBLE ASSETS
------------------------------
(A) GOODWILL
--------
Goodwill arising from the acquisition of certain assets of Ice Cold Water Co.,
Inc. (see Note 14 (C)) is being amortized on a straight-line basis over five
years.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
Goodwill at December 31, 1999 was as follows:
Goodwill $ 58,616
Less accumulated amortization (5,862)
---------
$ 52,754
=========
Amortization expense for the year ended December 31, 1999 was $5,862.
(B) SOFTWARE
--------
During 1999, the Company's subsidiary, Nutrition Cafe, Inc. developed an
Internet web site and related software to use in the sales and marketing of its
products. Pursuant to SOP 98-1 certain of these costs were recorded as a
software asset and are being amortized on a straight-line basis over three
years.
Software at December 31, 1999 was as follows:
Software $ 213,355
Less accumulated amortization (2,541)
------------
$ 210,814
============
NOTE 6 - INCOME TAXES
-------------------------
Income tax expense (benefit) for the years ended December 31, 1999 and 1998 is
summarized as follows:
1999 1998
----------- ------------
Current:
Federal $ - $ 17,100
State - 3,500
Deferred:
Federal and State 2,935,000 1,540
Change in valuation allowance (2,935,000) (1,540)
----------- ------------
Income tax expense (benefit) $ - $ 20,600
========== ============
The Company's tax expense differs from the "expected" tax expense for the years
ended December 31, 1999 and 1998 (computed by applying the Federal Corporate tax
rate of 34 percent to income (loss) before taxes), as follows:
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
1999 1998
-------------- -----------
Computed "expected" tax expense (benefit) $ (2,832,598) $ (244,587)
State income tax - net of federal tax
benefit (267,973) 2,312
Non-deductible expenses 60,760 (262,794)
Effect of non-consolidated losses and
other - 4,043
Benefit of surtax exemption - (3,962)
Effect of net operating losses 3,039,811 -
-------------- -----------
$ - $ 20,600
============== ===========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31, 1999 and 1998 are as
follows:
1999 1998
----------- -----------
Deferred tax liabilities:
Unrealized gains $ - $ (346)
----------- -----------
Total deferred tax liabilities - (346)
----------- -----------
Deferred tax assets:
Depreciation - 1,886
Stock based compensation 155,705 259,080
Net operating loss carryforwards 3,039,811
----------- -----------
Total gross deferred tax assets 3,195,516 260,966
----------- -----------
Less valuation allowance (3,195,516) (260,620)
----------- -----------
Net deferred tax asset (liability) $ - $ -
=========== ===========
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $8,932,000 available to offset future taxable income expiring in
2019.
The valuation allowance at January 1, 1999 was $260,620. The net change in the
valuation allowance during the year ended December 31, 1999 was an increase of
approximately $2,935,000.
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.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
HLHK pre-merger 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 7 - DEBT
----------------
(A) NOTES AND LOANS PAYABLE
-------------------------------
The following schedule reflects notes and loans payable to non-related parties
at December 31, 1999:
Note payable, due on March 11, 2000, interest at prime,
unsecured $ 75,000
Other loans payable, currently due 1,475
-----------
$ 76,475
===========
Accrued interest of $5,055 on the notes payable has been included in accrued
expenses at December 31, 1999.
(B) CONVERTIBLE DEBENTURES
----------------------------
On June 14, 1999, the Company issued $1,000,000 of convertible debentures due on
June 14, 2002 with interest at 7% per annum. 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. In addition, the Company reserves the right to call a mandatory
redemption if the quoted trading price falls below the $6.00 at a price equal to
the principal and accrued interest due plus lost profits from the conversion and
subsequent sale of the common stock as stipulated in the agreement.
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.
At December 31, 1999, accrued interest of $38,111 has been included in accrued
expenses.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
NOTE 8 - COMMITMENTS AND CONTINGENCIES
-------------------------------------------
(A) YEAR 2000 ISSUES
-----------------------
The Company is aware of the issues associated with the programming code in
existing computer systems resulting from the arrival of the millennium (Year
2000). 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 changed 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. As
of the date of this report, the Company has not been significantly affected by
Year 2000 issues.
(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 2000 through 2003. In addition, the Company has some storage and
appliance leases that run on a month-to-month basis.
In connection with the formation of its subsidiary, NutritionCafe.com, Inc. in
April 1999 the Company entered into a lease/purchase option agreement for a
facility, which is used for the operations of NutrionCafe.com. The lease called
for rental payments of $8,000 per month and was 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, and purchased the
building.
