U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-2
|X| Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____________________- to
_____________________
Commission file number 0-29245
Health & Nutrition Systems International, Inc.
(Name of small business issuer in its charter)
FLORIDA 65-0452156
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3750 INVESTMENT LANE, SUITE 5
WEST PALM BEACH, FLORIDA 33407
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (561) 863-8446
Securities registered under Section 12(b) of the Exchange Act:
NONE
Name of each exchange on which registered:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference to Part III of this Form
10-KSB/A-2 or any amendment to this Form 10-KSB/A-2. [X]
State issuer's revenues for its most recent fiscal year. $3,567,848.00
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. The aggregate market
value of the voting stock held by non-affiliates on March 29, 2002 was $145,193
(computed at the closing price of the common stock of the issuer outstanding on
March 17, 2002)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 3,632,813 shares of common
stock were outstanding as of March 20, 2003.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
EXPLANATORY NOTE
This Form 10-KSB/A-2 is being filed in response to comments received
from the Securities and Exchange Commission during their review of the
Registrant's Preliminary Proxy Statement on Schedule 14A filed December 22,
2003.
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
FORM 10-KSB/A-2
INDEX
PART I............................................................................................................1
ITEM 1. DESCRIPTION OF BUSINESS...............................................................................1
ITEM 2. DESCRIPTION OF PROPERTY...............................................................................9
ITEM 3. LEGAL PROCEEDINGS.....................................................................................9
PART II..........................................................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............................................11
ITEM 7. FINANCIAL STATEMENTS.................................................................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON.....................................................22
PART III.........................................................................................................22
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT.....................................................................................22
ITEM 10. EXECUTIVE COMPENSATION...............................................................................24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................................30
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................................................30
ITEM 14. CONTROLS AND PROCEDURES..............................................................................33
SIGNATURES.......................................................................................................35
i
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
This annual report on Form 10-KSB/A-2 contains forward-looking statements. These
forward looking statements concern the Company's operations, economic
performance, and financial condition, including but not limited to, the
information under the caption "Management's Discussion and Analysis or Plan of
Operation." These statements are based on management's beliefs as well as
assumptions made by and information currently available to management, including
statements regarding future economic performance and financial condition,
liquidity and capital resources, and management's plans and objectives. Any
statements that are not statements of historical fact should be regarded as
forward-looking statements. For example, the words "intends," "believes,"
"anticipates," "plans," and "expects" are intended to identify forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those factors described
under "Certain Factors Which May Affect Future Results" in this annual report.
In addition, the recent terrorist attacks on the United States, current and
future responses by the U.S. government, the war in the Persian Gulf, the
effects of these events on consumer confidence and demand, the introduction of
products that compete with the Company's products, the loss of significant
customers, and the availability to the Company and deployment by the Company of
capital, increase the uncertainty inherent in forward-looking statements. In
addition, the announcement by the Food and Drug Administration that it is
considering banning the use of ephedra in neutraceutical products and the
surrounding negative publicity regarding ephedra-containing products caused us
to discontinue selling products containing ephedra. These factors, among others,
could cause our actual results to differ materially from those indicated by such
forward-looking statements.
ii
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Health & Nutrition Systems International, Inc. (the "Company," "HNS,"
"we" or "us") was organized as a Florida corporation on October 25, 1993. Our
fiscal year end is December 31. Our corporate offices are located at 3750
Investment Lane Building, Building #5, West Palm Beach, FL 33404. Our phone
number is (561) 863-8446.
We develop, market and sell weight management, energy and sport
nutrition products to national and regional, food, drug, health, pharmacy, and
mass-market accounts, as well as to independent health and pharmacy accounts.
Our product formulations are not proprietary and therefore, our strategy is to
create market awareness and sales through the name branding each of our products
as well as the "Health and Nutrition Systems" name.
PRODUCTS
We market and sell the following products:
o ACUTRIM(R) NATURAL -- This is a dietary supplement that uses a
special blend of natural ingredients to help the consumer burn
fat by supporting healthy carbohydrate and fat metabolism.
o THIN TAB(R)MAHUANG FREE -- Thin Tab(R)Mahuang Free offers the
same benefits as Thin Tab(R)in an ephedra-free formula.
o CARB CUTTER(R) -- Carb Cutter(R) helps convert carbohydrates
into energy. The carb free blend activates a Cellular
Transport System (CTS) that shuttles newly consumed
carbohydrates into the cells where it then can be metabolized
for energy instead of being stored as fat.
As of March 15, 2003, we stopped selling two products, ThinTab(R) and
Fat Cutter Plus, which contained ephedra, because of negative publicity related
to the use of ephedra. Retailers who purchased those products from us may,
however, continue to sell them from their inventory. A third product,
Carbolizer(TM), was transferred to KMS-Thin Tab 100, Inc. in September 2002 as
part of a larger general settlement of pending litigation with KMS and J.C.
Herbert Bryant, III. Carbolizer(TM) also contained ephedra. In 2002, these three
products accounted for 19% of our total revenue.
Acutrim(R) Natural was introduced into our product line in 2001. The
Acutrim(R) trademark was purchased by us in the first quarter of 2001. After we
purchased the trademark, we completely reformulated the Acutrim(R) product to
our current product, Acutrim(R) Natural.
CERTIFICATES OF ANALYSIS
Garden State Nutritional, a division of Vitaquest International Inc.,
is the only manufacturer of our products. See "Manufacturing and Shipping." GSN
provides a certificate of analysis for each of our products which gives
laboratory test results performed by GSN that verify product quality and
ingredients. We deliver these certificates to our customers, and to consumers,
upon request.
CLINICAL TESTING
No regulatory agency specifically requires that a marketer of dietary
supplements perform clinical testing. However, the claims that are made with
respect to our products' performance are subject to review by various state and
local authorities, including, but not limited to, the Federal Trade Commission.
As a result, in 2001, we initiated a practice of performing independent clinical
trials of our principal products. These trials are meant to substantiate that
our products work as described in our advertising, labeling, or other
consumer-directed communications. These double blind placebo trials were
conducted by Marshall-Blum LLC, an independent research company with twenty
years of experience in product testing. Marshall-Blum follows strict clinical
guidelines to assist with product compliance with applicable regulations and
scientific standards.
MARKETING
We currently design and develop all of our products, marketing and
advertising in house. We strive to create market awareness and sales through
name-brand recognition of our trademarked products We target print advertising
to develop brand awareness and recognition. During 2002 and 2001, we spent 8.4%
and 14.8%, respectively, of our total revenues advertising our products in
consumer magazines such as Cosmopolitan, Mademoiselle, Glamour, Fitness,
Redbook, Allure, Muscle and Fitness, and others. We intend to continue promoting
our products through the print media.
In addition to print advertising, we have ongoing "co-op" programs with
all of the major retailers who sell our products. These programs obligate us to
spend a certain percentage of projected revenue to be generated by sales of our
products on targeted advertising for that retailer through marketing vehicles
such as Sunday newspaper inserts and 10-30 day price specials. We are obligated
to spend these co-op dollars irrespective of the actual revenue generated by the
sales of our products with that retailer. These co-op programs allow us to
target several million consumers and drive sales to the specific retailer. In
2002 and 2001, we spent approximately $823,481, 16.2% and $1,252,000, 21.1%,
respectively, of our total gross revenues on advertising and promotion, on these
"co-op" programs.
All of our products are included in the "plan-o-gram" marketing
programs of the major retailers who sell our products. These programs give our
products identical shelf and aisle positions in all locations in a particular
chain of stores using a pre-planned, in-store display format. The plan-o-gram
program guarantees consistent distribution and location of our products in all
stores. The major retailers periodically review the products that participate in
their plan-o-gram programs, sometimes as often as quarterly. There can be no
assurance that our products will remain in any given retailer's plan-o-gram
program. If one of our products is removed from a retailer's plan-o-gram
program, it is likely that the sales volume of that product by that retailer
will decline.
MANUFACTURING AND SHIPPING
Garden State Nutritional, a division of Vitaquest International Inc.,
manufactures all of our products. GSN is a state-of-the-art supplement, liquid,
and powder manufacturer, which owns a 200,000 square foot manufacturing facility
in West Caldwell, New Jersey. GSN has been known as an industry leader for more
than 25 years. GSN has the capacity to support the production of all of HNS's
product line. During 2001, we did not have a term contract with GSN, but rather
acquired our needed inventory on a purchase order basis. In early April 2002, we
entered into a two year exclusive manufacturing contract with GSN under which we
purchase all of our products' requirements from GSN. Although back-up suppliers
are identified and available, the loss of this supplier would have a material
2
adverse affect on us. GSN's research and development personnel, in conjunction
with our in-house team, develop our product formulations. Pursuant to the terms
of our exclusive manufacturing agreement with GSN, we have a $450,000 line of
credit with GSN with 60 day terms. GSN informally allowed the Company to
purchase up to $1,000,000 on the line of credit. At December 31, 2002, the
balance owed to GSN under this line of credit is $892,878.
Our production/assembly personnel package products received from GSN.
Our production/assembly personnel fill out shipping documents and oversee
quality control and inventory flow. Our large retailer orders are shipped on
pallets using the preferred freight company of the retailer's choice.
INTELLECTUAL PROPERTY
Our policy is to pursue registration of all of the trademarks
associated with our key products. We currently own trademarks registered with
the United States Patent and Trademark Office for our Acutrim(R), and Carb
Cutter(R) products and for our "On the Move(R)" advertising slogan. We have also
applied for trademark protection in the United States relating to several of our
advertising phrases, such as "I cheat," "We cheat," "Do you cheat?," Joint Lube,
Fat Drops, Come Together, Thin Tab Carb Blocker, Thin Shake and Carb Blocker.
Federally registered trademarks have a perpetual life, provided that they are
renewed on a timely basis and are used properly as trademarks, subject to
certain rights of third parties to seek cancellation of the marks.
We also rely on common law trademark rights to protect our unregistered
trademarks. Common law trademark rights do not provide us with the same level of
protection as afforded by a United States federal registration of a trademark.
In addition, common law trademark rights are limited to the geographic area in
which the trademark is actually used.
We regard our trademarks and other proprietary rights as valuable
assets and believe that such rights have significant value in the marketing of
our products. We have in the past, and intend to continue in the future to,
vigorously protect our trademarks against infringement, both in the United
States and in foreign countries.
EMPLOYEES
We currently have twelve (12) full-time employees; four (4) are
managerial, four (4) are engaged in sales and marketing, two (2) are
administrative personnel and two (2) are assembly personnel. We believe our
relationship with our employees is good.
PRODUCT DISTRIBUTION
GENERAL
Our customers are predominantly drug, health food, and mass retailers
who then sell our products to the retail consumer. We do not have contracts with
our customers to purchase our products. All of our customers purchase our
products on a purchase order basis.
DRUG, HEALTH FOOD AND MASS RETAILERS
During 2002, we continued to diversify our customer base by
establishing one or more of our products in more than eighteen (18) different
drug, health food, and mass retailers. Each of our products has achieved "full
distribution" in each of the chains that sell it, which means that if one of our
products is sold by a retailer, it is sold in every location operated by that
3
retailer. We estimate that Carb Cutter(R) and Acutrim(R) Natural are now
available in more than 25,000 store locations nationwide. Because our customers
purchase our products on a purchase order basis, there can be no assurance that
our products will continue to have "full distribution" (or any distribution) by
the retailers that carry them.
One or more of our products are currently sold by the following mass
retailers: Wal-Mart (2,048 locations), Walgreens (3,520 locations), Rite-Aid
(3,631 locations), CVS (4,123 locations), Brooks (Maxi Drug) (330 locations),
Vitamin World (600 locations), H. E. Butt Grocery Co. (280 locations), Wakefern
(200 locations), Sav-On (1,300 locations), Giant Landover (180 locations), Giant
Eagle (188 locations), Eckerd's (2,650 locations), GNC (4,000 locations), Target
(968 locations), Albertsons (2,128 locations), Duane Reade (193 locations),
Long's (430 locations) and Vitamin Shoppe (78 locations).
In 2002, we derived approximately $4,835,691 (or 95.2%) of gross
revenues from these customers. In 2001, we derived $5,524,760 (or 92.9%) of
gross revenues from drug, health food, and mass retailer customers. The term
"gross revenues," as used in this document, relates to revenues excluding sales
returns, allowances and discounts, slotting fees paid, co-op advertising and
promotion expense.
INDEPENDENT RETAIL HEALTH AND PHARMACY STORES
Our in-house staff of telemarketers (HNS Direct) has opened 4,000 new
accounts with independent retail health and pharmacy stores since we began this
program in January, 1999. These stores are not owned by a chain but are
independently owned and operated. We also participate in trade shows attended by
buyers for these independent retail health and pharmacy stores. In 2002, we
derived $246,456 (or 4.8%) of revenues from independent health and pharmacy
accounts. In 2001, we derived $419,827 (or 7.1%) of revenues from independent
health and pharmacy accounts. We believe that our revenue from the independent
customers declined in 2002 in part due to many independents going out of
business, our concentration of distribution efforts on our mass retailer
distribution network, and our focus on re-orders with existing independent
customers rather than on generating new accounts through special promotions.
Although we intend to work to expand the HNS Direct program using our existing
web site, HNSDirect.com and our in-house telemarketing program, we can offer no
assurance that we will be able to maintain or expand our number of independent
retail accounts in the future.
SIGNIFICANT CUSTOMERS
We currently have approximately 15 drug, health food, and mass retailer
customers which collectively comprised 87.0% of our gross revenues in 2002. We
depend on several significant customers for a large percentage of our sales. Our
largest customers are GNC, Wal-Mart, Walgreens, Rite Aid, Target, and Eckerd
Drugs. We do not have written agreements with any of these customers or any of
our other customers.
During the fiscal year ending 2002, GNC represented approximately 20.5%
of our gross sales, Wal-Mart represented approximately 12.2 % of our gross
sales, Walgreens represented approximately 10.6% of our gross sales, Rite Aid
represented approximately 10.1% of our gross sales, Target represented
approximately 7.0% of our gross sales, and Eckerd's represented approximately
5.1% of our gross sales. The loss of any one or more of our significant
customers would have a material adverse effect on our operations.
GOVERNMENT REGULATIONS
The processing, formulation, packaging, labeling, and advertising of
our products are subject to regulation by one or more federal agencies,
including the Food and Drug Administration ("FDA"), the Federal Trade Commission
("FTC"), the Consumer Product Safety Commission, the United States Department of
4
Agriculture and the United States Environmental Protection Agency. These
activities are also regulated by various agencies of the states, localities, and
countries in which its products are sold. In addition, we manufacture and market
certain of our products in substantial compliance with the guidelines
promulgated by the United States Pharmacopoeia Convention, Inc. ("USP") and
other voluntary standard organizations.
The Dietary Supplemental Health and Education Act ("DSHEA") recognizes
the importance of good nutrition and the availability of safe dietary
supplements in preventive health care. DSHEA amends the Federal Food, Drug and
Cosmetic Act ("FFD&CA") by defining dietary supplements, which include vitamins,
minerals, nutritional supplements and herbs, as a new category of food, separate
from conventional food. Under DSHEA, the FDA is generally prohibited from
regulating such dietary supplements as food additives or drugs. It requires the
FDA to regulate dietary supplements so as to guarantee consumer access to
beneficial dietary supplements, allowing truthful and proven claims. Generally,
dietary ingredients that were on the market before October 15, 1994 may be sold
without FDA pre-approval and without notifying the FDA. However, new dietary
ingredients (those not used in dietary supplements marketed before October 15,
1994) require pre-market submission to the FDA of evidence of a history of their
safe use, or other evidence establishing that they are reasonably expected to be
safe. There can be no assurance that the FDA will accept the evidence of safety
for any new dietary ingredient that we may decide to use, and the FDA's refusal
to accept such evidence could result in regulation of such dietary ingredients
as food additives, requiring the FDA pre-approval based on newly conducted and
costly safety testing. Also, while DSHEA authorizes the use of statements of
nutritional support in the labeling of dietary supplements, the FDA is required
to be notified of such statements, and there can be no assurance that the FDA
will not consider particular labeling statements we use to be drug claims rather
than acceptable statements of nutritional support, necessitating approval of a
costly new drug application, or re-labeling to delete such statements. It is
also possible that FDA could allege false statements were submitted to it if
structure/function claim notifications was either non-existent or so lacking in
scientific support as to be plainly false.
