SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
----------------
Commission file number 0-18160
OMNI NUTRACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
----------------
UTAH 87-0468225
(State of incorporation) (I.R.S. Employer Identification No.)
5310 Beethoven Street
Los Angeles, California 90066
(Address of principal executive offices)
Registrant's telephone number: (310) 306-3636
----------------
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:
--- ---
The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of June 30, 2000 was 32,372,364.
1
<PAGE>
Omni Nutraceuticals, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements: 4
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Operations for Three
Months and Six Months Ended June 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for Six
Months Ended June 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Matters 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL
FACTS INCLUDED IN THIS QUARTERLY REPORT, INCLUDING, WITHOUT LIMITATION, THOSE
REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS, MARKETING AND PRODUCT
INTRODUCTION AND DEVELOPMENT PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISKS
RELATED TO THE BUSINESS OF THE COMPANY" AND ELSEWHERE IN THE COMPANY'S ANNUAL
REPORT ON FORM 10-K AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THE ANNUAL REPORT. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON BEHALF OF THE COMPANY, ARE EXPRESSLY QUALIFIED
IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OMNI NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
2000 1999
(unaudited)
------------ ------------
CURRENT ASSETS
Accounts Receivable, net. . . . . . . . . 6,467,000 6,776,000
Inventories . . . . . . . . . . . . . . . 4,409,000 5,972,000
Prepaid Expenses and Other. . . . . . . . 1,415,000 539,000
Notes Receivable. . . . . . . . . . . . . 447,000 450,000
------------ ------------
Total Current Assets . . . . . . . . . . 12,738,000 13,737,000
Property and Equipment, net . . . . . . . 1,495,000 1,516,000
Trademarks and Websites . . . . . . . . . 17,467,000 12,798,000
Intangibles . . . . . . . . . . . . . . . 2,263,000 2,422,000
Other Assets. . . . . . . . . . . . . . . 957,000 1,254,000
34,920,000 31,727,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash Overdraft. . . . . . . . . . . . . . 890,000 165,000
Accounts Payable. . . . . . . . . . . . . 8,781,000 7,176,000
Accrued Liabilities . . . . . . . . . . . 1,652,000 2,875,000
Line of Credit. . . . . . . . . . . . . . 4,979,000 6,436,000
Current Portion of Term Loan. . . . . . . 10,861,000 2,332,000
Current Portion of Notes Payable. . . . . 21,000 176,000
Income Taxes Payable. . . . . . . . . . . - 52,000
Customer Deposits . . . . . . . . . . . . 450,000 450,000
------------ ------------
Total Current Liabilities. . . . . . . . 27,634,000 19,662,000
Term Loan, net of Current Portion . . . . - 10,085,000
Notes Payable, net of Current Portion . . 98,000 102,000
Minority Interest . . . . . . . . . . . . -
Stockholders' Equity
Shares issueable under legal settlement . 1,200,000
Common Stock. . . . . . . . . . . . . . . 324,000 274,000
Additional Paid in Capital. . . . . . . . 34,498,000 18,008,000
Treasury Stock. . . . . . . . . . . . . . (50,000) (50,000)
Deficit . . . . . . . . . . . . . . . . . (27,584,000) (17,554,000)
------------ ------------
Total Stockholders' Equity . . . . . . . 7,188,000 1,878,000
Total Liabilities and Stockholders equity 34,920,000 31,727,000
============ ============
</TABLE>
4
<PAGE>
OMNI NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months Ended Six months Ended
June 30 June 30
2000 1999 2000 1999
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
------------------- ----------------- ------------ -----------
Net Sales. . . . . . . . . . . . . . . . . . 9,561,000 7,989,000 17,350,000 14,980,000
Cost of Sales. . . . . . . . . . . . . . . . 5,550,000 3,950,000 10,106,000 7,357,000
------------------- ----------------- ------------ -----------
Gross Profit. . . . . . . . . . . . . . . . 4,011,000 4,039,000 7,244,000 7,623,000
Costs and Expenses
Distribution Expenses . . . . . . . . . . . 608,000 755,000 1,194,000 1,342,000
Sales and Marketing . . . . . . . . . . . . 1,689,000 2,843,000 6,252,000 4,598,000