Future minimum lease payments under operating leases are as follows at December
31, 1999:
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
YEARS ENDING AMOUNT
------------ ------
2000 $ 75,189
2001 75,532
2002 71,673
2003 66,759
2004 56,590
-----------
$ 345,743
===========
Rent expense for 1999 and 1998 aggregated $69,976 and $31,885, 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 was to issue 20,000 shares of common stock to the
consultant. 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 a payment
of $2,000 in the form of services performed during 1999.
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 was to
issue 50,000 free trading common shares pursuant to Regulation D, Rule 504 and
250,000 common shares restricted under Rule 144. In addition, the Company was
to 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 minimal
services as anticipated in 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. If an invoice is received, the Company will recognize consulting
expense for all shares issued based on the fair market value of the stock on the
grant date.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 was to
issue 100,000 free trading common shares pursuant to Regulation D, Rule 504 and
350,000 common shares restricted under Rule 144. 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 minimal
services as anticipated in 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 275,000
restricted shares at a price of $0.25 per share resulting in a subscription
receivable of $68,750. Subsequent to the execution of the rescission agreement
further disputes between the parties resulted in a settlement agreement, which
became null and void due to non-performance by the parties. As the consultant
did not recognize the rescission agreement, it is the Company's opinion that all
agreements subsequent to the original agreement have to be considered null and
void and therefore the original consulting agreement entered into on December
18, 1998 was the prevailing agreement. Thus, during 1999, the Company recognized
compensation expense of approximately $194,000 based on the fair market value of
the stock on the grant date.
During 1999, the Company entered into various additional consulting agreements
whereby common stock was 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. The Company also periodically issues common stock as
payment to vendors and records such issues at the fair market value of the
common stock. During the year ended December 31, 1999, the Company issued
approximately 918,300 shares of common stock for consulting services and as
payment to vendors valued for financial accounting purposes at a fair market
value of approximately $4,744,000 based upon the quoted trading price of the
stock.
(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. 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. As of December 31, 1999, management does
not expect to receive any further payments of this customer and therefore
decided to write off the balance as of December 31, 1999 reduced by payments
received during January 1999 (See Note 3).
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
<R>
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 its third party manufacturer, however, the Company has
received notice from the insurance carrier denying all claims. The Company
obtained its own insurance policy in May 1999 and believes it would not be
covered under its own policy for these prior occurrences. Management intends to
contest the claim denials. 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 December 31, 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 SAB 5:Y. The
above litigation related to Revivarant may have an adverse effect on the
Company's results of operations and financial condition.
</R>
The Company is subject to a course of action premised on a Letter of Agreement
between the two parties whereby the Plaintiff alleges the Company committed to
purchase 155,000 shares of the Company's common stock at a stipulated price (See
Note 9E). 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 call 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, a former principal
stockholder, and other parties alleging that 600,000 shares of the Company,
previously owned by the former principal stockholder, were improperly cancelled
by the Company while still validly owned by the Plaintiff. The Plaintiff has
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
demanded the removal of the stop transfer order from their share certificates or
alternatively the Company reissue 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 judgement may have an adverse affect on the
Company's results of operations and financial condition.
<R>
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. 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.
</R>
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 December 31, 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 - 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 the accompanying financial statements have been retroactively
restated to reflect the reverse stock split as well as the recapitalization
discussed in Note 14.
(C) REPURCHASE OF OUTSTANDING COMMON STOCK BY PRINCIPAL STOCKHOLDER
---------------------------------------------------------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 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) 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. On March 30, 1999,
another agreement was executed restricting the resale of the 300,000 shares
issued as a subscription receivable under item (ii) above. The Company was to
indemnify the investment group for any tax liability which may result from the
resale of the shares. As of the date of the accompanying audit report, no such
liability was determined. 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 in price on a basis
of $.25 every two weeks as stipulated in the agreement. On November 10, 1999, an
agreement was signed amending the October 22, 1999, agreement to require the
Company to purchase such shares at $8.25 per share on or before January 25,
2000, with a $.25 per month escalation in the price after January 25, 2000 and
pledging the Company's real estate (see Note 4) as security against the October
22, 1999 purchase agreement, as amended. (See Note 8(D)) The quoted market
price on October 22, 1999 was approximately $7.00 per share. As of December 31,
1999, the Company recorded a $1,317,500 stock repurchase commitment for the
155,000 shares as a charge to additional paid-in capital. As of the date of the
accompanying audit report, no shares have been repurchased by the Company (see
Note 8(D)).