FFD&CA also authorizes the FDA to promulgate good manufacturing
practice regulations ("GMP") for dietary supplements, which would require
special quality controls for the manufacture, packaging, storage, and
distribution of supplements. Although the final version of the GMP rules has not
yet been issued, we anticipate we will be in substantial compliance with the
proposed regulations once they are enacted. FFD&CA further authorizes the FDA to
promulgate regulations governing the labeling of dietary supplements. Such
rules, which were issued on September 23, 1997, entail specific requirements
relative to the labeling of our dietary supplements. The rules, which took
effect in March 1999, also require additional record keeping and claim
substantiation, reformulation, or discontinuance of certain products. We believe
we are in substantial compliance with these new requirements.
All of our products are classified as dietary supplements under the
FFD&CA. In September 1997, the FDA issued regulations governing the labeling and
marketing of dietary supplement products. These regulations cover:
o the identification of dietary supplements and their nutrition
and ingredient labeling;
o the wording used for claims about nutrients, health claims and
statements of nutritional support;
o labeling requirements for dietary supplements for which "high
potency" and "anti-oxidant" claims are made;
5
o notification procedures for statements on dietary supplements;
and
o pre-market notification procedures for new dietary ingredients
in dietary supplements.
The notification procedures became effective in October 1997. The
labeling requirements became effective on March 23, 1999. Where required, we
revised our product labels as necessary to reflect the requirements. We believe
we substantially comply with these requirements. In addition, we are required to
continue our ongoing program of providing evidence for our product performance
claims, and notify the FDA of certain types of performance claims made for our
products. Our substantiation program involves ongoing compilation and review of
scientific literature pertinent to the ingredients contained in our products and
the claims we make about them.
In certain markets, including the United States, claims made with
respect to dietary supplements, personal care or any of our other products may
change the regulatory status of our products. For example, in the United States,
the FDA could possibly take the position that claims made for some of our
products make those products new drugs requiring preliminary approval. The FDA
could also place those products within the scope of its a Food and Drug
Administration over-the-counter (OTC) drug regulations and require it to comply
with a published FDA OTC monograph. OTC monographs dictate permissible
ingredients, appropriate labeling language, and require the marketer or supplier
of the products to register and file annual drug listing information with the
Food and Drug Administration. We do not at present sell OTC drug products. If
the FDA were to assert that our product claims cause them to be considered new
drugs or fall within the scope of over-the-counter regulations, we would be
required to either file a new drug application, comply with the applicable
monographs, or change the claims made in connection with our products.
Additionally, dietary supplements are subject to the Nutrition,
Labeling and Education Act (NLEA), which regulates health claims, ingredient
labeling and nutrient content claims characterizing the level of a nutrient in a
product. NLEA prohibits the use of any health claim for dietary supplements
unless the health claim is supported by significant scientific agreement and is
pre-approved by the FDA.
The FTC regulates the marketing practices and advertising of all our
products. In the past several years, the FTC instituted enforcement actions
against several dietary supplement companies for false and misleading marketing
practices and advertising of certain products. These enforcement actions have
resulted in consent decrees and monetary payments by the companies involved.
Under FTC standards, the dissemination of any false advertising constitutes an
unfair or deceptive act or practice actionable under Section 45 of the Fair
Trade Commission Act and a false advertisement actionable under Section 52 of
that act. A false advertisement is one that is "misleading in a material
respect." In determining whether an advertisement or labeling information is
misleading in a material respect, FTC determines not only whether overt
representations and implied representations are false, but also whether the
advertisement fails to reveal material facts. Under FTC's standard, any health
benefit representation made in advertising must be backed by "competent and
reliable scientific evidence" by which FTC means:
tests, analyses, research studies, or other evidence based upon the
expertise of professionals in the relevant area, that have been
conducted and evaluated in an objective manner by persons qualified to
do so, using procedures generally accepted by the profession to yield
accurate and reliable results.
The FTC has increased its review of the use of the type of testimonials
we use in our business. The Federal Trade Commission requires competent and
reliable evidence substantiating claims and testimonials at the time that such
claims of health benefit are first made. The failure to have this evidence when
6
product claims are first made violates the Federal Trade Commission Act.
Although the FTC has never threatened an enforcement action against us for the
advertising of our products, there can be no assurance that the FTC will not
question our advertising or other operations in the future.
We may be required to obtain an approval, license, or certification
from a foreign country's ministry of health or comparable agency prior to
entering a new foreign market. We work with local authorities in order to obtain
the requisite approvals, license, or certification before entering a foreign
market. The approval process generally requires us to present each of our
products and product ingredients to appropriate regulators and, in some
instances, arrange for testing of our products by local technicians for
ingredient analysis. Such approvals may be conditioned on reformulation of our
products or may be unavailable with respect to certain of our products or
certain ingredients contained in our products. We must also comply with product
labeling and packaging regulations that are different from country to country.
In markets where a formal approval license or certification is not required, we
will rely upon the advice of local counsel in each country, to help us ensure we
comply with the law.
Although we cannot predict what new legislation or regulations
governing our activities will be enacted by legislative bodies or promulgated by
agencies regulating our activities. We do know that our industry has come under
increased scrutiny, principally due to the FDA's investigation of the use of
ephedra. We believe we will become subject to additional laws or regulations
administered by the FDA or other federal, state, or foreign regulatory
authorities. We also believe the laws or regulations which we consider favorable
may be repealed, or more stringent interpretations of current laws or
regulations will be implemented in the future. Any or all of such requirements
could be a burden and costly, to us. Future regulations could:
o require us to change the way we conduct business;
o require us to change the contents of our products;
o make us keep additional records;
o make us increase the available documentation of the properties
of our products; or
o make us increase or use different labeling and scientific
proof of product ingredients, safety or usefulness.
COMPETITION
The diet industry is highly competitive. We compete directly with the
following companies who sell to our customers and their diet product brands:
Atkins Nutritional, Twinlabs, Metabolife International, Inc, Rexall Sundown,
Dexatrim, Natures Bounty (NBTY) and Slim Fast. We also compete indirectly with
companies that use direct marketing to distribute diet products directly to the
retail consumer without the use of an intermediary such as a mass retailer.
These companies use television and radio advertising which can range from thirty
second commercials to full length thirty minute infomercials. Many of these
companies also attempt to bring their best selling brands to the retail market
and such products then also compete directly with our products.
Our product formulae are not proprietary. Similar formulations are
currently being developed and marketed by our competitors. Substantially all of
our competitors have greater resources and name recognition than we do. Many of
our competitors sell, in addition to diet products, a broad range of health and
nutrition products. In addition, many of our competitors sell to the same
7
customers as we do. In addition, GSN, our sole manufacturer, sells similar
products to our competitors, often with similar formulations. We strive to
differentiate our products through the mixture of ingredients in our products
and the amounts of such ingredients contained in our products. We also trademark
our proprietary brand names such as, the " Free Blend" in Carb Cutter(R) See
"Intellectual Property." We believe that this allows us to maintain consumer
loyalty to our brand rather than to a specific ingredient or combination of
ingredients. We also strive to differentiate our products by providing
distinctive packaging. Despite the introduction of new products, we remain
significantly dependent on a single brand, the original Carb Cutter(R).
The most significant barrier to entry within our industry is the
difficulty of establishing a new product. This involves a major capital
commitment to advertise, participate in trade shows, build inventory, and pay
the cost of entry with slotting fees and or free merchandise. Test marketing
also requires a significant commitment of time and capital.
FINANCING
FACTORING
During 2002, we factored certain of our accounts receivable with
Alliance Financial Capital, Inc. On March 15, 2002, we terminated our factoring
agreement with Alliance and entered into a factoring agreement with LSQ Funding
Group, L.C. (LSQ). We only factor certain large accounts, and we do not factor
the accounts serviced through HNS Direct. The agreement with LSQ provides that
LSQ will purchase certain of our receivables and advance to us 85% of the face
amount of such receivables. The term of this agreement is one year. The maximum
amount of receivables we may factor under our agreement with LSQ is $750,000,
and there is no minimum amount required to be factored. In connection with the
factoring agreement, we granted to LSQ a blanket lien on our assets. In
connection with the LSQ Factoring Agreement, our President and Chief Executive
Officer was required to deliver a personal indemnity agreement to LSQ. The LSQ
contract expired in March of 2003 and the Company did not renew it.
GSN FINANCING
In early April 2002, we entered into an agreement with GSN, our sole
manufacturer, pursuant to which we agreed to repay to GSN amounts owed to it as
of the date of the agreement which were approximately $700,000. Our repayment
schedule requires equal monthly payments over the next twenty four months,
without interest. In connection with this agreement, we granted a blanket second
priority lien on our assets to GSN.
Also, in early April 2002, we entered into an exclusive manufacturing
agreement with GSN pursuant to which GSN has provided us with a $450,000 line of
credit, on current invoices, with 60 day terms. GSN informally allowed the
Company to purchase up to $1,000,000 on the line of credit. At December 31,
2002, the balance owed to GSN under this line of credit is $892,878.
VENDOR FINANCING
We consider our relationships with our vendors to be good. During 2002,
we were able to increase our credit limits as well as improve our payment terms
with certain vendors.
PRODUCTS LIABILITY INSURANCE
We are currently insured for products liability claims up to an
aggregate of $6,000,000. While our products liability policy currently covers
our products which contain ephedra, there can be no assurance that this coverage
will be available in the future at premium rates that were considered
acceptable, or at all.
8
We are also an additional named insured on GSN's products liability
policy, which has an aggregate coverage of up to $5,000,000.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate offices and finished product warehouse is located in a
6,000 square foot facility at 3750 Investment Lane, Building 5, West Palm Beach,
Florida, 33404. This lease expires on October 31, 2003 and provides for lease
payments of approximately $2,172, per month. We also have leased a 4,000 square
foot storage facility, also located at 3750 Investment Lane with lease payments
of $1,767 per month. The lease expiries on October 31, 2003. All packaging and
shipping is performed at this location.
During the first quarter of 2002, we entered into a sublease of 4,000
square feet of excess warehouse space for approximately $1,800 per month.
ITEM 3. LEGAL PROCEEDINGS
NEW YORK CITY DEPARTMENT OF CONSUMER AFFAIRS
In January 2001, the New York City Department of Consumer Affairs
("DCA") issued a Notice of Violation ("NOV") relating to certain claims made by
the Company relating to Carb Cutter(R). In January 2002, HNS reached a
settlement with the DCA which provided for the payment to DCA of $10,000 and no
admission of guilt, liability or misconduct of any kind by HNS.
J.C. HERBERT BRYANT, III AND KMS-THIN TAB 100, INC.
The Company was involved in the litigation with J.C. Herbert Bryant,
III, a former officer, director and one of our shareholders, and KMS-Thin Tab
100, Inc., which was settled in September 2002. The settlement agreement
generally provided for Bryant and KMS to transfer the registration and ownership
of the domain names Thintab.com, Thintab.CC, and Carbcutter.cc to HNS, and to
take other action to eliminate confusion over the ownership of the Thin Tab(R)
name. Additionally, each of the adverse parties generally released the others.
As part of the settlement, HNS entered into a distribution agreement with
Bryant, beginning on September 26, 2002 and ending on September 25, 2007,
permitting Bryant to purchase certain of its products from HNS and to
exclusively distribute those products in Florida from Orlando south. HNS also
transferred its rights to the Carbolizer(TM) product to KMS. Carbolizer(TM)
contained ephedra and in our judgment would have required a considerable
investment of corporate attention and money to remanufacture, repackage, and
promote, to significantly increase its revenue share. The value of
Carbolizer(TM) in facilitating settlement of the law suit, and recovering
control over more valued HNS trademarks, was deemed of greater benefit to the
Company.
Twenty-two (22) cases have been filed alleging that our Acutrim(R)
products contain Phenylpropanolamine ("PPA") and that those products have caused
damage to the plaintiffs. Many of these cases have been consolidated in class
action suits pending in the U.S. District Court for the Western District of
Washington in Seattle, the Philadelphia County Court of Common Pleas or the
Louisiana State Court. None of the Company's Acutrim(R) products has ever
contained, or currently contains, PPA. Based on that defense, to date, ten cases
have been voluntarily dismissed after delivery to plaintiff's counsel
information substantiating the fact that HNS's products do not presently
contain, and have not contained, PPA.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 2002, we did not submit any matters to the
vote of our security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company trades on the OTC Bulletin Board under
the trading symbol "HNNS." The prices set forth below reflect the quarterly high
and low bid information for shares of our common stock during the last two
fiscal years as reported by CSI, Inc. These quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent
actual transactions.
There were no trades of our securities on the OTCBB prior to
October 4, 2000.
Fiscal Year 2002 High Low
---------------- ---- ----
Fourth Quarter 0.08 0.04
Third Quarter 0.15 0.08
Second Quarter 0.17 0.05
First Quarter 0.55 0.05
Fiscal Year 2002 High Low
---------------- ---- ----
Fourth Quarter 0.28 0.10
Third Quarter 0.51 0.14
Second Quarter 1.03 0.23
First Quarter 2.06 0.63
As of March 20, 2002, there were 83 holders of record of our common
stock.
Our common stock is covered by an SEC rule that imposes additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors, which are
generally institutions with assets in excess of $5,000,000, or individuals with
net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. For transactions covered by the rule, the
broker-dealer must make a special suitable determination for the purchaser and
transaction prior to the sale. Consequently, the rule may affect the ability of
broker-dealers to sell our securities, and also may affect the ability of
purchasers of our stock to sell their shares in the secondary market. It may
also cause fewer broker-dealers to be willing to make a market in our common
stock, and it may affect the level of news coverage we receive.
Prior to June 29, 2000, we were not a reporting company and were not
required to file quarterly, annual, and other reports with the SEC.
We have not declared or paid any cash dividends on our common stock
since our inception, and our Board of Directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements, and other factors deemed relevant by our Board of Directors.
The following table provides information as of December 31, 2002 about
our common stock that may be issued upon the exercise of options under our 1998
Stock Option Plan for employees, officers, directors, and independent
contractors.
10
EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- ----------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS (EXCLUDING
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS (A) RIGHTS COLUMN (A))
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 506,500 $.14 322,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders
(1)
------------------------------- ---------------------------- ---------------------------- ----------------------------
TOTAL 506,500 $.14 322,000
======= ---- =======
------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) We do not maintain equity compensation plans that have not been
approved by our stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This annual report on Form 10-KSB/A-2 contains forward-looking
statements and information. Any statements that are not statements of historical
fact should be regarded as forward-looking statements. For example, the words
"intends," "believes," "anticipates," "plans," and "expects" are intended to
identify forward-looking statements. There are a number of important factors
that could cause our actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those factors described under "Certain Factors That May Affect Future
Operations" in this annual report. In addition, the recent terrorist attacks on
the United States, possible responses by the U.S. government, the effects on
consumer demand, the financial markets and other conditions increase the
uncertainty inherent in forward-looking statements. Finally, recent government
action and the surrounding publicity regarding ephedra-containing products may
make it difficult for us to obtain and maintain product liability insurance for
our products containing ephedra at current premiums. This could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
The following discussion of our results of operations and financial
condition should be read along with our Consolidated Financial Statements listed
in Item 7 and the Notes to them appearing elsewhere in this Form 10-KSB/A-2.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
U.S. Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our financial statements include a summary of the
significant accounting policies and methods used in the preparation of our
financial statements.