General and Administrative. . . . . . . . . 1,694,000 2,286,000 5,336,000 4,428,000
Depreciation and Amortization . . . . . . . 721,000 598,000 1,376,000 860,000
Write-off of Surgical Technologies. . . . . 390,000 390,000
------------------- ----------------- ------------ -----------
Total Costs and Expenses. . . . . . . . . . 4,712,000 6,872,000 14,158,000 11,618,000
(Loss) from Operations . . . . . . . . . . . (701,000) (2,833,000) (6,914,000) (3,995,000)
Other Income (Expense)
Interest Income. . . . . . . . . . . . . . 9,000 17,000 22,000 32,000
Interest Expense . . . . . . . . . . . . . (636,000) (472,000) (1,198,000) (450,000)
Other Income (Expense) . . . . . . . . . . 10,000 3,000 11,000 474,000
------------------- ----------------- ------------ -----------
Total Other Income (Expense). . . . . . . . (617,000) (452,000) (1,165,000) 56,000
------------------- ----------------- ------------ -----------
Minority Interest. . . . . . . . . . . . . . - -
Net (Loss) before Income Taxes . . . . . . . (1,318,000) (3,285,000) (8,079,000) (3,939,000)
------------------- ----------------- ------------ -----------
Income Tax (Benefit) . . . . . . . . . . . . - (123,000) (123,000)
Net (Loss) . . . . . . . . . . . . . . . . . (1,318,000) (3,162,000) (8,079,000) (3,816,000)
------------------- ----------------- ------------ -----------
Preferred Stock Dividends. . . . . . . . . . - 1,950,000
------------------- ----------------- ------------ -----------
Net (Loss) Available to Common Shareholders. (1,318,000) (3,162,000) (10,029,000) (3,816,000)
=================== ================= ============ ===========
Net (Loss) per common share
Basic. . . . . . . . . . . . . . . . . . (0.04) (0.11) (0.34) (0.14)
Diluted. . . . . . . . . . . . . . . . . (0.04) (0.11) (0.34) (0.14)
Weighted Average Shares Outstanding
Basic. . . . . . . . . . . . . . . . . . 32,028,218 28,247,945 29,758,250 28,128,389
Diluted. . . . . . . . . . . . . . . . . 32,028,218 28,247,945 29,758,250 28,128,389
</TABLE>
5
<PAGE>
OMNI NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30
<S> <C> <C>
2000 1999
UNAUDITED UNAUDITED
------------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss). . . . . . . . . . . . . . . . . . . (8,079,000) (3,816,000)
Adjustments to reconcile Net Income
(Loss) to Net Cash Provided by
(Used in) Operating Activities;
Depreciation and Amortization. . . . . . . . . . . . 1,376,000 821,000
(Gain) Loss on Disposal of Assets. . . . . . . . . . (481,000)
Write-off of Surgical Technologies Assets. . . . . . 390,000
Issuance of Warrants and Options . . . . . . . . . . 194,000 293,000
Issuance of Shares for Services. . . . . . . . . . . 1,760,000
Amortization of Notes from Officers. . . . . . . . . 67,000
(Increase) Decrease in;
Accounts Receivable. . . . . . . . . . . . . . . . 309,000 647,000
Inventory. . . . . . . . . . . . . . . . . . . . . 1,563,000 (504,000)
Prepaid and Other. . . . . . . . . . . . . . . . . (364,000) (203,000)
Increase (Decrease) in:
Bank Overdraft . . . . . . . . . . . . . . . . . . 725,000
Accounts Payable . . . . . . . . . . . . . . . . . 1,605,000 1,501,000
Accrued Liabilities. . . . . . . . . . . . . . . . (1,223,000) 181,000
Income Taxes . . . . . . . . . . . . . . . . . . . (52,000) (135,000)
------------------------- ------------
Cash Provided by (Used in) Operating Activities. . . . (2,186,000) (1,239,000)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Fixed Assets . . . . . . . . . . . . . (196,000) (318,000)
Purchase of Inholtra and HVE. . . . . . . . . . . . . (13,502,000)
Net Proceeds from Asset Dispositions. . . . . . . . . 386,000
Decrease in Other Assets. . . . . . . . . . . . . . . 233,000 (46,000)
Collections on Notes Receivable . . . . . . . . . . . 4,000 1,000
------------------------- ------------
Cash Provided by (Used in) Investing Activities. . . . 41,000 (13,479,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock . . . . . . . . 2,418,000 85,000
Proceeds from Issuance of Preferred Stock. . . . . . . 1,900,000
Proceeds from Issuance of Warrants . . . . . . . . . . 100,000
Proceeds from Sale of Minority Interest. . . . . . . . 1,000,000
Repayments of old line of credit . . . . . . . . . . . (1,000,000)
Borrowings (Repayments) under existing Line of Credit. (1,457,000) 3,602,000
Borrowings on Long Term Borrowings . . . . . . . . . . 13,000,000