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
(F) CONVERSION OF DEBT TO EQUITY AND SHARES HELD IN ESCROW
--------------------------------------------------------------------
During 1999, the Company issued 24,500 shares and agreed to issue 20,000 shares
of common stock to unrelated parties in exchange for loans payable of $70,125
plus accrued interest resulting in a loss on extinguishment of debt of $150,979.
The 20,000 shares are shown as common stock to be issued in the balance sheet.
During 1999, the Company issued 23,000 shares of common stock to be held in
escrow as a security for the repayment of a loan to an unrelated party. These
shares were to be issued to this party in case the Company defaulted on the loan
payments in proportion to the outstanding loan balance. In December 1999, the
Company issued 7,321 shares of common stock to this party in exchange for the
remaining unpaid balance of the loan payable plus accrued interest of a total of
$30,882. As of the date of this report, the remaining 15,679 shares are still
held in escrow and are to be returned to the Company.
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.
(G) 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 12).
(H) 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 403,000 shares for aggregate cash proceeds of $934,500.
(I) 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
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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.
On April 25, 2000, the Company received notice from the holder of the Series A
convertible preferred stock that as a result of the Company's failure to
register the common stock underlying the preferred shares and various other
violations of other agreements entered into between the Company and the
preferred stock holder that the preferred stock holder seeks the redemption of
its preferred stock at the redemption price of $625,000 plus all accrued but
unpaid dividends, plus all accrued but unpaid liquidated damages. The Company
is unable to register the underlying common stock shares until such time that
the Company is in a position to file a registration statement with the
Securities and Exchange Commission. There can be no assurances that the Company
will ever be in a position to file a registration statement or if the
registration statement will ever clear comments.
NOTE 10 - STOCK OPTIONS
---------------------------
During the year ended December 31, 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
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 $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 December 31, 1999 is
presented below:
Number of Weighted Average
Options Exercise Price
------------------------------
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
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Average Weighted Number Weighted
Range Of Outstanding At Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise At December, Exercise
Price 1999 Life Price 31, 1999 Price
-------------- -------------- ----------- ---------- ------------ --------
$ 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
============== ===========
NOTE 11 - CONCENTRATIONS
---------------------------
(A) SUPPLIER CONCENTRATION
----------------------------
During 1998, the Company procured raw materials from various suppliers but
contracted the production of finished products to one primary third party
manufacturing company. During 1999, the Company 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
----------------------------
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
During 1998, approximately 60% of consolidated revenues were derived from one
customer and 12% was derived from one other customer.
During 1999, there was no significant customer concentration.
NOTE 12 - 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, 1999 and the net
effect of transactions with the principal stockholder are shown as due to
stockholder at December 31, 1999. All net amounts due to the principal
stockholder at December 31, 1998 were converted to common stock. (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 9(F)).
During 1998 the Company issued 19,500 shares of common stock to that same
individual in exchange for the $40,000 payable.
NOTE 13 - OPERATING AND LICENSE AGREEMENTS
------------------------------------------------
(A) 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.
(B) LICENSE AGREEMENT
-----------------------
On June 24, 1999, the Company entered into a license agreement (the "Agreement")
with a licensor whereby the Company was granted the nonexclusive license for
certain Trimfast Energy Bars ("WCW Bars"). The agreement terminates on December
31, 2002. As consideration for the license rights, the Company paid an advance
of $50,000 on the date of the agreement and agreed to pay the higher of 6% of
the net sales under the license agreement or $100,000 on December 31, 1999, and
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
$100,000 on each of June 30, 2000, September 30, 1999,December 31, 2000 and June
30, 2001. The advance of $50,000 was recorded as prepaid expenses and amortized
over the term of the agreement. As of December 31, 1999, 6% of the net sales
did not exceed the agreed amount of $100,000. Thus, the Company accrued an
amount of $100,000 to be paid to the licensor, which is included in Accounts
Payable as of December 31, 1999.
NOTE 14 - ACQUISITIONS AND FORMATIONS OF SUBSIDIARY
----------------------------------------------------------
(A) 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
3 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 9(D)). 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. As a result, 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.
(B) ACQUISITION AND RESCISSION
---------------------------------
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
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
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 would be
employed as the Chief Executive Officer of IMMMU and IMMCEL and serve on the
Board of Directors of the Company. The former stockholder was to receive an
annual salary of $75,000 and a bonus based on stipulated performance criteria.