Management believes the following critical accounting policies affect
the significant judgments and estimates used in the preparation of the financial
statements.
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective
merchandise. Included in the net sales in the accompanying financial statements
for the twelve months ended December 31, 2002, and 2001 are returns and
allowances and sales discounts in the amounts of $612,700 and $579,255,
respectively.
11
APPLICATION OF EIFT 01-9, "ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO
CUSTOMER (INCLUDING A RESELLER OF THE VENDOR'S PRODUCTS)'
In accordance with EITF 01-9, we reclassified expenses relating to
slotting fees paid, co-op advertising and promotions, from operating expenses to
revenues. The term "gross revenues" as used in this document relates to the
revenues excluding the above mentioned advertising expenses and sales returns,
allowances and discounts. Gross revenues for 2002 and 2001 are $5,082,147 and
$5,944,587, respectively, and the co-op advertising expenses are $901,599 and
$1,524,943, respectively.
USE OF ESTIMATES
Management's discussion and analysis of financial condition and results
of operations is based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates these estimates,
including those related to valuation allowance for the deferred tax asset,
estimated useful life of fixed assets and the carrying value of long-lived
assets, intangible assets and allowances for sales returns, doubtful accounts,
and obsolete and slow moving inventory and reserve for customer liabilities.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
OVERVIEW
Like most consumer businesses, our business is affected by general
economic, political and public safety conditions that impact consumer confidence
and spending. The impact of the terrorist attacks of September 11, 2001 and the
government's response to them, including the commencement of the Persian Gulf
war, have had short-term and also have had, and may continue to have, long-term
adverse effects on our revenues, results of operations, financial condition, and
prospects.
The industry revenues reported in year 2002 were down approximately 25%
percent from those reported in year 2001. We believe that this trend will
reverse itself in the year 2003 and result in an upturn in the industry.
Particularly, because of the popularity of low carbohydrate diets, we expect
increased consumer demand for low carbohydrate diet assisting products such as
ours. However, our product formulae are not proprietary. Similar formulations
are currently being developed and marketed by our competitors. Substantially all
of our competitors have greater resources and name recognition than we do. Many
of our competitors sell, in addition to diet products, a broad range of health
and nutrition products. In addition, many of our competitors sell to the same
customers as we do. We believe at least some of these potential competitors will
also find low carbohydrate diet assisting products attractive and compete with
us. We strive to differentiate our products through the mixture of ingredients
in our products and the amounts of such ingredients contained in our products.
We also trademark our proprietary brand names, such as, the "Carb Free Blend" in
Carb Cutter(R). We believe that this allows us to maintain consumer loyalty to
our brand rather than to a specific ingredient or combination of ingredients. We
also strive to differentiate our products by providing distinctive packaging. In
addition, GSN, our sole manufacturer, sells similar products to our competitors,
often with similar formulations. None of our efforts in differentiating
ourselves, however, will insure that existing or potential competitors will not
erode our market share. We also expect that many customers will continue to want
to purchase diet products containing ephedra which we discontinued selling early
in 2002.
12
The most significant barrier to entry within our industry is the
difficulty of establishing a new product. This involves a major capital
commitment to advertise, participate in trade shows, build inventory, and pay
the cost of entry with slotting fees and or free merchandise. Test marketing
also requires a significant commitment of time and capital. In this respect, the
very popularity of the low carbohydrate diets may encourage additional stronger
competitors to compete with us.
During 2002, we continued to implement our strategic plan to diversify
our product line through the development and promotion of two new products: Fat
Cutter Plus and Acutrim(R) Natural as well as the promotion and expansion of the
distribution of Carb Cutter(R). This strategy is aimed at reducing the negative
impact upon us of (i) a shift in consumer preferences with regard to any one of
our products, (ii) a change in retailer preferences for our products, or (iii)
any other cause of reduced sales either for a particular product or in a
particular geographical region because of negative publicity. Despite the
introduction of new products, we remain significantly dependent on a single
brand, the original Carb Cutter(R).
The Company announced on December 19, 2002 that it had made a strategic
decision to discontinue the sales of all ephedra-based products. As a result,
the Company discontinued sales of Thin Tab(R) and Fat Cutter Plus in the first
quarter of 2003. Our retail customers, however, may continue to sell those
products from their inventory. Alternatively, they may return the products to
us. In 2002, sales of those products were $965,608, or 19% of total revenue. At
December 31, 2002, the Company recorded an allowance for sales returns of
$317,600, including $200,000 for returns of products containing ephedra expected
in 2003.
We cannot predict the effects of the discontinuance of these products
on our revenues, results of operations, financial condition, and prospects. See
"Commitments and Contingencies."
GOVERNMENT REGULATIONS
The processing, formulation, packaging, labeling and advertising of our
products are subject to regulation by one or more federal agencies, including
the FDA, the FTC, the Consumer Product Safety Commission, the United States
Department of Agriculture and the United States Environmental Protection Agency.
These activities are also regulated by various agencies of the states,
localities, and countries in which its products are sold.
Although we cannot predict what new legislation or regulations
governing our activities will be enacted by legislative bodies or promulgated by
agencies regulating our activities. We do know that our industry has come under
increased scrutiny, principally due to the FDA's investigation of the use of
ephedra. We believe we will become subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities. We also believe the laws or regulations which we consider favorable
may be repealed or more stringent interpretations of current laws or regulations
will be implemented in the future. Any or all of such requirements could be a
burden and costly, to us. Future regulations could:
o require us to change the way we conduct business;
o require us to change the contents of our products;
o make us keep additional records;
o make us increase the available documentation of the properties
of our products; or
13
o make us increase or use different labeling and scientific
proof of product ingredients, safety or usefulness.
RESULTS OF OPERATIONS
NET REVENUES:
Gross revenue is the total dollars generated from the total amount of goods sold
to a customer before any deductions. Net Revenue is gross revenue reduced by
o returns and allowances;
o cash discounts;
o slotting fees and new store discounts; and
o co-op advertising and promotions given to the customers to
promote the product and improve sales.
Year ended December 31, 2002 compared with Year ended December 31, 2001
Gross revenues for the twelve months ended December 31, 2002 decreased
by $862,440, to $5,082,147, versus the comparable period in 2001 of $5,944,587.
The decrease was due to the decrease in sales to our major customers of $689,069
and a decrease in our in house telemarketing revenue of $173,371. We believe
these decreases were primarily based on a generally soft market and reduced
advertising.
Net revenues for the twelve months-ended December 31, 2002 decreased by
$272,541 to $3,567,848 versus the comparable period in 2001 of $3,840,389, also
because of a soft market and reduced advertising.
During the twelve months ended December 31, 2002, six companies
accounted for 65.5% of our gross revenues. GNC, our largest account, accounted
for 20.5% of gross revenues versus the comparable period in 2001 of 20.8%.
Year ended December 31, 2001 compared with Year ended December 31, 2000.
Gross revenues for the twelve months ended December 31, 2001 increased
by $298,943 to $5,944,587 versus the comparable period in 2000 of $5,645,644.
Although we experienced a decrease in our in-house telemarketing revenue of
$603,550 in fiscal year 2001 versus the comparable period in fiscal 2000, the
loss in telemarketing revenue was more than made up by increased gross revenue
from the Company's large retail customers.
Net revenues for the twelve months ended December 31, 2001, however,
decreased by $954,000 to $3,840,389 versus the comparable period in 2000 of
$4,794,854, because of increases in cooperative advertising, returns, and other
allowances.
During the twelve months ended December 31, 2001, six companies
accounted for 73.5% of the total Company's gross revenues . In 2001, GNC, our
largest account, accounted for 20.8% of gross revenues versus the comparable
period in 2000 of 45.0%.
14
COST OF SALES
Year ended December 31, 2002 compared with Year ended December 31, 2001
Cost of sales for the twelve months ended December 31, 2002 was
$1,511,826, or 42.4% of net sales, compared to $1,903,755, or 49.6% of net sales
for the twelve months ended December 31, 2001. The decrease in cost of sales as
a percentage of net sales is primarily attributed to higher sales of Carb
Cutter(R), which had a formula change decreasing the cost of goods sold on this
product in fiscal year 2002. Additionally, the cost of sales was reduced by
$73,747, which represents imputed interest on the Company's Note with GSN. The
cost of sales as a percentage of net sales without this discount is 44.4%.
Year ended December 31, 2001 compared with Year ended December 31, 2000
Cost of sales for the twelve months ended December 31, 2001 was
$1,903,755 or 49.6% of net sales, compared to $1,472,528, or 30.7% of net sales
for the twelve months ended December 31, 2000. The increase in cost of sales as
a percentage of net sales is primarily attributed to higher sales of Carb
Cutter(R), which had a formula change increasing the cost of goods sold on this
product in fiscal year 2001, and the reformulation of Acutrim Natural(R) that
increased the cost of sales percentage.
GROSS PROFIT:
Year ended December 31, 2002 compared with Year ended December 31, 2001
Gross profit for the twelve months ended December 31, 2002 was
$2,056,022 an increase of $119,388, or 6.2%, compared to gross profit of
$1,936,634 for the twelve months ended December 31, 2001. As a percent of net
sales, gross profit was 57.6% for the twelve months ending December 31, 2002, as
compared to 50.4% for the twelve months ended December 31, 2001. The increase in
gross profit dollars is primarily attributed to the decrease in cost of goods as
explained above.
Year ended December 31, 2001 compared with Year ended December 31, 2000
Gross profit for the twelve months ended December 31, 2001 was
$1,936,634 a decrease of $1,385,691 or 41.7%, compared to gross profit of
$3,322,325 for the twelve months ended December 31, 2000. As a percent of net
sales, gross profit was 50.4% for the twelve months ending December 31, 2001, as
compared to 69.2% for the twelve months ended December 31, 2000. The decrease in
gross profit is primarily attributed to the increase in cost of goods for the
Carb Cutter(R) and also Acutrim(R) Natural, each of which were reformulated in
2001 and as a result of such reformulation, has a lower gross margin than the
prior year.
OPERATING EXPENSES:
Year ended December 31, 2002 compared with Year ended December 31, 2001
Operating expenses were $1,980,493 for the twelve months ended December
31, 2002, compared to $3,313,837 for the twelve months ended December 31, 2001,
representing a decrease of $1,333,344. As a percent of net sales, operating
expenses were 55.5% for the twelve months ended December 31, 2002, compared to
86.3% for the twelve months ended December 31, 2001. Advertising and promotion
expenses were $425,349 for the twelve months ended December 31, 2002, compared
to $881,541 for the twelve months ended December 31, 2001, representing a
decrease of $456,192. Expenditures of $901,600 and $1,523,943 for the years 2002
and 2001, respectively, which were previously classified as advertising and
promotion expenses were classified to revenues. These expenses in 2001 were
15
primarily due to expenses associated with the new product launches of Fat Cutter
and Carbolizer(TM) as well as expenses associated with expanding the
distribution of our other products. General and administration expenses were
$1,524,678 for the twelve months ended December 31, 2002, compared to $2,400,680
for twelve months ended December 31, 2001, representing a decrease of $876,002.
This decrease was primarily a result of reductions in personnel expenditures,
factoring expenditures offset in part by professional fees associated with
litigation during 2002.
Year ended December 31, 2001 compared with Year ended December 31, 2000
Operating expenses were $3,313,837 for the twelve months ended December
31, 2001, compared to $3,238,121 for the twelve months ended December 31, 2000,
representing an increase of $75,716. As a percent of net sales, operating
expenses were 86.3% for the twelve months ended December 31, 2001, compared to
67.5% for the twelve months ended December 31, 2000. Advertising and promotion
expenses were $881,541 for the twelve months ended December 31, 2001, compared
to $1,007,694 for the twelve months ended December 31, 2000, representing a
decrease of $126,153. General and administration expenses were $2,400,680 for
the twelve months ended December 31, 2001, compared to $2,201,478 for the twelve
months ended December 31, 2000, an increase of 9.0%. This increase was primarily
a result of additional personnel expenditures and professional fees associated
with litigation during 2001.
NET INCOME FROM OPERATIONS
Year ended December 31, 2002 compared with Year ended December 31, 2001
Net income for the twelve months ended December 31, 2002 was $27,606 or
..01 per share, compared to a net loss of $(1,399,533) or $(.39) per share for
the twelve months ended December 31, 2001. The increase in income was a direct
result of our commitment to reduce the operating expenses, resulting in a
decrease of $1,333,344 over the prior year.
Year ended December 31, 2001 compared with Year ended December 31, 2000
Net loss for the twelve months ended December 31, 2001 was $(1,399,533)
or (.39) per share, compared to net income of $70,562 or $.02 per share for the
twelve months ended December 31, 2000. The decrease in income was a direct
result of our commitment to the advertising and promotion of our product lines.
Advertising, Slotting Fees, Co-ops, Free Goods and Promotion Expenditures
increased $789,392, or 48.8%, over the previous twelve months ended December 31,
2000.
CARRY FORWARD LOSS
We have a net operating loss carryforward, as of December 31, 2002 of
$895,346 for tax purposes to affect future taxable income. The net operating
loss carryforward expires in 2022.
LIQUIDITY & CAPITAL RESOURCES
At December 31, 2002, the Company had a working capital deficit of
$702,970, compared to the prior year end, at December 31, 2001, of $900,663.
This is an improvement of $197,693. In early April 2002, we entered into an
agreement with GSN, our sole manufacturer, pursuant to which we agreed to repay
to GSN amounts we owed to them as of the date of the agreement which were
approximately $700,000 over the next twenty-four months. Our current liabilities
from accounts payable and accrued expenses decreased during 2002 by $106,916,
primarily as a positive result of cash flow from operations and the financing
arrangements with GSN described below.
16
At December 31, 2002, the Company had inventory of $438,375, compared
to $194,792 at December 31, 2001. The increased inventory was primarily the
result of increased stocking and delivery requirements of a major new customer
acquired in mid 2002.
Net cash provided by operating activities for the year ended December
31, 2002 was $190,329 and resulted primarily from decreased operating expenses.
Net cash provided by investing activities was $0 for the year ended December 31,
2002. Net cash used in financing activities for the year ended December 31, 2002
was $(257,483), which includes repayment of notes payable of $237,400 and
$20,083 for capital lease payments. Net cash used in operating activities for
the year ended December 31, 2001 was $(33,650) and resulted primarily from
increased operating expenses. Net cash provided by investing activities was
$122,163 for the year ended December 31, 2001, which resulted from purchases of
trademarks for $25,000 and the release of a certificate of deposit as collateral
for a bank loan of approximately $150,000.
During 2001, we factored certain of our accounts receivable with
Alliance Financial Capital, Inc. On March 15, 2002, we terminated our factoring
agreement with Alliance and entered into a factoring agreement with LSQ Funding
Group, L.C. (LSQ). The term of this agreement is one year. The maximum amount of
receivables we may factor under our agreement with LSQ is $750,000, and there is
no minimum amount required to be factored. In connection with the factoring
agreement, we granted to LSQ a blanket lien on our assets. Our factoring
arrangement provides us with cash at the time of shipment of the product. The
Company decided not to renew the LSQ agreement in March 2003.
In early April 2002, we entered into an agreement with GSN, our sole
manufacturer, pursuant to which we agreed to repay over a two-year period to GSN
amounts we owed to them as of the date of the agreement which were approximately
$700,000. In connection with this agreement, we granted to GSN a blanket second
priority lien on our assets. Also, in early April 2002, we entered into an
exclusive manufacturing agreement with GSN pursuant to which GSN has provided us
with a $450,000 line of credit with 60 day terms. At the same time, in order to
finance sales to a new major customer, GSN informally allowed the Company to
purchase up to $1,000,000 on the line of credit.