Repayments from Long Term Borrowings . . . . . . . . . (1,716,000) (146,000)
Costs Incurred with Financing. . . . . . . . . . . . . (100,000) (992,000)
------------------------- ------------
Cash Provided by (Used in) Financing Activities. . . . 2,145,000 14,549,000
Net Increase (Decrease) in Cash. . . . . . . . . . . . - (169,000)
Cash and Cash Equivalents, Beginning of Period . . . . - 426,000
Cash and Cash Equivalents, End of Period . . . . . . . - 257,000
</TABLE>
6
<PAGE>
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES
1999
In connection with the sale of the Company's facility in Boulder, Colorado, (i)
a note receivable of $458,000 was received from the buyer, and (ii)
$1,300,000 of debt was assumed by the buyer.
In connection with the acquisition of Health and Vitamin Express Inc., the
Company (i) issued 363,636 shares of the Company's common stock valued at
$2,273,000, and (ii) assumed $571,000 of debt.
In connection with the acquisition of certain assets and liabilities of
Inholtra, Ltd., short term debt of $10,000,000 was incurred by the Company.
2000
The Company recorded a preferred dividend of $1,950,000 related to the issuance
of preferred stock with a conversion rate below the market price of the
Company's common stock.
The Company issued two directors a total of 40,000 shares of common stock and
recorded a non-cash charge of $40,000.
The Company recorded a compensation charge of $1,720,000 related to the transfer
of personal shares from an officer and major shareholder to a departing board
member.
The Company issued 800,000 shares of common stock to a financial consulting firm
for services provided with the private placement of 700,000 shares of
common stock for $2,100,000.
The Company issued 838,941 shares of common stock to acquire certain assets of
Healthshop.Com, Inc. The shares had a value of $3,500,000.
The Company issued 170,000 shares of common stock to acquire SmartBasics, Inc.
The shares had a value of $510,000.
7
<PAGE>
Omni Nutraceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 2000
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect the results of
operations for Omni Nutraceuticals, Inc. (the "Company"), and have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Form 10-K. Certain
1999 amounts have been reclassified to conform to 2000 presentation. For the
three-month and six-month periods ended June 30, 2000 and June 30, 1999, no
common stock equivalents were included because they would have been
anti-dilutive.
NOTE 2. GOING CONCERN ISSUES
In connection with the audit for the year ended December 31, 1999, the Company
received a report from its independent auditors that included an explanatory
paragraph describing the Company's uncertainty to continue as a going concern.
These condensed consolidated financial statements contemplate the ability to
continue as such and do not include any adjustments that might result from this
uncertainty. Additionally, the Company is in violation of revised covenants
contained in the credit facility.
NOTE 3. NEW AUTHORITATIVE PRONOUNCEMENTS
In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition, to provide guidance on the recognition, presentation
and disclosure of revenue in financial statements. Changes in accounting to
apply the guidance in SAB No. 101 may be accounted for as a change in accounting
principles effective January 1, 2000. Management has not yet determined the
complete impact of SAB No. 101 on the Company; however, management does expect
that application of SAB No, 101 will have a material effect on the Company's
revenue recognition and results of operations.
8
<PAGE>
NOTE 4. ACQUISITIONS
On May 22 the Company acquired certain assets, including equipment and customer
lists of Healthshop.com. The purchase price called for the issuance of 838,951
shares of common stock valued at $3,500,000; 250,000 common stock purchase
options, exercisable at $4.50 per share with a term of 10 years, vesting
immediately, issued to the former officers of Healthshop.com, valued at
$872,000; and an option to purchase additional shares of the Company's common
stock at a price of $4.15 for a 30 day period, up to a maximum of $2,500,000,
valued at $289,000. The aggregate purchase price was $4,661,000, which has been
allocated to Websites and Customer Lists.