The employment agreement could have been terminated by the Company if IMMMU and
IMMCEL had 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. The $50,000 cash and all common
stock issued to the seller were returned to the Company. The Company recorded a
receivable of $88,830 for the net cash expenditures of IMMU and IMMCEL for the
period from the acquisition date to the rescission date of October 31, 1999.
The receivable was written off as of December 31, 1999. (See Note 3)
(C) ACQUISITION OF CERTAIN ASSETS
-------------------------------------
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. The Company reserved 23,000 shares of the
Company's common stock 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, Inc. and transferred these assets into it. During the month of November,
the 7,321 shares of the Company's common stock held in escrow were released in
exchange for the remaining outstanding balance of principal and interest of the
promissory note. The shares were valued for financial accounting purposes at
the quoted market price on the default date resulting in a value equal to the
principal and interest of $30,882.
(D) FORMATION OF NEW SUBSIDIARY
-----------------------------------
On April 21, 1999, the Company formed a new subsidiary, Nutrition Cafe, 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.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
NOTE 15 - GOING CONCERN
---------------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$8,331,171 during 1999, negative cash flows from operating activities of
$2,084,257 and had a working capital deficiency and accumulated deficit of
$1,818,422 and $9,646,805, respectively, at December 31, 1999. In addition, the
Company is subject to several legal actions with regard to a product whereby
uncertainties exist regarding related contingent liabilities (See Note 8(D)).
These conditions raise substantial doubt about the Company's ability to continue
as a going concern, and if substantial additional funding is not acquired or
alternative financing sources developed to meet the Company's working capital
and contingent liabilities needs, management will be required to curtail its
operations.
<R>
The Company's President and Principal Stockholder has contributed marketable
securities and cash capital to the Company during 2000 to fund continued
operations and expansion. In addition, the Company is attempting to secure a
mortgage on their building, has been seeking additional equity capital and has
recently acquired a health products company (See Note 16 (C)). Management
believes that actions presently being taken provide the opportunity for the
Company to continue as a going concern. No assurance is possible of additional
financing. Without additional financing the Company may be unable to continue
as a going concern.
</R>
NOTE 16 - SUBSEQUENT EVENTS
-------------------------------
(A) CONSULTING AGREEMENT
--------------------------
On March 7, 2000 (the "Effective Date"), the Company entered into a consulting
agreement with a business consultant (the "Consultant"). The services provided
by the Consultant primarily consist of the preparation of a Private Placement
Memorandum. In addition, the Consultant will provide general investment banking
consulting services to help the Company to implement its business objectives.
As consideration for the services provided, the Company agreed to pay the
Consultant a monthly service fee of $2,500 and 15% of all investment capital
raised for the Private Placement, including a negotiable finder's fee.
Furthermore, the Company agreed to issue to the Consultant 5% of the quantity of
shares of the Company's common stock sold through the Private Placement.
(B) LICENSE AGREEMENT
-----------------------
On February 25, 2000, effective March 1, 2000 (the "Commencement Date"), the
Company entered into a license agreement (the "Agreement") whereby the Company
was granted the nonexclusive license for a children's chewable multi-vitamin and
mineral supplement. The agreement is for nineteen months from the Commencement
Date. As consideration, the Company agreed to pay a minimum royalty of $150,000,
of which $100,000 was paid as an advance on the date of the agreement and the
remaining balance of $50,000 is payable on March 1, 2001. The agreed royalty
rate is 9% of the net sales.
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
(C) ACQUISITION AND STOCK EXCHANGE AGREEMENT
-------------------------------------------------
<R>
On March 20, 2000 (the "Closing Date"), the Company consummated a stock exchange
agreement (the "Agreement") with Nutrition Superstores.com, Inc. ("Nutrition
Superstores") to acquire one hundred percent of the issued and outstanding
common stock of Nutrition Clubstores, Inc. ("Nutrition Clubstores") in exchange
for $150,000 in cash and 570,000 shares of the Company's 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 transaction as required by EITF 95-19. As a
result of the exchange, Nutrition Clubstores became a wholly owned subsidiary of
the Company. In case the net worth of Nutrition Clubstores as reflected on its
audited financial statements - to be provided to the Company within 60 days of
the Closing Date - 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 the Company's common stock for every $5.00 reduction or
portion thereof in net worth. Under the terms of the Agreement, the Company
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 and continuing for a period of twelve months thereafter. As of the
date of this report, the Company issued the 570,000 shares and paid the
$150,000. The Company estimates its transaction costs, which are included in
the figures below to be approximately $5,000.