In 2001, net loss was ($1,391,645). The net cash flow from operations
was ($33,650). The 2002 net cash provided by operations was $190,329, and we
increased our average monthly inventory to approximately $425,000 from
approximately $289,000 in 2001, primarily because of inventory levels necessary
to facilitate the Wal-Mart ordering process.
Based on our improved results in 2002, our arrangements with GSN, and
continued attention to expense reduction, we believe that our operations will
provide sufficient cash to support our activities during 2003. However, if GSN
determines to alter the informal arrangements extending our limit of credit to
$1,000,000 or our operations fail to generate positive cash flow, it is likely
we would not be able to continue our operations.
In addition, our gross margins improved in 2002 to 58% from 50% in
2001. Operating and cost controls were put in place during 2002, which allowed
us to reduce our General and Administrative expenses by almost $900,000.
COMMITMENTS AND CONTINGENCIES
Regulatory Matters - Our discontinued products, Fat Cutter Plus, Thin
Tab(R), and formally owned Carbolizer(TM) product, contain ephedra, also known
as "Ma Huang," an herb which contains naturally-occurring ephedrine. These
products represented approximately 19% of our gross revenue for the twelve
17
months ended December 31, 2002. Ephedra containing products have been the
subject of adverse publicity in the United States and other countries relating
to alleged harmful effects. The company has discontinued all sales of products
containing ephedra.
In April 2000, the FDA withdrew most of the provisions of its proposed
rule regarding dietary supplements that contain ephedrine alkaloids. The
proposed rule, which was published in 1997, would have significantly limited our
ability to sell Fat Cutter Plus, Thin Tab(R) and Carbolizer(TM) if it had been
made effective. The FDA's withdrawal of the provisions removed most, but not
all, of the limitations. This action was prompted largely by a report issued by
the United States General Accounting Office (GAO) in which the GAO criticized as
faulty the scientific basis for the proposed rule and the FDA's evaluation of
approximately 900 reports of adverse events supposedly related to the
consumption of dietary supplements containing ephedrine alkaloids. The FDA made
available for public inspection most of the adverse event reports on April 3,
2000.
On October 25, 2000, several trade organizations for the dietary
supplement industry submitted a petition to the FDA which concerned the
remaining provisions of the proposed rule regarding dietary supplements that
contain ephedrine alkaloids. The petition requested the FDA to: (1) withdraw the
remaining provisions of the proposed rule, and (2) adopt new standards for
dietary supplements that contain ephedrine alkaloids, which were set forth in
the petition.
The FDA will, most likely, attempt to issue new rules with respect to
dietary supplements that contain ephedrine alkaloids or ban them entirely.
However, it is uncertain what restrictions the new proposed rule might contain
or when a new proposed rule will be issued. Consequently, we are unable at the
present time to predict the ultimate resolution of these issues, or their
ultimate impact on our results of operations or financial condition. We have
already developed ephedrine-free formulae for products. However, these
formulations may not be popular with customers accustomed to products containing
ephedra. On the other hand, to the extent that sales of ephedra-containing
products of our competitors decline as a result of any new rules, sales of our
current non-ephedra products may be positively affected.
Although we cannot predict what new legislation or regulations
governing our activities will be enacted by legislative bodies or promulgated by
agencies regulating our activities, we do know that our industry has come under
increased scrutiny principally due to the FDA's investigation of the use of
ephedra. We believe we will become subject to additional laws or regulations
administered by the FDA or other federal, state, or foreign regulatory
authorities. We also believe the laws or regulations which we consider favorable
may be repealed or more stringent interpretations of current laws or regulations
will be implemented in the future. Any or all of such requirements could be a
burden and costly, to us. Future regulations could:
o require us to change the way we conduct business;
o require us to change the contents of our products;
o make us keep additional records;
o make us increase the available documentation of the properties
of our products; or
o make us increase or use different labeling and scientific
proof of product ingredients, safety or usefulness.
18
PRODUCT LIABILITY
The Company, like other marketers of products that are intended to be
ingested, face the inherent risk of exposure to product liability claims in the
event that the use of our products results in injury. We currently maintain
product liability insurance coverage of $6,000,000. Because of the increased
scrutiny of our industry arising out of the FDA's consideration of ephedra, or
otherwise, it may become increasingly difficult to obtain and maintain product
liability insurance coverage for products containing ephedra at current
premiums, or at all. Our products liability coverage is on an occurrence basis
and, even if we are unable to continue to secure product liability insurance on
a claims made basis, would cover ephedra based claims. We believe that our
insurance coverage would be adequate to cover any claims made against it
relating to its products, whether based on ephedra or otherwise. We further
believe that by ceasing to sell products containing ephedra and agreeing to
accepting returns of its customers existing inventory, it has further reduced
any potential liability relating to ephedra. We are not aware of any claims
similar to those relating to ephedra having been made with respect to any of the
other ingredients contained in its products.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
If Garden State Nutritionals, our sole manufacturer, fails to supply
our products in sufficient quantities and in a timely fashion, our business may
suffer. We currently obtain 100% of our manufactured product from a single
source of supply, Garden State Nutritionals. In 2002, we entered into a two year
contract with GSN to manufacture all of our products. In the event that GSN is
unable or unwilling to provide us with the products in accordance with the terms
of our contract, delays in securing alternative sources of supply would result
in a material adverse effect upon our operations.
The dietary supplement industry is highly competitive. Many of our
competitors, particularly manufacturers of nationally advertised brand name
products, are larger and have resources substantially greater than we do. In the
future, if not currently, one or more of these companies could seek to compete
more directly with us by manufacturing and distributing their own or others'
products, or by significantly lowering the prices of their existing national
brand products. If one or more of our competitors significantly reduce their
prices on existing products in an effort to gain market share or aggressively
promote new products in an effort to enter a market, our results of operations
or market position could be adversely affected. In addition, because the
formulations of our products are not proprietary, similar formulations are
currently being developed and marketed by these competitors.
Our products may also face competition in the future from diet-related
drugs introduced by pharmaceutical companies.
We currently have a limited number of products. We currently market
seven products. The loss of, or deterioration in the popularity of any one or
more of our other brands will have a material adverse effect on our Company.
Our failure to develop and introduce new products could have an adverse
effect on our Company. We believe our ability to grow in our existing market is
partially dependent upon our ability to introduce new and innovative products
into these markets. Although we seek to introduce additional products in our
existing markets, the success of new products is subject to a number of
variables, including developing products that will appeal to customers and
competing with product launches by our competitors. We cannot assure you that
our efforts to develop and introduce new products will be successful or that
customers will accept new products.
19
We could be adversely affected if any of our products or any similar
products distributed by other companies should prove or be asserted to be
harmful to consumers or should scientific studies provide unfavorable findings
regarding the effectiveness of our products. All of our products have
certificates of analysis supplied by our manufacturer, and we have completed
independent clinical testing of all of our principal products to insure they
work as described. We are highly dependent upon our customers' and the retail
consumers' perception of the overall integrity of our business, as well as the
safety and quality of our products and similar products distributed by other
companies, which may not adhere to our quality standards. Our ability to attract
and retain customers who, in turn, attract retail consumers, could be adversely
affected by negative publicity regarding our products or one or more ingredients
in our products or by the announcement by any governmental agency of a
regulatory initiative relating to ingredients in our products.
Our customers may discontinue use of our products at any time. Our
customers order products on a purchase order basis and may discontinue the sale
of our products at any time. If product sales are discontinued, we may not
receive payment for units that are not paid for as of the time of
discontinuation. Additionally, certain of our customers have the right to take a
credit in an amount equal to the unpaid balance of the discontinued product
against other products of ours that they may purchase.
Our success largely depends upon national media attention. We believe
that the historical growth experienced by the nutritional supplement market is
based in part on the national media attention regarding recent scientific
research suggesting potential health benefits from regular consumption of
certain vitamins and other nutritional products. Such research has been
described in major medical journals, magazines, newspapers and television
programs. The scientific research to date is preliminary, and there can be no
assurance of future favorable scientific results and media attention or of the
absence of unfavorable or inconsistent findings. While public awareness of the
positive effects of vitamins and nutritional supplements on health was
heightened by widely publicized reports of scientific findings supporting such
claims during 1997-1998, we believe that negative media attention focusing on
questions of efficacy, safety and label claim content have had a significant
adverse impact on the supplement industry over the past two years. In
particular, negative publicity with respect to ephedrine products has impacted
our business. The lack of growth in the nutritional supplement industry has also
been caused by the lack of new "blockbuster" products and increasing
competition, including intense private label expansion. There can be no
assurance that these factors will not be present in the future.
We, like other sellers of products that are ingested, face an inherent
risk of exposure to product liability claims if, among other things, the use of
our\products results in injury. We currently have product liability insurance
for our operations in amounts we believe are adequate for our operations. There
can be no assurance, however, that such insurance will continue to be available
at a reasonable cost, if at all, or, if available, will be adequate to cover
such liabilities.
Restrictive governmental regulations govern the manufacturing and
distribution of our products. We are subject to numerous governmental
regulations, including, but not limited to, regulations promulgated by FDA, FTC,
and the Consumer Product Safety Commission, regarding the distribution,
labeling, and promotion of our products. All of the ingredients that we use in
our products have been reviewed by the FDA upon submission of information by
others. If we intend to use any ingredient in our products that has not already
been reviewed by the FDA, we would be required to submit the new dietary
ingredient to the FDA and to demonstrate a history of safe use. If the FDA does
not accept the evidence of safety we present for the new dietary ingredient, the
FDA could determine that such result ingredient should be regulated as a food
additive and require time consuming and costly FDA approval. Additionally, under
the FD&CA (including NLEA and DSHEA), the FDA has issued regulations regarding
labeling and marketing of our products, and the NLEA regulates nutrient and
ingredient labeling. The FTC regulates marketing practices and advertising of
our products. Our business and financial results could be materially harmed by
our failure to comply with these labeling and marketing regulations.
20
The laws and regulations relating to our products are subject to
frequent and substantial changes resulting from legislation, adoption of rules
and regulations and administrative and judicial interpretation of existing laws.
These changes may have a dramatic effect on our business. Such changes may be
applied retroactively. The ultimate timing or effect of such changes cannot be
predicted. Our failure to comply with such laws, requirements, and regulations
could adversely affect our business and finances.
We depend on significant customers for a large percentage of our net
sales. Our largest customers are GNC, Wal-Mart, Walgreens, Rite Aid, Target,
Eckerd's and CVS. We do not have written agreements with any of these customers.
We cannot assure you that these customers will continue as major customers of
the Company. The loss of any of these customers, or a significant reduction in
purchase volume by any of these customers, could have a material adverse effect
on our results of operations or financial condition.
We believe that trademarks and other proprietary rights are among our
most important assets. In fiscal 2002, substantially all of our net sales were
from products bearing proprietary brand names, including Acutrim(R) Natural Thin
Tab(R) and Carb Cutter(R). Accordingly, our future success depends upon the
goodwill associated with these brand names. Although our principal brand names
are registered in the United States, we cannot assure you that the steps we have
taken to protect our proprietary rights in our brand names will be adequate to
prevent the misappropriation of these registered brand names in the United
States or abroad. In addition, the laws of some foreign countries do not protect
proprietary rights in brand names to the same extent as do the laws of the
United States. In addition, to the extent that we rely on common law trademark
rights to protect our unregistered trademarks, such common law trademark rights
do not provide us with the same level of protection as afforded by a United
States federal registration of a trademark. In addition, common law trademark
rights are limited to the geographic area in which the trademark is actually
used. Additionally, the sales of certain of our products rely on our ability to
maintain and extend our licensing agreements with third parties, and we cannot
assure you that these third parties can successfully maintain their intellectual
property rights or that we will be successful in maintaining these licensing
agreements. If we lose the right to use these licenses, our business could be
materially adversely affected.
Although we are committed to enforce our various trademarks and other
intellectual property rights against infringement, we cannot assure you that we
will be able to successfully do so. The loss of, or deterioration in, our
intellectual property rights could adversely affect our business.
We depend substantially on the continued services and performance of
our senior management. Our business may be hurt if Christopher Tisi, our
President and Chief Executive Officer, leaves us. Although we have an employment
agreement with Mr. Tisi, this does not guarantee that he will remain with us. If
we lose his services, we may not be able to attract and retain additional
qualified personnel to fill his position in the future.
Control of our company is concentrated among a limited number of
stockholders who can exercise significant influence over all matters requiring
stockholder approval. As of December 31, 2002, our present directors, executive
officers and their respective affiliates and related entities beneficially owned
approximately 33% of our outstanding common stock and common stock equivalents.
In addition, our President and Chief Executive Officer has agreed with certain
other significant shareholders to vote together on certain matters. These
stockholders can exercise significant influence over all matters requiring
stockholder approval, including the election of directors and the approval of
significant corporate transactions. This concentration of ownership may also
potentially delay or prevent a change in control of our company.
21
Our stock price is likely to remain volatile. The stock market has,
from time to time, experienced significant price and volume fluctuations that
may be unrelated to the operating performance of particular companies. In
addition, the market price of our common stock, like the stock price of many
publicly traded dietary and nutritional product companies, has been, and will
likely continue to be, volatile. Prices of our common stock may be influenced by
many factors, including:
o investor perception of us;
o analyst recommendations;
o market conditions relating to dietary and nutritional product
companies;
o announcements of new products by us or our competitors;
o publicity regarding actual or potential developments relating
to products under development by us or our competitors;
o developments or disputes concerning proprietary rights;
o regulatory developments;
o period to period fluctuations in financial results of us and
our competitors;
o future sales of substantial amounts of common stock by
shareholders; and
o economic and other external factors.
We are not likely to pay dividends. We have not paid any cash dividends
on our common stock and we do not plan to pay any cash dividends in the
foreseeable future. We plan to retain any earnings for the operation of our
business.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are included beginning at F-1. See Index to
the Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
We have adopted a written code of ethics that applies to our senior
financial officers and persons performing similar functions, which Code has been
filed as Exhibit 14 hereto. We intend to disclose any amendments to, or waivers
from, the Code on our website, www.hnsglobal.com. Upon written request to our
corporate secretary by U.S. mail, we will provide, at no charge, a copy of such
Code to any person requesting a copy.
22
DIRECTORS AND EXECUTIVE OFFICERS
As of April 29, 2003, our directors and executive officers are:
Name Age Position/Office
---- --- ---------------
Christopher Tisi 33 Interim Chairman of the Board,
Chief Executive Officer,
President, Secretary
Steven Pomerantz 47 Director
Ted Alflen 56 Director
The following is a brief biographical summary of our officers and
directors.
Christopher Tisi has been our Chief Executive Officer and Interim
Chairman of the Board since December 2001. Mr. Tisi has been our President and
Secretary since November 2000, and was our Chief Operating Officer from December
1999 until November 2000. From March 1998 until December 1999, Mr. Tisi was our
Vice President of Sales and Marketing. From 1994 to March 1998, Mr. Tisi was our
Vice President of Training.
Steve Pomerantz has been one of our directors since 1994. He has been
the President of TDR Safety Products, a touch free, self-serve car wash, since
2002. From November 2000 to December 2001, Mr. Pomerantz was our Chairman of the
Board and Treasurer, and he held the office of Chief Executive Officer from
March 1998 until December 2001. He was our President from March 1998 until
November 2000. From 1995 to March 1998, Mr. Pomerantz was our Vice President of
Finance and Chief Operating Officer.
Ted Alflen has been one of our directors since October 2000. In March
1991, Mr. Alflen founded TCCD International Inc. and served as President from
1991 to present. TCCD manufactures and markets crystal deodorants. TCCD recently
acquired Real Natural Products and the Moistic brand of all natural lip balms.
Mr. Alflen has been in sales and marketing for over 29 years.