The acquisition agreement also calls for additional shares to be issued should
the Company's stock price drop below the pre-acquisition levels, up to a maximum
of 400,000 shares. In the event the Company is forced to issue additional
shares under this provision, these amounts will be applied to the aggregate
purchase price to increase Websites and Customer Lists.
Additionally, the acquisition calls for shares to be issued under certain
earn-outs if acquired customer lists generate certain levels of revenue. Any
additional shares issued under these earn-outs will also be applied to the
purchase price when issued. Management does not believe the Company will have
to issue additional shares under these earn-out agreements.
The Company is currently amortizing the Websites and Customer Lists straight
line over 5 years.
On May 25, 2000, the Company acquired Smart Basics, Inc., dba SmartBasics.com,
for 170,000 shares of the Company's common stock valued at $510,000.
SmartBasics.com is an internet and mail order business that sells nutritional
supplements and health related products.
NOTE 5. CREDIT FACILITY
The current credit facility consists of a $13 million (original amount) term
loan ("Term Loan") and up to a $7 million revolving loan ("Revolving Loan"). The
$13 million Term Loan was payable in quarterly installments of $583,333 that
began October 15, 1999 and were to increase to $750,000 on October 15, 2002
until the loan was paid in full on April 15, 2004. The credit facility also
contained certain financial and other covenants or restrictions including the
maintenance of certain financial ratios, limitations on capital expenditures,
restrictions on acquisitions, limitations on incurrence of indebtedness, and
restrictions on dividends paid by the Company. As of March 31, 2000, the Company
was in violation of several of the covenants.
On May 8, 2000, the Company's credit facility was amended. As a condition of the
waiver of certain covenant defaults, the amendment changed the expiration dates
of both loans to April 30, 2001, when the loans are payable in full. Further,
the Term Loan amortization and interest payment schedule was changed from
quarterly to monthly payments. The amendment also requires the Company to meet
revised financial covenants. As of June 30, 2000, the Company was in violation
of several of the revised covenants and is negotiating with the lender for
waivers. As of June 30, 2000, the maximum additional credit available under the
borrowing limitations was $2,000,000.
NOTE 6. CAPITAL TRANSACTIONS
During the first six months of year 2000, as compensation for serving on the
Board of Directors, the Company issued two directors a total of 40,000 shares of
common stock. The accompanying financial statements include a charge of $40,000
to reflect this issue of shares.
On January 24, 2000, the Company sold 2,000,000 shares of its newly created 5%
$.01 par Convertible Preferred Stock for $1,900,000 and sold seven year warrants
to purchase 500,000 of common stock at $2.25 per share for $100,000. The Company
incurred issuance costs of $100,000, which consisted of legal and placement
agent fees. On March 24, 2000, the Company converted all of these preferred
shares, plus accrued dividends, for 2,016,438 shares of its common stock. Since
the conversion price of $0.753 per share was significantly below the trading
price of $1.719 per share of the Company's common stock when the preferred was
issued, the Company recognized a preferred dividend of $1,950,000, which is
reflected as a reduction in net income available to common stockholders. In
connection with the placement of the preferred shares, an officer of the Company
transferred 222,000 shares of his personally held common stock to the investor,
as added consideration for the funding. Pursuant to this agreement, the Company
has attributed a portion of the proceeds from the preferred stock to the
transfer of the common shares equal to $380,000, which was the fair market value
of common stock at the date of the transaction. After the allocation of
proceeds, the net purchase price for the preferred stock aggregated to
$1,520,000.
9
<PAGE>
Concurrent with the issuance of the preferred stock, the Company sold a 10%
interest in its wholly owned subsidiary, HealthZone.com, to the same investors
for $1,000,000. The excess of the investment over the interest in the
subsidiary's net equity that was sold has been recorded as an increase in paid
in capital on the Company's financial statements.