</R>
The acquisition will be accounted for under the purchase method. Subject to the
completion of the Nutrition Clubstores audit, the Company anticipates allocating
the $2,886,000 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.
NOTE 17 - RESTATEMENT
------------------------
Subsequent to the issuance of the Company's 1999 and 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. Subsequent to the issuance of the Company's 1999 and
1998 consolidated financial statements, management became aware that a stock
repurchase commitment of $1,317,500 was not included as a liability at December
31, 1999 and common stock issued to consultants and other professionals was
undervalued in the statement of operations in 1999 by $949,000 due to a discount
taken on the quoted trading price. The inclusion of these items and the 1998
restatement in the revised 1999 consolidated financial statements has the effect
of increasing current liabilities by $1,317,500, increasing additional paid-in
<PAGE>
TRIMFAST GROUP, INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------
capital by $393,500, increasing net loss by $949,000 and increasing net loss per
share by $0.23.
-68-
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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.
PART III
Item 9. Directors and Executive Officers of the Registrant.
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/
851 Lantana Avenue
Director
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
-69-
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 an oral
employment agreement with the Company that pays each an annual salary 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. If 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. Dr. Hee opened and operated four medical clinics in Tampin,
Malaysia. After gaining admission to practice medicine in the United States,
Dr. Hee became the Chief Medical Officer of the Tampa Military Processing
Station for the United States Department of Defense. Dr. Hee provides the Board
with the medical background and skills necessary for the Company to develop
vitamins and supplements.
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.
-70-
Item 10. 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.
Troy is responsible for the accounting and financial reporting of the company
and receives annual compensation of $65,000. Mr. Muzio and Mr. Vosler exercise
complete control over employee compensation.
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(1)
Name & Annual Compensation Long-Term Compensation Other
Position Year Salary Bonus Other Stock SARs LTIP Comp
Michael Muzio
President & 1999 $ 150,000 $ 0 $ 0 $ 0 $ 0 $ 0 $0
Treasurer 1998 $ 150,000 $ 0 $ 0 $ 240,000 $ 0 $ 0 $0
1997 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $0
Gregg Vosler
Vice President 1999 $ 50,000 $ 0 $ 0 $ 0 $ 0 $ 0 $0
& Secretary 1998 $ 50,000 $ 0 $ 0 $ 96,000 $ 0 $ 0 $0
1997 $ 31,000 $ 0 $ 0 $ 0 $ 0 $ 0 $0
JOHN TROY
Chief 1999 $ 52,500 $ 0 $ 0 $ 0 $ 0 $ 0 $0
Financial 1998 Not employed with the company
Officer 1997 Not employed with the company.
(1) The amount used in this table were calculated using the market close price
for TRIM common stock on December 31, 1998.
-71-
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth the security ownership of certain beneficial
owners of the Company as of March 31, 2000 known to own more than 5% of the
Company's common stock:.
TITLE OF NAME & ADDRESS NO. OF & NATURE OF %OWNED
CLASS OWNERSHIP
Common Michael Muzio 1,033,846: Direct 20.28%
4957 Bayshore Blvd.
Tampa, Florida 33611
Common Mark Sansom 312,000: Direct 6.12%
4061 South Powers Circle
Salt Lake City, UT 84124
Common Carroll Edwards 300,000: Direct 5.8%
Box 219
Marshville, NC 28103
Common Nutrition Superstores.com Inc. 570,000: Direct 11.18%
3600 Investment Lane Suite 102
West Palm Beach, FL 33404
Security Ownership of Officers and Directors.
TITLE OF NO. OF NATURE OF
CLASS NAME & ADDRESS SHARES(1) OWNERSHIP %OWNED
Common Michael Muzio 1,033,846 Direct 20.28%
4957 Bayshore Blvd.
Tampa, Florida 33611
Common Gregg Vosler 0 Direct 00.0%
851 Lantana Avenue
Clearwater Beach,
Florida 34630
Common Christopher Hee 1,749 Direct Less
3152 Fiesta Drive Than 1%
Dunedin, Florida 34689
Common John Troy 10,000 Direct Less
4014 W Waters Avenue Than 1%
#1508
Tampa, Florida 33614
-------------------------------------------------------------------------------
All Officers and Directors as a Group
(3 Individuals) 1,045,595 Direct 20.51%
-72-
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.
Item 12. 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 13,705,488
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 $126,664.00 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 65,000 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.