Each director holds his office until the next annual meeting of the
shareholders unless he resigns or is removed.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(e) of the Securities Exchange Act of 1934
during the fiscal year ended December 31, 2002, we are not aware of any person
that failed to file on a timely basis, as disclosed in the aforementioned forms,
reports required by Section 16(a) of the Exchange Act during the fiscal year
ended December 31, 2002.
AUDIT COMMITTEE FINANCIAL EXPERT
The board has determined that it does not have an audit committee
financial expert serving on its audit committee. We do not have an audit
committee financial expert on our audit committee because no individual on our
Board possesses all of the attributes of an audit committee financial expert.
Currently we have two vacancies on our board and plan to fill at least one of
those vacancies with a financial expert.
23
ITEM 10. EXECUTIVE COMPENSATION
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 2002,
2001 and 2000 received by each of our chief executive officer and our other
executive officers whose total annual salary and bonus exceeded $100,000 during
fiscal year 2002 (each a "Named Officer" and collectively the "Named Officers").
No other executive officers were paid salary and bonus compensation by us which
exceeded $100,000, during 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------------
NAME AND PRINCIPAL SECURITIES
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR ($)(1)) ($) ($)(2) OPTIONS(#)(3) ($)
-------- ---- ------- --- ------ ------------- ---
Christopher Tisi 2002 164,983 7,249 -- 50,000 --
President, Chief 2001 100,703 7,524 -- - --
Executive Officer 2000 118,169 18,169 -- 102,000 --
And Secretary (4)
Steve Pomerantz 2002 62,182 -- -- -- 50,000(5)
Director(4) 2001 114,321 3,762 -- -- --
2000 100,000 11,642 -- 50,000 --
--------------------
(1) Payment of $23,443 of Steve Pomertanz's 2001 salary and $32,578 of
Christopher Tisi's 2001 salary was deferred in 2001 and was paid during
2002 in twelve equal monthly installments.
(2) The Named Officers did not receive any other annual compensation not
categorized as salary or bonus except for perquisites and other personal
benefits which in the aggregate did not exceed the lesser of $50,000 or 10%
of the total annual salary and bonus reported for such Named Officer.
(3) In 2000, Mr. Pomerantz was granted options under our 1998 Stock Option Plan
for the purchase of 50,000 shares of common stock. Such options were
granted at the then current market value of the shares. The options granted
vested immediately on the date of grant. Also in 2000, Mr. Tisi was granted
options under our 1998 Stock Option Plan for the purchase of 102,000 shares
of common stock. In 2002, Mr. Tisi was granted options under our 1998 Stock
Option Plan for the purchase of 50,000 shares of common stock. Such options
were granted at the then current market value of the shares. The options
granted vested immediately on the date of grant.
(4) Mr. Pomerantz resigned as Chief Executive Officer, Treasurer and Chairman
of the Board on December 14, 2001, and Mr. Tisi assumed the position of
Chief Executive Officer, Secretary and Interim Chairman of the Board on
December 14, 2001. Mr. Tisi has served as President since October 1, 2000.
(5) Paid to Mr. Pomertanz as severance pursuant to the terms of his Severance
Agreement effective as of January 1, 2002.
24
STOCK OPTION GRANTS
The following table contains information concerning the grant of stock
options under our 1998 Stock Option Plan to the Named Officers during 2002.
OPTION GRANTS IN 2002
Individual Grants
Number of Securities % of Total
Underlying Options Options Granted Exercise or
Granted to Employees in Base Price Expiration
Name (#) (1) 2002 ($/Sh) Date (2)
---- ------- ---- ------ --------
Christopher Tisi(3) 50,000 100% $.12 02/11/06
President, Chief
Executive Officer,
Secretary and Interim
Chairman of the Board
-------------------
(1) All options granted in 2002 are non-qualified stock options and are not
intended to qualify as an incentive stock option ("ISOs") under ss.422 of
the Internal Revenue Code of 1986, as amended. The options are exercisable
as of the date of grant. The options were granted at fair market value on
the date of the grant.
(2) The term of the option is four (4) years from the date of grant unless
terminated earlier due to termination of employment, disability or death.
(3) Mr. Tisi became President on October 1, 2000.
We do not currently have (and have not previously had) any plan
pursuant to which any stock appreciation rights ("SARs") may be granted.
25
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information relating to options
exercised during 2002 by each of the Named Officers and the number and value of
options held on December 31, 2002 by each of them.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 2002
AND FISCAL YEAR-END OPTION VALUES
Shares Value Number of Securities Underlying Value of Unexercised
Acquired on Realized Unexercised In-the-Money Options at
Name Exercise (#) ($) Options at Dec. 31, 2002 (#) Dec. 31, 2002 ($)(1)
---- ------------ --- ---------------------------- --------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Christopher Tisi(2) -- -- 152,000 -- -- --
Secretary and
President
------------------
(1) Total value of unexercised options is based upon the difference between the
last sales price of our common stock on the Nasdaq National Market System
on December 31, 2002, which was $.04 per share, and the exercise price of
the options, multiplied by the number of option shares.
(2) Options granted under our 1998 Stock Option Plan.
No options to purchase common stock were exercised by our executive
officer during the year ended December 31, 2002.
DIRECTOR AND OFFICER COMPENSATION
During 2002, we paid to each of our non-employee directors meeting fees
of $500 for attendance at each board meeting. Pursuant to the terms of the Stock
Option Plan, a grant of a stock option for the purchase of common shares may be
made to each non-employee director. Those options are granted at an exercise
price equal to the fair market value of our common stock on the date of grant,
and become 25% vested on each anniversary date of grant or, if earlier, upon a
change of control as defined in the plan and expire ten years from the date of
grant or earlier in the event service as a director ceases. We did not grant
stock options to our non-employee directors in the last fiscal year.
EMPLOYMENT AGREEMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Effective January 1, 2002, we entered into a new employment agreement
with Christopher Tisi, our Chief Executive Officer, President, Secretary and
Interim Chairman of the Board. The agreement provides for a base salary of
$140,000 ($18,750 of which will be used to pay certain amounts owing to third
parties in connection with the settlement of litigation) as well as bonuses
which are contingent upon increases in revenue over prior periods and net income
results. The agreement provides that bonuses will be determined quarterly with
33% of such bonuses to be paid quarterly and the balance to be paid at year-end
depending on the maintenance of previously achieved performance levels. The
agreement also provides for an annual grant of 50,000 stock options under our
1998 Stock Option Plan. The options will have a four-year term and will be
vested 100% on the date of grant. The agreement also provides for the payment of
an amount equal to the lesser of (i) $275,000 or (ii) the maximum "golden
parachute" payment permitted to be deducted by us under the federal tax law in
26
the event Mr. Tisi is terminated after a change of control. An amendment to the
agreement provided that $32,578 of Mr. Tisi's salary for 2001, which was not
paid to him during 2001, would be paid in 2002 in twelve equal monthly
installments.
Effective January 1, 2002, we entered into a severance agreement with
Steve Pomerantz, our former Chairman of the Board, Chief Executive Officer, and
Treasurer. The agreement provided for a severance payment of $50,000 to be paid
over the following year ($18,750 of which was used to pay certain amounts owing
to third parties in connection with the settlement of litigation). An amendment
to the agreement provided that $23,443 of Mr. Pomerantz's salary for 2001 which
was not paid to him during 2001, would be paid in 2002 in twelve equal monthly
installments.
In light of the fact that Mr. Pomerantz has in the past personally
guaranteed certain obligations of the Company to third parties (the "Guaranteed
Obligations"), the severance agreement provided that on the earlier to occur of
(i) a Change in Control, or (ii) December 31, 2002, we would provide substitute
collateral for the Guaranteed Obligations in exchange for a release from Mr.
Pomerantz from any and all personal liability on the Guaranteed Obligations. The
guarantee obligations were all satisfied prior to December 31, 2002.
[INTENTIONALLY LEFT BLANK]
27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table below shows, as of April 29, 2003, the number of shares of common
stock beneficially owned by:
o each person whom we know beneficially owns more than 5% of the
common stock;
o each director;
o each executive officer included in the Summary Compensation
Table; and
o all executive officers and directors as a group.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
------------------
NUMBER OF SHARES AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES BENEFICIALLY OWNED (2) PERCENT OF CLASS (3)
---------------------------------------- ----------------------------- --------------------
Christopher Tisi 869,088(4)(5) 22.8%
Steven Pomerantz 401,829(4)(5) 10.9%
Ted Alflen 5,500(5) *
Tony D'Amato 255,000 7.0%
1526 Michigan Avenue, #1
Miami Beach, FL
All executive officers and directors as a 1,276,417(3)(4)(6) 32.8%
group (3 persons)
-----------------------------
Less than 1%
(1) The address of each executive officer and director is c/o the Company, 3750
Investment Lane, #5, West Palm Beach, FL 33404.
(2) Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of common stock beneficially
owned by them.
(3) Based upon 3,629,813 outstanding shares as of April 29, 2003, and, with
respect to each holder of options exercisable, or notes convertible, within
60 days of March 30, 2003, the shares issuable under such instruments.
(4) In 2000, Tony D'Amato ("D'Amato") executed and delivered to Christopher
Tisi ("Tisi") and the Company a Shareholders' Agreement pursuant to which
D'Amato granted to Tisi an irrevocable proxy (the "Irrevocable Proxy")
authorizing Tisi to vote shares of the Company beneficially owned by
D'Amato as of that date and any shares of the Company acquired by D'Amato
thereafter. The Irrevocable Proxy had a two-year term. On January 31, 2001,
Tisi relinquished his right to vote pursuant to the Irrevocable Proxy with
respect to 125,000 shares beneficially owned by D'Amato as of that date. As
disclosed in the 13D dated April 24, 2002 filed by Steve Pomerantz
("Pomerantz"), Tisi and D'Amato, on April 29, 2002, D'Amato executed and
delivered to Tisi a First Amendment to the Shareholders' Agreement (the
"First Amendment") pursuant to which D'Amato extended the term of the
Shareholders' Agreement and the Irrevocable Proxy for an additional
two-year period. In addition, Tisi and Pomerantz have entered into an oral
understanding that each will vote the shares of common stock beneficially
owned by him (or, in the case of Tisi, as to which he has voting power)
together as a group, but only for the following purposes: (i) in favor of
the same person or persons to be nominated and elected to serve on the
28
board of directors to fill any vacancies on the board, if, and as such
vacancies may arise from time to time (whether such vacancy occurs by
removal, resignation or an increase in the size of the board of directors)
at any time prior to our 2003 annual meeting of stockholders, or any
adjournment thereof, and (ii) in favor of the same person or persons to be
nominated and elected as the slate of nominees, and elected, to the board
of directors to be voted upon by the shareholders at our 2003 annual
meeting of shareholders, or any adjournment thereof. Accordingly, Tisi has
sole voting power of 819,088 shares and sole dispositive power of 416,788
shares, and D'Amato has sole voting power of 125,000 shares and sole
dispositive power of 308,502 shares.
(5) Share ownership of the following persons includes shares subject to
immediately exercisable options or options exercisable within 60 days of
April 29, 2003, as follows: for Mr. Pomerantz - 50,000 shares, for Mr.
Alflen - 2,500 shares, and for Mr. Tisi - 202,000 shares.
(6) Includes an aggregate of 254,500 shares subject to immediately exercisable
options or options exercisable within 60 days of April 29, 2003 held by
executive officers and directors as a group.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
--------------------------- ----------------------------- ---------------------------- ----------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS (A) RIGHTS REFLECTED IN COLUMN (A))
--------------------------- ----------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security 506,500 $.14 322,000
holders
--------------------------- ----------------------------- ---------------------------- ----------------------------
Equity compensation plans
not approved by security
holders (1)
--------------------------- ----------------------------- ---------------------------- ----------------------------
TOTAL 506,500 $.14 322,000
--------------------------- ----------------------------- ---------------------------- ----------------------------
(1) We do not maintain equity compensation plans that have not been approved by
our stockholders.
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the years ended December 31, 2001 and December 31, 2000, we sold
$63,881 and $163,969, respectively, products to KMS-Thin Tab, an entity we
believe is controlled by J.C. Herbert Bryant III, a beneficial owner of greater
than five percent of our stock. These sales were on terms no more favorable than
those given to unaffiliated third parties in arms-length transactions.
On January 12, 2002, we repaid a $100,000 loan from SunTrust Bank which
was collateralized by a certificate of deposit in the principal amount of
$100,000 pledged by Steve Pomerantz, our former Chief Executive Officer and
Chairman of the Board. Accordingly, on that date, the collateral was released.
On January 15, 2002, we obtained another short-term loan from SunTrust Bank in
the amount of $23,400. This loan is collateralized by a certificate of deposit
in the amount of $23,400 owned by Steve Pomerantz. The loan was due on July 15,
2002 and is payable in monthly installments of $4,167. The loan was paid in full
during 2002.
On March 15, 2002, the Company terminated their factoring agreement
with Alliance Financial Capital, Inc. and entered into a factoring agreement
with LSQ Funding Group, L.C. (LSQ). The agreement provided that LSQ would
purchase certain receivables and advance 85% of the face amount of such
receivables. The term of this agreement was for one year. The maximum amount of
receivables the Company could factor under the agreement was $750,000. In
connection with the factoring agreement, the Company granted LSQ a blanket lien
on Company assets and the President/Chief Executive Officer was required to
deliver a personal guarantee. The LSQ contract expired in March 2003 and the
Company did not renew it.
The Company was involved in the litigation with J.C. Herbert Bryant,
III ("Bryant") and KMS-Thin Tab 100, Inc. ("KMS,") which was settled in
September 2002. The settlement agreement generally provided for Bryant and KMS
to transfer the registration and ownership of the domain names Thintab.com,
Thintab.CC, and Carbcutter.cc to HNS and to take other action to eliminate
confusion over the ownership of the Thin Tab@ name. Additionally, each of the
adverse parties generally released the others. As part of the settlement, HNS
entered into a distribution agreement with Bryant, beginning on September 26,
2002 and ending on September 25, 2007, permitting Bryant to purchase certain of
its products from HNS and to exclusively distribute those products in Florida
from Orlando south. HNS also has agreed not to sell its products directly to
certain KMS customers. HNS booked a legal settlement expense of $58,836
associated with this settlement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-KSB/A-2 FINANCIAL
STATEMENTS:
o Independent Auditors' Report
o Balance Sheets as of December 31, 2002 and 2001
o Statements of Operations for the years ended December
31, 2002 and 2001
o Statements of Changes in Stockholders' Equity for the
years ended December 31, 2002 and 2001
o Statements of Cash Flows for the years ended December
31, 2002 and 2001
o Notes to Financial Statements
30
THE FOLLOWING EXHIBITS ARE FILED AS PART OF THIS FORM 10-KSB/A-2
The exhibits to this Form 10-KSB/A-2 appear following the Company's
Financial Statements included in this report.
3.1(a) Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(A) of
Registrant's registration statement on Form 10-SB, filed on January 31, 2000; Commission File
Number 000-29245).
3.1(b) Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit
3.1(B) of Registrant's registration statement on Form 10-SB, filed on January 31, 2000;
Commission File Number 0000-29245).
3.1(c) Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit
3.1(C) of Registrant's registration statement on Form 10-SB, filed on January 31, 2000;
Commission File Number 000-29245).
3.1(d) Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit
3.1(D) of Registrant's Annual Report on Form 10-KSB, filed on April 16, 2001; Commission File
Number 000-29245).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of Registrant's
registration statement on Form 10-SB, filed on January 31, 2000; Commission File Number
000-29245).
3.3 Amendment to the Restated Bylaws of the Company dated September 25, 2000 (incorporated by
reference to Exhibit 3.3 of Registrant's Annual Report on Form 10-KSB, filed on April 16,
2000; Commission File Number 000-29245).
3.4 Amendment to the Restated Bylaws of the Company dated November 10, 2000 (incorporated by
reference to Exhibit 3.4 of Registrant's Annual Report on form 10-KSB, filed on April 16,
2000; Commission File Number 000-29245).