On March 12, 2000, the Company entered into a two year consulting agreement with
Liviakis Financial Communications, Inc. ("LFC") and, in connection therewith,
authorized the issuance of 1,200,000 restricted shares of common stock to LFC in
consideration of, and as a retainer and prepayment for, the consulting services
to be rendered to the Company by LFC. Under the terms granted to LFC, the
Company issued 800,000 shares during the current year. The balance of 400,000
shares will be due and payable in fiscal year 2001 depending on whether the
Company continues to retain LFC. Pursuant to a provision in the consulting
agreement, LFC is entitled to receive a finders fee in connection with any debt
or equity financing for the Company from a source introduced to the Company, or
its nominee, from LFC and a finders fee in connection with any acquisition of
the Company by any candidate introduced to the Company, or its nominee, by LFC.
The shares have been recorded as an issuance cost on the accompanying financial
statements.
On March 27, 2000, the Company sold 700,000 shares of common stock to individual
investors organized by LFC in a private placement for aggregate proceeds of
$2,100,000.
On April 13, 2000, the Company finalized the settlement of the lawsuit filed by
the former shareholders of Health & Vitamin Express by issuing 363,636 shares of
common stock and granting a warrant expiring in 2005 to buy 100,000 shares of
common stock for $2.25 per share. Due to the issuance of these shares, the
Company has reclassified the contingent shares to additional paid in capital.
On April 20, 2000, the Company entered into a one year consulting agreement with
a financial advisor. The agreement calls for the issuance of options to
purchase 30,000 shares of common stock at $3.86 per share. The options vest
7,500 at the end of each three months after the initiation of the contract.
Related to the agreement, the Company has recorded $115,000 of prepaid
consulting fees, which is being amortized as consulting expense over the term
the services are being provided.
On June 28, 2000 the company entered into a consulting agreement with an
investment banking firm to perform certain financial consulting services. The
agreement called for the issuance of 300,000 options to purchase the company's
common stock at $4.00 per share and covered a term of six months. The options
were valued at $747,000 and are being amortized into consulting expense over the
term of the agreement.
On June 28, 2000 the company entered into a consulting agreement with an
investment banking firm to perform certain financial consulting services. The
agreement called for the issuance of 25,000 warrants with a 7-year term and
immediate vesting, to purchase the company's common stock at $0.01 per share.
Subsequent to June 30, 2000, the agreement with the investment banking firm was
terminated and the warrants cancelled.
10
<PAGE>
NOTE 7. SUBSEQUENT EVENTS
On March 31, 2000, the Company signed a binding term sheet with Vitamin Discount
Connection to purchase that company for 120,000 shares of the Company's common
stock. Vitamin Discount Connection is an Internet and mail order business that
sells nutritional supplements and health related products. On July 31, 2000
the purchase price was changed to 190,000 shares of common stock and certain
terms and conditions of the term sheet were revised.
On April 17, 2000, the Company's directors and a majority of the Company's
shareholders approved an amendment to the Company's Articles of Incorporation
changing the name of the Corporation to Healthzone.com, Inc. The proposed
amendment was submitted for filing with SEC on Schedule 14C on May 8, 2000, but
requires full shareholder approval. It is uncertain when the name change will
actually be adopted, if at all.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OPERATING RESULTS
Consolidated net sales for the three months ended June 30, 2000 were $9,561,000
with an operating loss of $701,000 and a net loss of $1,318,000 or $.04 per
basic and diluted share. Consolidated net sales for the same period in the prior
year were $7,989,000 with an operating loss of $2,833,000 and a net loss of
$3,162,000 or $.11 per basic and diluted share. Total operating expenses for the
three months ended June 30, 2000 were $4,712,000 compared with $6,872,000 for
the same period in 1999.
Consolidated net sales for the six months ended June 30, 2000 were $17,350,000
with an operating loss of $6,914,000, a net loss of $8,079,000 and a net loss
available to common shareholders of $10,029,000 or $.34 per basic and diluted
share. Consolidated net sales for the same period in the prior year were
$14,980,000 with an operating loss of $3,995,000 and a net loss of $3,816,000 or
$.14 per basic and diluted share. Total operating expenses for the six months
ended June 30, 2000 were $14,158,000 compared with $ 11,618,000 for the same
period in 1999.
SALES
Net sales for the three months ended June 30, 2000 increased by $1,572,000 or
20%, to $9,561,000, from $7,989,000 for the comparable period in 1999. The
increase in sales relates to introduction of new products in 2000 and an overall
increase in sales from some of the existing product lines.