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. Mr. Troy has
entered into an oral employment agreement with the company which pays him an
annual compensation of $65,000. It is expected that this agreement will be
renewed in 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.
Mike Muzio, our President, loaned TrimFast an aggregate of about $440,000 in 1998.
The full outstanding amount of the loan was converted into TrimFast common stock
in December 1998. Interest was not charged.
A loan by us to Millennium Health Products, Inc., of an amount of about $220,000
took place in 1998. Our President, Mike Muzio, is considered a “control
person” of Millennium. We made a loan to Millennium in the form of
assigning some shares of a publicly traded security to Millennium so that it
could settle a sale of the same security that was executed on behalf of
Millennium in a matching amount. At the time of the sale, the Company managed
some of its cash by buying and trading in the stock market. Other companies also
traded in the stock market, including Millennium. Mr. Muzio had executed a sale
of shares on behalf of Millennium, even though the shares were in another account
he managed. Whichever of the two companies had held the shares, Mr. Muzio would
have sold the shares. Mr. Muzio managed these trading accounts at the time as
best he could, but mistakes are possible, and in this case the shares held by the
Company were needed to be transferred to Millennium, which is an affiliate of Mr.
Muzio. But during the time concerned, Mr. Muzio personally loaned the Company,
first, and later Millennium, the cash to trade in the stock market in the first
place--so that, when we transferred approximately $220,000 in stock to Millennium,
$220,000 of our indebtedness owed to Mr. Muzio was transferred and assigned to
Millennium. Millennium assumed $220,000 of indebtedness from us, and we were not
subject to any obligation in the event Millennium failed to repay that amount to
Mr. Muzio.
-73-
PART IV
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
2.1 Kendrex and HLHK Merger Agreement (2)
2.2 TrimFast Inc. Acquisition Agreement (2)
2.3 Rescission Of Immu and Immcel Acquisitions (2)
3.1 Articles of Incorporation Kendrex Systems, Inc (1)
3.2 Amendment to Kendrex Articles of Incorporation (1)
3.3 Certificate of Incorporation for HLHK World Group, Inc.(1)
3.4 Certificate of Amendment to Articles of Incorporation for
HLHK World Group, Inc.(1)
3.5. Bylaws(1)
4.1 Specimen Share Certificate (1)
4.2 Debenture Agreement (1)
4.3 Warrant Agreement (2)
4.4 Preferred Share Agreement (2)
4.5 Series A Certificate of Designations, Preferences and Rights (7)
10.1 Lease Option Agreement (1)
10.2 WCW Agreement (3)
10.3 MSN Agreement (2)
10.4 Distribution Agreement (2)
10.5 Convertible Debenture Subscription Agreement (6)
10.6 Aryeh Trading Agreement dated March 18, 1999 (3)
10.7 Aryeh Trading Agreement dated March 30, 1999 (3)
10.8 Aryeh Trading Agreement dated October 22, 1999 (3)
10.9 Aryeh Trading Agreement dated November 10, 1999 (3)
10.10 Stock Exchange Agreement - Nutrition Clubstores (4)
10.11 Registration Rights Agreement entered into by and between the
Company and certain investors in its Series A Preferred Stock, dated as of July 16, 1999 (6)
21 Subsidiaries of Registrant
23 Consent of Weinberg & Company, P.A.(5)
27 Financial Data Schedule
(1) Filed as an exhibit to the Company's Form 10-SB on July 12, 1999 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-SB on December 23, 1999 and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Form 10-SB on June 2, 2000 and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Form 8-K on May 12, 2000 and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's Form 10-KSB on April 13th, 2000
and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form 10-SB Amendment on or about
August 24, 2000 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 10-SB Amendment on or about
March 13, 2000 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Registrant:
TrimFast Group, Inc.
/s/ Michael Muzio
------------------------
By: Michael Muzio, president
-74-
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
BY /s/ Michael Muzio DATE: August 29, 2000
---------------------------
Michael Muzio, President/Director
BY: /s/ Gregg Vosler DATE: August 29, 2000
---------------------------
Vice President, Secretary, Director
BY: /s/ John Troy DATE: August 29, 2000
---------------------------
Chief Financial Officer
(Chief Accounting Officer)
-75-
Exhibit 21
Subsidiaries of Registrant
Ice Cold Water, Inc.
Nutrition Cafe, Inc.
Nutrition Clubstores, Inc.
TrimFast, Inc.
Cooler Group, Inc.
<ARTICLE> 5
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
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