10.1 Employment Agreement between the Company and Christopher Tisi effective as of January 1, 2002
(incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.2 Severance Agreement between the Company and Steven Pomerantz effective as of January 1, 2002
(incorporated by reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.3 Factoring and Security Agreement between LSQ Funding Group L.C. and Health and Nutrition
Systems International, Inc. effective as of March 15, 2002 (incorporated by reference to
Exhibit 10.3 of Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002; Commission
File Number 000-29245).
10.4 Indemnification Agreement dated March 15, 2002 between LSQ Funding Group L.C. and Christopher
Tisi (incorporated by reference to Exhibit 10.4 of Registrant's Annual Report on Form 10-KSB,
filed on April 12, 2002; Commission File Number 000-29245).
10.5 Indemnification Agreement between the Company and Christopher Tisi dated January 1, 2002
(incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.6 Indemnification Agreement between the Company and Steven Pomerantz dated January 1, 2002
(incorporated by reference to Exhibit 10.4 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
31
10.7 Lease Agreement between the Company and Fred Keller, Trustee dated November 1, 2000
(incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-KSB, filed
on April 16, 2001; Commission File Number 000-29245).
10.8 Lease Agreement between the Company and Fred Keller, Trustee dated January 1, 2001
(incorporated by reference to Exhibit 10.6 of Registrant's Annual Report on Form 10-KSB, filed
on April 16, 2001; Commission File Number 000-29245).
10.9 Secured Party's Bill of Sale between Fleet National Bank and the Company dated January 12,
2001 (incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K
filed on January 26, 2001; Commission File Number 000-29245).
10.10 Trademark Assignment from Heritage Consumer Products, LLC to the Company dated January 12,
2001 (incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K
filed on January 26, 2001; Commission File Number 000-29245).
10.11 Agreement between the Company and Steven Pomerantz dated January 12, 2001 (incorporated by
reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K filed on January 26,
2001; Commission File Number 000-29245).
10.12 Shareholders' Agreement among Tony D'Amato, Christopher Tisi, and the Company dated July 13,
2000 (incorporated by reference to Exhibit 1 of Christopher Tisi, Steven Pomerantz, Tony
Musso, and Tony D'Amato's Schedule 13D, filed on January February 14, 2001; Commission File
Number 0-29245).
10.13 Irrevocable Proxy dated July 13, 2000 (incorporated by reference to Exhibit 2 of Christopher
Tisi, Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on January February
14, 2001; Commission File Number 0-29245).
10.14 Waiver dated January 31, 2001 (incorporated by reference to Exhibit 3 of Christopher Tisi,
Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on January
February 14, 2001; Commission File Number 0-29245).
10.15 Joint Filing Agreement dated February 13, 2001 (incorporated by reference to Exhibit 4 of
Christopher Tisi, Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on
January February 14, 2001; Commission File Number 0-29245).
10.16 Exclusive Manufacturing Agreement dated April 11, 2002 between the Company and Garden State
Nutritionals, a division of VitaQuest International, Inc. (incorporated by reference to
Exhibit 10.16 of Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002;
Commission File Number 000-29245).
10.17 Security Agreement dated April 11, 2002 between the Company and Garden State Nutritionals, a
division of VitaQuest International, Inc. (incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002; Commission File Number
000-29245).
10.18 Health & Nutrition Systems International, Inc. 1998 Stock Option Plan (incorporated by
reference to Exhibit 10.18 of Registrant's Annual Report on Form 10-KSB, filed on April 12,
2002; Commission File Number 000-29245).
10.19 Promissory Note dated April 11, 2002 between the Company as borrower and Garden State
Nutritionals as lender (incorporated by reference to Exhibit 10.19 of
Registrant's Annual Report on Form 10-KSB, filed on April
12, 2002; Commission File Number 000-29245).
10.20 Subordination Agreement dated April 11, 2002 among the Company, LSQ Funding Group, L.C. and
Garden State Nutritionals (incorporated by reference to Exhibit 10.20 of Registrant's Annual
Report on Form 10-KSB, filed on April 12, 2002; Commission File Number 000-29245).
10.21 Amendment No. 1 dated April 29, 2002 to the Employment Agreement between the Company and
Christopher Tisi effective as of January 1, 2002 (incorporated by reference
to Exhibit 10.21 of Registrant's Annual Report on Form 10-KSB/A-1, filed on April 30, 2002;
Commission File Number 000-29245).
32
10.22 Amendment No. 1 dated April 29, 2002 to the Severance Agreement between the Company and Steven
Pomerantz effective as of January 1, 2002 (incorporated by reference to Exhibit 10.2 of
Registrant's Annual Report on Form 10-KSB/A-1, filed on April 30, 2002; Commission File Number
000-29245).
10.23 First Amendment to Shareholders' Agreement among Tony D'Amato, Christopher Tisi and
the Company dated April 24, 2002 (incorporated by reference to Exhibit 4 of
Christopher Tisi, Steven Pomerantz and Tony D'Amato's Schedule 13D, filed on April 29, 2002;
Commission File Number 0-29245).
10.24 Irrevocable Proxy dated April 24, 2002 (incorporated by reference to Exhibit 5 of Christopher
Tisi, Steven Pomerantz and Tony D'Amato's Schedule 13D, filed on April 29, 2002; Commission
File Number 0-29245).
10.25 Option Agreement effective as of February 12, 2002 between the Company and Christopher Tisi
(incorporated by reference to Exhibit 10.25 of Registrant's Annual Report
on Form 10-KSB/A-1, filed on April 30, 2002; Commission File Number 000-29245).
10.26 Indemnification Agreement between Ted Alflen and the Company dated as of January 1, 2002
(incorporated by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-QSB,
filed on November 14, 2002; Commission File Number 000-29245).
10.27 Indemnification Agreement between Darryl Green and the Company dated as of January 1, 2002
(incorporated by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form 10-QSB,
filed on November 14, 2002; Commission File Number 000-29245).
14.1 Code of Ethics
16.1 Letter from Butner & Kahle, CPA dated September 6, 2000 (incorporated by reference to Exhibit
16.4 of Registrant's Current Report on Form 8-K filed on September 7, 2000; Commission File
Number 000-29245).
24 Power of attorney (included on signature page)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K filed on December 10, 2001 reporting an Item 5 event.
2. Form 8-K filed on December 18, 2001 reporting an Item 5 event.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our principal executive officer and controller and principal accounting
officers have participated in and supervised the evaluation of our disclosure
controls and procedures that are designed to ensure that information required to
be disclosed by us in the reports that we file is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that the
33
information required to be disclosed by us in the reports that we file or submit
under the Act is accumulated and communicated to our management, including our
principal executive officer or officers and principal financial officer, to
allow timely decisions regarding required disclosure. Based on their evaluation
of those controls and procedures as of a date within 90 days of the date of this
filing, and of the filing of our original 10-KSB for the year ended December 31,
2002, our CEO and Controller and accounting officer determined that the controls
and procedures are adequate and effective.
(b) Changes in internal controls.
There were no significant changes, including any corrective actions
with regard to significant deficiencies and material weaknesses, in our internal
controls or in other factors that could significantly affect internal controls
since the date of the most recent evaluation of these controls by our chief
executive officer and chief financial officer.
[INTENTIONALLY LEFT BLANK]
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: April 30, 2004 Health & Nutrition Systems International, Inc.
By: /s/ Christopher Tisi
-------------------------------------------------
Christopher Tisi
Chief Executive Officer, President, and Secretary
(Principal Executive Officer)
Each person whose signature appears below hereby constitutes and
appoints Christopher Tisi his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
report, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying all that said attorney-in-fact and agent or his substitute or
substitutes, or any of them, may lawfully do or cause to be done by virtue
hereof.
In accordance with the requirements of the Exchange Act, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
Chief Executive Officer, President, and
/s/ Christopher Tisi Secretary (Principal Executive Officer) April 30, 2004
----------------------------------------
Christopher Tisi
/s/ Al Dugan Controller (Principal Accounting Officer) April 30, 2004
----------------------------------------
Al Dugan
/s/ James A. Brown Chairman of the Board April 30, 2004
----------------------------------------
James A. Brown
/s/ Steven A Pomerantz Director April 30, 2004
----------------------------------------
Steven A. Pomerantz
/s/ Ted Alflen Director April 30, 2004
----------------------------------------
Ted Alflen
35
CERTIFICATIONS
--------------
I, Christopher Tisi, certify that:
1. I have reviewed this annual report on Form 10-KSB/A-2 of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date April 30, 2004
/s/ Christopher Tisi
-----------------------------------------
Christopher Tisi, Chief Executive Officer
CERTIFICATIONS
--------------
I, Al Dugan, certify that:
1. I have reviewed this annual report on Form 10-KSB/A-2 of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date April 30, 2004
/s/ Al Dugan
------------------------------------------------
Al Dugan, Controller and Chief Accounting Officer
TABLE OF CONTENTS
-----------------
Independent Auditor's Report..............................................................F-1
Financial Statements:
Balance Sheets as of December 31, 2002 and 2001........................................F-2
Statements of Operations for the years ended December 31, 2002 and 2001................F-3
Statements of Changes in Stockholders' Deficit for the years ended
December 31, 2002 and 2001..........................................................F-4
Statements of Cash Flows for the years ended December 31, 2002 and 2001................F-5
Notes to Financial Statements .........................................................F6-F20
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
Health & Nutrition Systems International, Inc.
We have audited the accompanying balance sheets of Health & Nutrition Systems
International, Inc. as of December 31, 2002 and 2001, and the related statements
of operations, changes in stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Health & Nutrition Systems
International, Inc. as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended in conformity with
auditing principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company had a significant loss from operations, negative cash
flows from operations and negative working capital, which raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 19 to the financial statements, the accompanying 2002 and
2001 financial statements have been restated.
/s/DaszkalBolton LLP
Boca Raton, Florida
February 17, 2003
F-1
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
BALANCE SHEETS
YEARS ENDED DECEMBER 31, 2002 AND 2001
================================================================================
ASSETS
------
2002 2001
----------- -----------
Current assets
Cash $ 14,778 $ 81,932
Accounts receivable, net 344,700 194,792
Inventory 438,375 165,168
Prepaids and other current assets 2,373 --
----------- -----------
Total current assets 800,226 441,892
----------- -----------
Property and equipment, net 39,302 66,949
----------- -----------
Other assets:
Trademarks, net 24,092 26,911
Security deposit 6,424 6,424
----------- -----------
Total other assets 30,516 33,335
----------- -----------
Total assets $ 870,044 $ 542,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable 1,117,407 1,105,116
Accrued expenses 64,680 183,887
Capital leases, current portion 714 19,152
Notes payable 320,395 34,400
----------- -----------
Total current liabilities 1,503,196 1,342,555
----------- -----------
Notes payable, less current portion 141,266 1,645
----------- -----------
Total liabilities 1,644,462 1,344,200
----------- -----------
Stockholders' deficit:
Common stock, $ 0.001 par value,
authorized 30,000,000 shares; 3,629,813
and 3,629,813 shares issued and
outstanding at December 31, 2002 and
2001, respectively 3,630 3,630
Additional paid-in capital 834,812 834,812
Accumulated deficit (1,612,860) (1,640,466)
----------- -----------
Total stockholders' deficit (774,418) (802,024)
----------- -----------
Total liabilities and stockholders' deficit $ 870,044 $ 542,176
=========== ===========
See accompanying notes to financial statements
F-2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
================================================================================
2002 2001
----------- -----------
Net revenue $ 3,567,848 $ 3,840,389
Cost of Sales 1,511,826 1,903,755
----------- -----------
Gross profit 2,056,022 1,936,634
----------- -----------
Operating expense:
General and administrative expense 1,524,678 2,400,680
Advertising and promotion 425,349 881,541
Depreciation and amortization 30,466 31,616
----------- -----------
Total operating expense 1,980,493 3,313,837
----------- -----------
Income (loss) from operations 75,529 (1,377,203)
----------- -----------
Other income (expense)
Interest income -- 5,902
Interest expense (47,923) (23,347)
Other income (expense) -- 3,003
----------- -----------
Total other income (expense) (47,923) (14,442)
----------- -----------
Income (loss) before income taxes 27,606 (1,391,645)
Benefit (provision) for income taxes -- (7,888)
----------- -----------
Net income (loss) $ 27,606 $(1,399,533)
=========== ===========
Net income per share - basic $ 0.01 $ (0.39)
=========== ===========
Net income per share - diluted $ 0.01 $ (0.39)
=========== ===========
Weighted average number of shares - basic 3,629,813 3,612,472
=========== ===========
Weighted average number of shares - diluted 3,629,813 3,612,472
=========== ===========
See accompanying notes to financial statements
F-3
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002 AND 2001
================================================================================
Common Stock
--------------------------------
Additional
Paid-In Accumulated
Shares Amount Capital Deficit Total
---------------------------------------------------------------------------------------------------
Balance, December 31, 2000 3,604,813 $ 3,605 $ 831,537 $ (240,933) $ 594,209
Common stock issued for 20,000 20 1,980 -- 2,000
legal settlement
Common stock issued for 5,000 5 1,295 -- 1,300
services
Net loss -- -- -- (1,399,533) (1,399,533)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2001 3,629,813 3,630 834,812 (1,640,466) (802,024)
Net income -- -- -- 27,606 27,606
----------- ----------- ----------- ----------- -----------
Balance - December 31, 2002 3,629,813 $ 3,630 $ 834,812 $(1,612,860) $ (774,418)
=========== =========== =========== =========== ===========
See accompanying notes to financial statements
F-4
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
================================================================================
2002 2001
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 27,606 $(1,399,533)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Allowance for doubtful debts (14,431) (7,173)
Allowance for obsolete and slow moving inventory (70,362) 6,407
Depreciation and amortization 30,466 31,616
Imputed interest expense on note payable 42,272 --
Deferred tax asset -- 7,888
Common stock issued for services -- 3,300
(Increase) decrease in:
Accounts receivable (135,477) 310,216
Inventory (202,845) 127,981
Prepaids and other current assets (2,373) 168,454
Other assets -- (1,828)
Increase (decrease) in:
Accounts payable 634,680 657,512
Accrued expenses (119,207) 61,510
----------- -----------
Net cash provided by (used in) operating activities 190,329 (33,650)
----------- -----------
Cash flows from investing activities:
Investment in trademarks -- (25,000)
Proceeds from certificates of deposit -- 150,687
Purchases of property and equipment -- (3,524)
----------- -----------
Net cash provided by investing activities -- 122,163
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (237,400) (115,600)
Repayments on capital leases (20,083) (21,533)
Proceeds from related parties -- 4,967
----------- -----------
Net cash used in financing activities (257,483) (132,166)
----------- -----------
Net decrease in cash (67,154) (43,653)
Cash, beginning of year 81,932 125,585
----------- -----------
Cash, end of year $ 14,778 $ 81,932
=========== ===========
See accompanying notes to financial statements
F-5
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
--------------------------------
Health & Nutrition Systems International, Inc. ("HNS" or "the Company") markets
and distributes weight management, energy and sports nutrition products to
numerous national and regional health, food, drug and mass market accounts as
well as independent health and pharmacy accounts. The Company was incorporated
in Florida on October 25th, 1993. HNS product sales consist of six primary
dietary supplements: Acutrim Natural(R), Thin Tab(R), Carb Cutter(R),
Carbolizer(TM), Thin Tab Mahuang Free(TM), and Fat Cutter(R). The current
markets are concentrated in North America and Puerto Rico. One manufacturer
produces all of the HNS dietary supplements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 2002 and 2001.
Use of Estimates
----------------
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Inventories
-----------
Inventories are stated at the lower of cost or market with cost being determined
on a standard cost basis, net of allowances for slow-moving or obsolete
inventory. Inventory allowances at December 31, 2002 and 2001 were $88,376 and
$18,014, respectively. The increase in the inventory allowances were due to the
Company establishing an allowance for Ephedra containing products. The
allowances are based upon estimated returns and obsolete inventory.