Net sales for the six months ended June 30, 2000 increased by $2,370,000 or 16%,
to $17,350,000, from $14,980,000 for the comparable period in 1999. The increase
in sales relates to introduction of new products in 2000 and an overall increase
in sales from some of the existing product lines.
12
<PAGE>
GROSS PROFIT
Gross profit for the three months ended June 30, 2000 decreased by $28,000 or
1%, to $4,011,000 from $4,039,000 for the comparable period in 1999. Gross
profits as a percentage of sales for the three months ended June 30, 2000
decreased to 42% from 51% in the comparable period in 1999. The decrease in the
margin percentage relates to a shift in the product-mix to certain items that
have a slightly lower margin, increased pricing concessions offered and sales
adjustments given to customers.
Gross profit for the six months ended June 30, 2000 decreased by $379,000 or 5%,
to $7,244,000 from $7,623,000 for the comparable period in 1999. Gross profits
as a percentage of sales for the six months ended June 30, 2000 decreased to 42%
from 51% in the comparable period in 1999. The decrease in the margin percentage
relates to a shift in the product-mix to certain items that have a slightly
lower margin, increased pricing concessions offered and sales adjustments given
to customers.
SALES AND MARKETING
Sales and marketing expenses for the three months ended June 30, 2000 decreased
by $1,154,000 or 41% to $1,689,000 from $2,843,000 for the comparable period in
1999. The decrease primarily relates to approximately $964,000 of reduction in
advertising and promotion costs, and a $116,000 reduction in wages.
Sales and marketing expenses for the six months ended June 30, 2000 increased by
$1,654,000 or 36% to $6,252,000 from $4,598,000 for the comparable period in
1999. This was mainly due to a $1,925,000 increase in media and co-op
advertising campaigns initiated by the former management in an attempt to
increase sales for the first quarter and for the year 2000. The main products
promoted were Inholtra, Veromax and Cholestaid. This increase was partially
offset by a $200,000 decrease in wages.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30, 2000
decreased by $592,000 or 26% to $1,694,000 from $2,286,000 for the comparable
period in 1999. The decrease primarily relates to approximately $400,000
reduction in wages, consulting and travelling expenses, and $156,000 of reduced
costs at the Company's HealthZone.com operations.
13
<PAGE>
General and administrative expenses for the six months ended June 30, 2000
increased by $908,000 or 21% to $5,336,000 from $4,428,000 for the comparable
period in 1999. The increase primarily relates to a single item of $1,720,000.
In connection with Withdrawal Agreement between the Company and its former
Chairman of the Board, the current CEO transferred one million shares of
personally owned company common stock to the former Chairman of the Company.
Although the Company did not issue any additional shares, the applicable
accounting rules require the Company to record a one-time non-cash compensation
expense of $1,720,000 being the fair market value of the stock transferred. This
was partially offset by an approximately $502,000 decrease in wages, consulting
and travelling expenses. The remainder of the decrease relates to overall
savings in operating and overhead costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses for the three months ended June 30, 2000
increased by $123,000 or 21% to $721,000 from $598,000 for the comparable period
in 1999. The increase relates to amortization costs of the Inholtra and HVE
acquisitions, and the acceleration of the amortization of costs associated
with the credit facility.
Depreciation and amortization expenses for the six months ended June 30, 2000
increased by $516,000 or 60% to $1,376,000 from $860,000 for the comparable
period in 1999. The increase relates to amortization costs of the Inholtra
and HVE acquisitions, and the acceleration of the amortization of costs
associated with the credit facility.
OTHER INCOME (EXPENSE)
Interest expense for the three months ended June 30, 2000 increased by $164,000
or 35% to $636,000 from $472,000 for the comparable period in 1999. The
increase is consistent with the increase in company's line of credit
utilization.
Interest expense for the six months ended June 30, 2000 increased by $748,000 or
166% to $1,198,000 from $450,000 for the comparable period in 1999. The increase
is consistent with the increase in company's line of credit utilization and Term
Loan that the company secured on June 10, 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2000, the Company experienced a negative
cash flow from operations of $2,186,000. The sale of equities and minority
interest in the subsidiary HealthZone.com provided $5,418,000. $3,273,000 was
used for repayment of an existing line of credit and other long term borrowings
as well as for costs incurred with the financing.