Depreciation and Amortization
-----------------------------
Property and equipment are carried at cost. Depreciation is provided using the
straight-line or accelerated methods, over the estimated economic lives of the
assets, which range from three to seven years. Leasehold improvements are
amortized over the expected lease term. The Company reviews the valuation of
fixed and other assets and their remaining economic lives annually and adjusts
depreciation and amortization accordingly.
Revenue Recognition
-------------------
The Company recognizes revenue when
o Persuasive evidence of an arrangement exists
o Shipment has occurred
o Price is fixed or determinable, and
o Collectability is reasonably assured
Subject to these criteria, the Company recognizes revenue at the time of
shipment of the relevant merchandise.
F-6
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------
Included in the net sales in the accompanying financial statements are
reductions for returns and allowances, sales discounts, new store opening
discounts and coop advertising and promotions.
Advertising Costs
-----------------
The Company expenses advertising production costs as they are incurred and
advertising communication costs the first time the advertising event takes
place. Advertising and promotion expenses for the years ending December 31, 2002
and 2001 were $425,349 and $881,541, respectively.
Basic Earnings Per Share
------------------------
Basic income per common share is computed by dividing the net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted Earnings Per Shares
---------------------------
Diluted earnings per share reflect the potential dilution that could occur if
dilutive securities (stock options and stock warrants) to issue common stock
were exercised or converted into common stock that then shared in the earnings
of the Company.
Stock Compensation
------------------
The company has adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 encourages the
use of a fair-value-based method of accounting for stock-based awards, under
which the fair value of stock options is determined on the date of grant and
expensed over the vesting period. Under SFAS 123, companies may, however,
measure compensation costs for those plans using the method prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Companies that apply APB No. 25 are required to include
pro forma disclosures of net earnings and earnings per share as if the
fair-value-based method of accounting had been applied. The Company elected to
account for such plans under the provisions of APB No. 25. The Company accounts
for stock options granted to consultants under SFAS 123.
The Company amortizes deferred stock-based compensation on the straight-line
method over the vesting periods of the stock options, generally four years.
Had the compensation expense for the stock option plan been determined based on
the fair value of the options at the grant date consistent with the methodology
prescribed under Statement of Financial Standards No. 123, "Accounting for Stock
Based Compensation," at December 31, the Company's net income and earnings per
share would have been reduced to the proforma amounts indicated below:
2002 2001
--------- --------------
Net income (loss)
As reported $ 27,606 $ (1,399,533)
========= =============
Pro forma $ 20,636 $ (1,417,186
========= =============
Earnings per share
As report $ 0.01 $ (0.39)
========= =============
Pro forma $ 0.01 $ (0.39)
========= =============
F-7
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------
Intangible Assets
-----------------
Intangible assets are stated at cost less amortization. Intangible assets are
the trademarks that were acquired in 2000 and 2001 and are being amortized on a
straight line basis over the estimated useful life of 15 years.
Accounting for Long-Lived Assets
--------------------------------
The Company is required to periodically assess the impairment of long-lived
assets. An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors considered important which could trigger an impairment review include,
but are not limited to, significant underperformance relative to expected
historical or projected future operating results, significant changes in the
manner of the acquired assets or the strategy for the overall business,
significant negative industry or economic trends, a significant decline in the
stock price for a sustained period and the Company's market capitalization
relative to net book value.
When management determines that the carrying value may not be recoverable based
upon the existence of one or more of the above indicators of impairment, any
impairment measured is based on a projected discounted cash flow method using a
discount rate commensurate with the risk inherent in the Company's current
business model.
New Accounting Pronouncements
-----------------------------
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of the FASB Statement No. 13, and Technical Corrections."
SFAS 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of FASB No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of FASB 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. The provisions of SFAS
145 related to lease modifications is effective for transactions occurring after
May 15, 2002. Earlier application is encouraged. The Company believes that the
adoption of SFAS 145 will not have a material impact on its financial
statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company
believes that the adoption of SFAS 146 will not have a material impact on its
financial statements.
In July 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions." The provisions of this Statement institute the application of the
purchase method of accounting to all acquisitions of financial institutions,
except transactions between two or more mutual enterprises. Further, the
provisions of the Statement that relate to the application of Statement 144
apply to certain long-term customer-relationship intangible assets recognized in
an acquisition of a financial institution, including those acquired in
transactions between mutual enterprises. The Company believes that the adoption
of SFAS 147 will not have a material impact on its financial statements.
F-8
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
--------------------------------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 13 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except as specified and for hedging relationships designated after June 30,
2003. The Company does not anticipate that the adoption of this statement will
have any material impact on the balance sheet or statement of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities.
The financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. The Company does not anticipate that the adoption of this
statement will have any material impact on the balance sheet or statement of
operations.
November 2002, the financial Accounting Standards Board (the "FASB") issued
the FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"), which clarifies the requirements for a guarantor's
accounting and disclosures of certain guarantees issued and outstanding. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at its inception of guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of FIN 45 did not have a
material impact on the Company's consolidated results of operations or financial
position.
In November 2002, the EITF issued EITF Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addressed
how to account for arrangements that may involve delivery or performance of
multiple products, services, and/or rights to use assets, and when and, if so,
how an arrangement involving multiple deliverables should be divided into
separate units of accounting. It does not change otherwise applicable revenue
recognition criteria. It applies to arrangements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted. The adoption of
EITF 00-21 did not have a material impact on the Company's consolidated results
of operations or financial position.
NOTE 3 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. During 2002, the Company has successfully
controlled costs and attained profitability, including net income of $27,606 and
cash flow from operations of $190,329. However, at December 31, 2002, the
Company has a working capital deficit of $702,970 and adverse liquidity ratios.
Management intends to continue control costs and monitor financing capabilities.
Management believes these factors will contribute toward achieving sustained
profitability.
F-9
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY, CONTINUED
---------------------------------------------------------------------
There remains substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
NOTE 4 - TRADEMARKS
-------------------
In June 2001, the Financial Accounting Standards board approved the issuance of
SFAS 142, "Goodwill and Other Intangible Assets," which establishes new
accounting and reporting requirements for goodwill and other intangible assets.
The new standards required that all intangible assets acquired that are obtained
through contractual or legal right, or are capable of being separately sold,
transferred, licensed, rented or exchanged, must be recognized as an asset apart
from goodwill. Goodwill and intangibles with indefinite lives are no longer
amortized, but are subject to an annual assessment for impairment by applying a
fair value based test. The Company applied the provisions of SFAS 142 beginning
on January 1, 2002 and performed a transitional fair value based impairment
test. In connection with adopting SFAS 142, the Company also reassessed the
useful lives and the classifications of its identifiable intangible assets and
determined that they continue to be appropriate.
The components of the Company's intangible assets subject to amortization are as
follows:
December 31, 2002 December 31, 2002
----------------- -----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets:
Trademakes $32,228 $(8,137) $32,228 $(5,317)
======= ======= ======= =======
Amortization expense for the years ended December 31, 2002 and 2001 was
approximately $2,820 and $2,822, respectively.
Estimated amortization of intangible assets is as follows:
2003 $ 2,820
2004 2,820
2005 2,820
2006 2,820
2007 2,820
Thereafter 12,812
---------
$ 24,092
=========
F-10
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - TRADEMARKS, CONTINUED
------------------------------
The following table adjusts earnings for the adoption of SFAS 142 for the years
ended December 31, 2002 and 2001:
2002 2001
-------- ------------
Net earnings:
Reported net earnings (loss) $ 27,606 $ (1,399,533)
Goodwill amortization -- --
-------- ------------
Adjusted net earnings $ 27,606 $ (1,399,533)
======== ============
NOTE 5 -FACTORING ARRANGEMENTS
------------------------------
In 2002, the Company factored certain of its accounts receivable, without
recourse, with a commercial finance company. The factor purchases the
receivables for the face amount of certain invoices, less a discount rate fee of
2.125%. The Company maintains a reserve account with the factor of 15%.
On March 15, 2002, the Company terminated their factoring agreement with
Alliance Financial Capital, Inc. and entered into a factoring agreement with LSQ
Funding Group, L.C. (LSQ). The agreement provides that LSQ will purchase certain
receivables and advance 85% of the face amount of such receivables. The term of
this agreement is one year. The maximum amount of receivables the Company may
factor under the agreement is $750,000, and there is no minimum amount required
to be factored. In connection with the factoring agreement, the Company granted
LSQ a blanket lien on Company assets and the President/Chief Executive Officer
was required to deliver a personal guarantee. The LSQ contract expired in March
2003 and the Company did not renew it. At December 31, 2002 the Company had
factored approximately $10,000 of accounts receivable.
In 2001, the Company factored certain of its accounts receivable, without
recourse, with a commercial finance company. The factor purchases the
receivables for the face amount of certain invoices, less a discount rate fee of
1.75%. The Company maintained a reserve account with the factor of 20% to 50%,
depending on the customer, of the outstanding receivables held by the factor.
The reserve account may be charged additional fees from 3.35% to 4.75% on
invoices paid beyond the agreed to terms.
2002 2001
--------- ---------
Receivables assigned to factor $ 10,118 $ 272,868
Advances to (from) factor (9,612) (259,225)
Amounts due from factor 33,389 181,149
Unfactored accounts receivable, net 310,805 --
--------- ---------
$ 344,700 $ 194,792
========= =========
F-11
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - ACCOUNTS RECEIVABLE
----------------------------
Accounts receivable consisted of the following at December 31, 2002 and 2001:
2002 2001
---------- ----------
Accounts receivable $ 685,078 $ 352,002
Less: allowance for doubtful amounts (22,778) (37,210)
Less: allowance for sales returns (317,600) (120,000)
---------- ----------
Accounts receivable, net $ 344,700 $ 194,792
========== ==========
At December 31, 2002, the Company recorded an allowance for sales returns of
$317,600, including $200,000 for returns of products containing ephedra expected
in 2003.
At December 31, 2001, the Company recorded an allowance for sales returns of
$120,000 based upon expected returns from customers of one product with
expiration dates in March and May 2002. During the year ended December 31, 2002,
as product was returned, the related amounts were charged against the reserve.
NOTE 7 - RELATED PARTY TRANSACTIONS
-----------------------------------
For years ended December 31, 2002 and 2001, KMS-Thin Tabs 100, Inc., a
corporation controlled by Herbert Bryant, III, who resigned as a director of the
Company in 1999, made aggregate purchases of one of the Company's products of
$2,423 and $63,881, respectively.
In 2001 and 2002, Steve Pomerantz, a former officer of the Company and a member
of the Board of Directors guaranteed short-term working capital loans from a
bank in the amount of $100,000 and $23,400, respectively. Those loans have been
repaid. See Note 11.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------
2002 2001
--------- ----------
Cash paid for interest $ 9,514 $ 23,347
========= ==========
Cash paid for income taxes $ -- $ --
========= ==========
Non-cash investing and financing activities:
Common stock issued for services $ -- $ 3,300
========= ==========
Conversion of accounts payable to
notes payable $ 700,000 $ --
========= ==========
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------
The carrying value of cash, accounts receivables, loans receivable, accounts
payable and other payables approximates fair value because of their short
maturities.
F-12
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2002 and 2001:
2002 2001
--------- ---------
Furniture and equipment $ 38,713 $ 38,713
Office equipment 31,536 31,536
Warehouse equipment 24,349 24,349
Computer equipment 51,815 51,815
Software 40,126 40,126
Website development 2,155 2,155
Leasehold improvements 1,860 1,860
--------- ---------
190,554 190,554
Less: accumulated depreciation (151,252) (123,605)
--------- ---------
Property and equipment, net $ 39,302 $ 66,949
========= =========
Depreciation expense for the years ended December 31, 2002 and 2001 was $27,647
and $28,795, respectively.
NOTE 11 - NOTES PAYABLE
-----------------------
On April 11, 2002, the Company entered into an agreement with Garden State
Nutritionals (GSN), the Company's sole manufacturer, to repay $700,000 owed to
GSN as of the date of the agreement. The repayment schedule requires eight equal
quarterly payments, without interest, starting June 1, 2002.
In connection with this agreement, the Company granted to GSN a blanket second
priority lien on the Company's assets under a Security Agreement, which may only
be, foreclosed upon the event the Company fails to make (3) consecutive
quarterly principle payments in accordance with the terms of the promissory
note. The GSN debt has been recorded as a note payable with an imputed interest
rate of 9% per annum and with the interest calculated over the term on the loan
in the amount of $73,747. The cost of sales was reduced in the amount of
$73,747, which represents imputed interest on the note. GNS granted the Company
a waiver on the first quarterly payment due June 1, 2002 of $87,500. This amount
shall be due and payable on March 1, 2004. At December 31, 2002, the balance
owed to GSN is $497,000.
Also, on April 11, 2002, the Company entered into an exclusive manufacturing
agreement with GSN pursuant to which GSN has provided a $450,000 line of credit
with 60-day terms to the Company. During 2002, GSN informally allowed the
Company to purchase up to $1,000,000 on the line of credit. At December 31,
2002, the balance owed to GSN under this line of credit is $892,878.
On January 15, 2002, the Company received a short-term loan from a bank in the
amount of $23,400. Interest accrues at a rate of 4.75% per annum and is
collateralized by a certificate of deposit in the amount of $23,400 owned by a
former officer of the Company and member of the Board of Directors. The loan was
paid in full on July 15, 2002.
On January 12, 2001, the Company received a short-term loan from a bank in the
amount of $100,000. Interest accrued at a rate of 7.73% per annum and was
F-13
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
collateralized by a certificate of deposit in the amount of $100,000 owned by a
former officer of the Company and member of the Board of Directors. The loan was
paid in full on January 12, 2002.
On December 15, 2000, the Company received a short-term loan from a bank in the
amount of $150,000. Interest accrued at a rate of 8.1% per annum and two
certificates of deposits totaling $150,687 collateralized the note. This note
was paid in full on December 15, 2001.
NOTE 12 - LEASE COMMITMENTS
---------------------------
The Company leases office and warehouse space in Riviera Beach, Florida. Rent
expense for the years ended December 31, 2002 and 2001 was $54,044 and $64,664,
respectively. The Company also leases various equipment. Lease expense for the
years ended December 31, 2002 and 2001 was $34,340 and $29,952, respectively.
In April 2002, the Company began sub-leasing part of its warehouse space for
$1,800 per month.
Certain non-cancelable leases are classified as capital leases, and the leased
assets are included as part of property and equipment. Other leases are
classified as operating leases and are not capitalized. The obligations under
capital leases are at fixed rates ranging from 10% to 23% and are collateralized
by the corresponding equipment.
Property under capital leases at December 31, 2002 and 2001 consisted of the
following:
2002 2001
---------- ----------
Machinery and equipment $ 59,902 $ 59,902
Less: accumulated amortization (40,977) (27,442)
Total ---------- ----------
$ 18,925 $ 32,460
========== ==========
Future minimum rentals for property under operating and capital leases at
December 31 are as follows:
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------ ------
2003 $ 790 $ 82,704
2004 -- 23,008
2005 -- 6,214
2006 -- --
-------- ----------
Total minimum lease obligation 790 111,926
Less: interest 76 --
--------- -----------
Present value of total minimum
lease payments 714 $ 111,926
===========
Less: current portion 714
---------
Non-current portion $ --
=========
NOTE 13 - STOCKHOLDERS' EQUITY
------------------------------
During the year ended December 31, 2002, the Company issued no common stock for
cash or in exchange of services.
During the year ended December 31, 2001, the Company issued its common stock for
cash and in exchange of services as follows:
F-14
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The Company issued 20,000 shares of common stock as settlement of a lawsuit, as
disclosed in Note 14, valued at $2,000.