14
<PAGE>
The current credit facility consists of a $13 million (original amount) term
loan ("Term Loan") and up to a $7 million revolving loan ("Revolving Loan"). The
$13 million Term Loan was payable in quarterly installments of $583,333 that
began October 15, 1999 and were to increase to $750,000 on October 15, 2002
until the loan was paid in full on April 15, 2004. The credit facility also
contained certain financial and other covenants or restrictions including the
maintenance of certain financial ratios, limitations on capital expenditures,
restrictions on acquisitions, limitations on incurrence of indebtedness, and
restrictions on dividends paid by the Company. As of March 31, 2000, the Company
was in violation of several of the covenants.
On May 8, 2000, the Company's credit facility was amended. As a condition of the
waiver of certain covenant defaults, the amendment changed the expiration dates
of both loans to April 30, 2001, when the loans are payable in full. Further,
the Term Loan amortization and interest payment schedule was changed from
quarterly to monthly payments. The amendment also requires the Company to meet
revised financial covenants. As of June 30, 2000, the Company was in violation
of several of the revised covenants and is negotiating with the lender for
waivers. As of June 30, 2000, the maximum additional credit available under the
borrowing limitations was $2,000,000.
The Company has primarily funded its operations to date through internally
generated capital, bank or private equity financing. The Company's future
capital requirements will depend on many factors, including the nature and
timing of orders from customers, collection of trade accounts receivable, the
expansion of sales and marketing efforts, costs associated with entering into
new channels of distribution, and the status of competing products.
Management believes that additional investment capital will be required to
permit the Company to meet its business objectives in the near term. Such funds
may be raised either through debt or equity offerings, or some combination of
the two. However, there is no assurance that the Company will be able to secure
such funds on commercially reasonable terms, if at all. If not successful in
securing additional funds, the Company may be forced to dispose of its assets
outside of its normal course of business and/or resort to bankruptcy protection.
The common stock of the Company is currently listed on the NASDAQ National
Market Quotation System. Continued listing on this Exchange is dependent on
meeting certain share price and financial guidelines relating to profitability
and net asset values, which the Company currently doe not meet. The Company has
until approximately August 21, 2000 to achieve compliance or to request a
hearing if compliance is not achieved prior to that date. There can be no
assurance that compliance will be achieved by that date or that, if a hearing is
requested, it will result in continued listing of the common stock on this
Exchange. In the event of an unfavorable outcome, options that may be available
at that time for listing the common stock include listing on NASDAQ Small Cap or
on the American Stock Exchange.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 23, 1999, a lawsuit was filed against the Company and certain
officers by former shareholders of Health & Vitamin Express alleging various
causes of action. The proposed terms of the settlement provided that the
Company immediately issue the 363,636 shares of common stock, which could have
been issuable to the former shareholders of HVE if future earnings targets were
met. On April 13, 2000, the Company finalized the settlement by issuing 363,636
shares of common stock and granting a warrant expiring in 2005 to buy 100,000
shares of common stock for $2.25 per share.
The Company may from time to time be involved in various claims, lawsuits,
disputes with third parties, actions involving allegations of discrimination, or
breach of contract actions incidental to the operation of its business. The
Company is not currently involved in any such litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first six months of year 2000, as compensation for serving on the
Board of Directors, the Company issued two directors a total of 40,000 shares of
common stock. The accompanying financial statements include a charge of $40,000
to reflect this issue of shares.
On January 24, 2000, the company sold 2,000,000 shares of its newly created 5%
$.01 par Convertible Preferred Stock for $1,900,000 and sold seven year warrants
to purchase 500,000 shares of common stock at $2.25 per share for $100,000. The
Company incurred issuance costs of $100,000, which consisted of legal and
placement agent fees. On March 24, 2000, the Company converted all of these
preferred shares, plus accrued dividends, for 2,016,438 shares of its common
stock. Since the conversion rate was significantly below the trading price of
the Company's common stock when the Preferred was issued, the Company recognized
a preferred dividend of $1,950,000, which is reflected as a reduction in net
income available to common stockholders.
Concurrent with the issuance of the preferred stock, the Company sold a 10%
interest in its wholly owned subsidiary, HealthZone.com, to the same investors
for $1,000,000. The excess of the investment over the interest in the
subsidiary's net equity that was sold has been recorded as an increase in paid
in capital on the Company's financial statements.
16
<PAGE>
On March 12, 2000, the Company entered into a two year consulting agreement with
Liviakis Financial Communications, Inc. ("LFC") and, in connection therewith,
authorized the issuance of 1,200,000 restricted shares of common stock to LFC in
consideration of, and as a retainer and prepayment for, the consulting services
to be rendered to the Company by LFC. Under the terms granted to LFC, the
Company issued 800,000 shares during the current year. The balance of 400,000
shares will be due and payable in fiscal year 2001 depending on whether the
Company continues to retain LFC. Pursuant to a provision in the consulting
agreement, LFC is entitled to receive a finders fee in connection with any debt
or equity financing for the Company from a source introduced to the Company, or
its nominee, from LFC and a finders fee in connection with any acquisition of
the Company by any candidate introduced to the Company, or its nominee, by LFC.
The shares have been recorded as an issuance cost on the accompanying financial
statements.
On March 27, 2000, the Company sold 700,000 shares of common stock to individual
investors organized by LFC in a private placement for aggregate proceeds of
$2,100,000.
On April 13, 2000, the Company finalized the settlement of the lawsuit filed by
the former shareholders of Health & Vitamin Express by issuing 363,636 shares of
common stock and granting a warrant expiring in 2005 to buy 100,000 shares of
common stock for $2.25 per share.
On May 22, 2000, the Company acquired certain assets of HealthShop.com, Inc. for
$3,500,000 in value of the Company's common stock (838,951 shares with up to
400,000 additional shares issuable if, the common stock value is less than
$3,500,000 by February 2001). HealthShop.com, Inc. is an Internet business that
sells nutritional supplements and health related products.
On May 25, 2000, the Company acquired Smart Basics, Inc., DBA SmartBasics.com,
for 170,000 shares of the Company's common stock. SmartBasics.com is an
Internet and mail order business that sells nutritional supplements and health
related products.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2000, the Company was in violation of several of the revised
covenants contained in the credit facility and is negotiating with the lender
for waivers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
On April 17, 2000, the Company's directors and a majority of the Company's
shareholders approved an amendment to the Company's Articles of Incorporation
changing the name of the Corporation to Healthzone.com, Inc. The proposed
amendment was submitted for filing with SEC on Schedule 14C on May 8, 2000, but
requires full shareholder approval. It is uncertain when the name change will
actually be adopted, if at all.
17
<PAGE>
No other matters were submitted to the security holders for a vote during the
period covered by this report.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On April 14, 2000 the Company filed a report on Form 8-K under Item 5 disclosing
(i) the resignation of Lindsey Duncan from the board of directors and as an
officer of the company and related agreements between Mr. Duncan and the
Company; and (ii) the election of Martin Sumichrast as a director, and
subsequent resignation; (iii) the termination of employment as President and
Chief Executive Officer of the Company; (iv) the appointment of Klee Irwin as
President and Chief Executive Officer; (v) the adoption of a consulting
agreement with Liviakis Financial Communications, Inc.; (vi) the approval and
execution of a termination agreement with Mr. Louis Mancini; and (vii) the
closing of a transaction with investors for a private placement of 700,000
shares of the Company's common stock at $3.00 per share with total gross
proceeds of $1,200,000.
On April 20, 2000 the Company filed a report on Form 8-K under Item 4 reflecting
a change in the Company's accountants from Arthur Andersen LLP to Singer, Lewak,
Greenbaum & Goldstein LLP.
On August 8, 2000 the Company filed a report on Form 8-K under Item 5 disclosing
the engagement of Rabobank International to perform a variety of investment
banking services to explore strategic alternatives for the Company.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934. The
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OMNI NUTRACEUTICALS, INC.
By /s/ Klee Irwin
-----------------------
Klee Irwin
President & CEO
By /s/ Andrew Vollero, Jr.
-----------------------
Andrew Vollero, Jr.
Chairman of the Board and Acting
Chief Financial Officer
Dated: August 14, 2000
19
<PAGE>