The Company issued 5,000 shares of common stock to consultants for professional
services rendered, valued at $1,300.
NOTE 14 - LEGAL MATTERS
-----------------------
Twenty-two (22) cases have been filed alleging that the Company's Acutrim(R)
products contain Phenylpropanolamine ("PPA") and that those products have caused
damage to the plaintiffs. Many of these cases have been consolidated in class
action suits pending in the U.S. District Court for the Western District of
Washington in Seattle, the Philadelphia County Court of Common Pleas or the
Louisiana State Court. None of the Company's Acutrim(R) products has ever
contained, or currently contains, PPA. Based on that defense, to date, ten cases
have been voluntarily dismissed after delivery to plaintiff's counsel of
information substantiating the fact that HNS's products do not presently
contain, and have not contained, PPA.
In 2000, the Company sued J.C. Herbert Bryant, III, a former officer and
director of the Company and KMS-Thin Tab 100, Inc., a corporation controlled by
the former director, for trademark infringement, unfair competition and cyber
piracy. Bryant and KMS-Thin-Tab 100, Inc. counterclaimed alleging a breach of
distribution agreement with the Company. On September 19, 2002, the Company
announced the settlement of all litigation between the Company, the former
director and KMS-Thin-Tab 100, Inc.
The settlement agreement generally requires Bryant and KMS to transfer the
registration and ownership of the domain names Thintab.com, Thintab.cc and
Carbcutter.cc to HNS and to take other actions to eliminate confusion over the
ownership of the Thin Tab(R) name. Additionally, it provides for each of the
adverse parties to generally release the others.
As part of the settlement, HNS transferred its Carbolizer(TM) product to KMS and
entered into a distribution agreement with Bryant, beginning on September 26,
2002 and ending September 25, 2007, permitting him to purchase certain products
from HNS and to exclusively distribute those products in Florida from Orlando
south. HNS has agreed not to sell its products directly to certain KMS
customers. The Company recorded a legal settlement expense of $58,836 associated
with this settlement.
During the year ended December 31, 2000, the Company filed a Complaint for
Declatory Relief in reference to the effectiveness of various Stock Purchase
Agreements among shareholders, the cancellation of certain shares and the
rightful ownership of these shares. On December 21, 2001, a settlement agreement
was reached in which the Company issued 20,000 shares of common stock, valued at
$2,000 and a net cash settlement of $18,750.
The Company from time to time is a party of various legal proceedings. In the
opinion of management, none of the proceedings are expected to have a material
impact on its financial position or results of operations.
NOTE 15 - CONCENTRATIONS
------------------------
Credit Risk
-----------
Financial instruments, which potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards No. 105,
consist primarily of trade receivables. The Company's officers have attempted to
minimize this risk by monitoring the companies for which it provided credit.
The Company maintains bank accounts at various financial institutions. At times
during the year, balances in these accounts exceeded the amount insured by the
FDIC. At December 31, 2002 and 2001, no amounts exceeded the insured limit.
F-15
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - CONCENTRATIONS, CONTINUED
-----------------------------------
Product Liability
-----------------
The Company is currently insured to the extent of $6 million for product
liability claims and uses vendors who are also insured. There is a risk that
certain vendors may not have sufficient product liability insurance or may lose
their insurance, or the Company may not be able to insure at reasonable cost. In
any of these events, there could be a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
Significant Customers
---------------------
We currently have approximately 15 drug, health food, and mass retailer
customers which collectively comprised 87.0% of our gross revenues in 2002. We
depend on several significant customers for a large percentage of our gross
revenues. Our largest customers are GNC, Wal-Mart, Walgreens, Rite Aid, Target,
and Eckerd Drugs. We do not have written agreements with any of these customers
or any of our other customers.
During the fiscal year ending 2002, GNC represented approximately 20.5% of our
gross revenues, Wal-Mart represented approximately 12.2% of our gross revenues,
Walgreens represented approximately 10.6% of our gross revenues, Rite Aid
represented approximately 10.1% of our gross revenues, Target represented
approximately 7.0% of our gross revenues, Eckerd's represented approximately
5.1% of our gross revenues. The loss of any one or more of our significant
customers would have material adverse effect on our operations.
The Company's gross revenue attributable to these customers for the years ended
December 31, 2002 and 2001 are as follows:
2002 2001
----------------- -----------------
Walmart $ 619,000 $ -
GNC 1,040,000 1,237,000
CVS under 10% 630,000
Walgreens 539,000 661,000
Rite Aid 514,010 840,000
Significant Supplier
--------------------
During the years ended December 31, 2002 and 2001, the Company received 100% of
its products from one manufacturer of herbal and dietary supplements, located in
Caldwell, New Jersey. The Company is dependent on the ability of its supplier to
provide products on a timely basis and on favorable pricing terms. The loss of
the supplier or a significant reduction in product availability from the
supplier could have a material adverse effect on the Company. The Company
believes that its relationship with its supplier is satisfactory.
F-16
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - INCOME TAXES
The Company's evaluation of the tax benefit of its net operating loss
carryforward is presented in the following table. At December 31, the tax
amounts have been calculated using the 34% federal and 5.5% state income tax
rates.
2002 2001
--------- ---------
Income tax (benefit) consists of:
Current $ -- $ 7,888
Deferred -- --
--------- ---------
$ -- $ 7,888
========= =========
Reconciliation of the Federal statutory income tax rate to the Company's
effective tax rate is as follows:
2002 2001
---------- -----------
Taxes computed at combine federal
and state tax rate $ 9,386 $ (473,159)
Non-deductible expenses 2,719 3,835
State income taxes, net of federal
income tax benefit 1,292 (50,107)
Other 28,845 (20,135)
Effect of change in income tax rate -- (6,953)
Increase (decrease) in deferred tax
asset valuation allowance (42,242) 540,501
---------- -----------
Provision (benefit) for income taxes $ -- $ 7,888
========== ===========
F-17
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - INCOME TAXES, CONTINUED
---------------------------------
The components of the deferred tax asset were as follows at December 31:
2002 2001
----------- -----------
Deferred tax assets:
Net operating loss carryforward $ 336,919 $ 464,427
Allowance for receivables 128,084 69,295
Allowance for inventory 33,256 6,779
Litigation costs related to capital -- --
----------- -----------
Total deferred tax assets 498,259 540,501
----------- -----------
Deferred tax liabilities:
Net deferred tax asset 498,259 540,501
----------- -----------
Valuation allowance:
Beginning of yuear (540,501) --
Decrease (increase) during year 42,242 (540,501)
----------- -----------
Ending balance (498,259) (540,501
----------- -----------
Net deferred taxes $ -- $ --
=========== ==========
As of December 31, 2002, the Company has an unused net operating loss
carryforward of $895,346 available for use on its future corporate income tax
returns. This net operating loss carryforward expires in 2022.
NOTE 17 - STOCK OPTIONS
-----------------------
In May 1998 the Company adopted a stock option plan. The purpose of the stock
option plan was to increase the employees and non-employee director's
proprietary interest in HNS and to align more closely their interests with the
interests of the shareholders of HNS, as well as to enable HNS to attract and
retain the services of experienced and highly qualified employees and
non-employees directors.
Options granted under this plan may either be options qualifying as incentive
stock options under Section 422 of the Internal Revenue Code of 1986, as
amended, or options that do not so qualify. Any incentive option must provide
for an exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant, but the exercise price of any
incentive option granted to an eligible employee owning more than 10% of the our
common stock must be at least 110% of such fair market value as determined on
the date of the grant.
The term of each option and the manner in which it may be exercised is
determined by the board of directors, provided that no option may be exercisable
more that 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more that 10% of the our common
stock, no more than five years after the date of the grant. The board of
directors shall determine the exercise price of non-qualified options.
F-18
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17 - STOCK OPTIONS, CONTINUED
We reserved an aggregate of 1,250,000 shares of common stock for issuance of
options under the stock option plan. As of December 31, 2002, options to
purchase an aggregate of 506,500 shares of common stock had been granted, after
giving effect to forfeitures. Therefore, options to purchase 743,500 shares of
common stock remain available under the Plan. The board of directors or a
committee of the board of directors will administer the plan including, without
limitation, the selection of the persons who will be granted plan options under
the plan, the type of plan options to be granted, the number of shares subject
to each plan options and the plan option price.
The per share exercise price of shares granted under the plan may be adjusted in
the event of certain changes in the total purchase price payable upon the
exercise in full of options granted under the plan. Officers, directors and key
employees of and consultants to HNS will be eligible to receive non-qualified
options under the plan. Only officers, directors and employees of HNS who are
employed by HNS or by any subsidiary thereof are eligible to receive incentive
options.
The Company has elected to account for the stock options under the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the employee stock options. The Company accounts for stock options
granted to consultants under Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation." The Company recognized $443 and
$847 in compensation expense at December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, 50,000 options were granted to
officers, directors and employees of the Company.
During the year ended December 31, 2001, no options were granted to officers,
directors and employees of the Company.
A summary of options during the years ended December 31, 2002 and 2001 is shown
below:
December 31, 2002 December 31, 2001
---------------------------------------- -------------------------------------
Number of Weighted-Average Number of Weighted-Average
Shares Exercise Price Shares Exercise Price
---------------- -------------------- ------------- --------------------
Outstanding at beginning of year 540,500 $ 0.50 710,000 $ 0.50
Granted 50,000 0 -- --
Exercised - -- -- --
Forfeited (84,000) (0.50) (169,500) (0.50)
------------ ------------------- ----------- -----------------
Outstanding at December 31 506,500 $ 0.47 540,500 0.50
============ =================== =========== =================
Exercisable at December 31 292,050 218,200
============ ===========
Available for issuance at December 31 743,500 709,500
============ ===========
F-19
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 17 - STOCK OPTIONS, CONTINUED
----------------------------------
The fair value of each option is estimated on the date of grant using the fair
market value option-pricing model with the assumptions:
Risk-free interest rate 4.5% - 6.5%
Expected life (years) Various
Expected volitility 1.23
Expected dividends None
NOTE 18 - RECLASSIFICATIONS
---------------------------
Certain reclassifications have been made to the 2001 financial statements to
conform to the 2002 financial statement presentation. These reclassifications
have no effect on reported net income. In 2002 and 2001, the Company
reclassified $901,599 and $1,524,943, respectively, of promotion and
co-operative advertising fees to revenues from the operating expense
"Advertising and promotion."
NOTE 19 - SUBSEQUENT EVENTS
---------------------------
As of March 15, 2003, the Company discontinued the sale of ephedra based Thin
Tab(R) and Fat Cutter Plus(R) products.
NOTE 20 - RESTATEMENTS
Subsequent to filing its Proxy Statement on January 5, 2004 the Securities and
Exchange Commission requested additional disclosures to be included. These
additional disclosures had no effect on the previously reported total assets or
net income.
NOTE 21 - EMPLOYMENT AGREEMENT
Effective January 1, 2002, we entered into a new employment agreement with
Christopher Tisi, our Chief Executive Officer, President, Secretary and Interim
Chairman of the Board. The agreement provides for a base salary of $140,000
($18,750 of which will be used to pay certain amounts owing to third parties in
connection with the settlement of litigation), as well as bonuses that are
contingent upon increases in revenue over prior periods and net income results.
The agreement provides that bonuses will be determined quarterly with 33% of
such bonuses to be paid quarterly and the balance to be paid in succeeding
quarters at which time the bonus is recalculated on cumulative year to year
results for the relevant period. The agreement also provides for an annual grant
of 50,000 stock options under our 1998 Stock Option Plan for two years. The
options will have a four-year term and will be vested 100% on the date of grant.
The agreement also provides for the payment of an amount equal to the lesser of
(i) $275,000 or (ii) the maximum "golden parachute" payment permitted to be
deducted by us under the federal tax law in the event Mr. Tisi is terminated
after a change of control. An amendment to the agreement provided that $32,578
of Mr. Tisi's salary for the 2001 that was not paid to him during 2001 would be
paid in 2002 in twelve equal monthly installments.
F-20
Index to Exhibits
-----------------
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
3.1(a) Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(A) of
Registrant's registration statement on Form 10-SB, filed on January 31, 2000; Commission File
Number 000-29245).
3.1(b) Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit
3.1(B) of Registrant's registration statement on Form 10-SB, filed on January 31, 2000;
Commission File Number 0000-29245).
3.1(c) Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit
3.1(C) of Registrant's registration statement on Form 10-SB, filed on January 31, 2000;
Commission File Number 000-29245).
3.1(d) Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit
3.1(D) of Registrant's Annual Report on Form 10-KSB, filed on April 16, 2001; Commission File
Number 000-29245).
3.2 By-Laws of the Registrant (incorporated by reference to Exhibit 3.2 of Registrant's
registration statement on Form 10-SB, filed on January 31, 2000; Commission File Number
000-29245).
3.3 Amendment to the Restated Bylaws of the Company dated September 25, 2000 (incorporated by
reference to Exhibit 3.3 of Registrant's Annual Report on Form 10-KSB, filed on April 16,
2000; Commission File Number 000-29245).
3.4 Amendment to the Restated Bylaws of the Company dated November 10, 2000 (incorporated by
reference to Exhibit 3.4 of Registrant's Annual Report on form 10-KSB, filed on April 16,
2000; Commission File Number 000-29245).
10.1 Employment Agreement between the Company and Christopher Tisi effective as of January 1, 2002
(incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.2 Severance Agreement between the Company and Steven Pomerantz effective as of January 1, 2002
(incorporated by reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.3 Factoring and Security Agreement between LSQ Funding Group L.C. and Health and Nutrition
Systems International, Inc. effective as of March 15, 2002 (incorporated by reference to
Exhibit 10.3 of Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002; Commission
File Number 000-29245).
10.4 Indemnification Agreement dated March 15, 2002 between LSQ Funding Group L.C. and Christopher
Tisi (incorporated by reference to Exhibit 10.4 of Registrant's Annual Report on Form 10-KSB,
filed on April 12, 2002; Commission File Number 000-29245).
10.5 Indemnification Agreement between the Company and Christopher Tisi dated January 1, 2002
(incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.6 Indemnification Agreement between the Company and Steven Pomerantz dated January 1, 2002
(incorporated by reference to Exhibit 10.4 of Registrant's Current Report on Form 8-K filed on
February 13, 2002; Commission File Number 000-29245).
10.7 Lease Agreement between the Company and Fred Keller, Trustee dated November 1, 2000
(incorporated by reference to Exhibit 10.5 of Registrant's Annual Report on Form 10-KSB, filed
on April 16, 2001; Commission File Number 000-29245).
10.8 Lease Agreement between the Company and Fred Keller, Trustee dated January 1, 2001
(incorporated by reference to Exhibit 10.6 of Registrant's Annual Report on Form 10-KSB, filed
on April 16, 2001; Commission File Number 000-29245).
10.9 Secured Party's Bill of Sale between Fleet National Bank and the Company dated January 12,
2001 (incorporated by reference to Exhibit 10.1 of Registrant's Current Report on Form 8-K
filed on January 26, 2001; Commission File Number 000-29245).
10.10 Trademark Assignment from Heritage Consumer Products, LLC to the Company dated January 12,
2001 (incorporated by reference to Exhibit 10.2 of Registrant's Current Report on Form 8-K
filed on January 26, 2001; Commission File Number 000-29245).
10.11 Agreement between the Company and Steven Pomerantz dated January 12, 2001 (incorporated by
reference to Exhibit 10.3 of Registrant's Current Report on Form 8-K filed on January 26,
2001; Commission File Number 000-29245).
10.12 Shareholders' Agreement among Tony D'Amato, Christopher Tisi, and the Company dated July 13,
2000 (incorporated by reference to Exhibit 1 of Christopher Tisi, Steven Pomerantz, Tony
Musso, and Tony D'Amato's Schedule 13D, filed on January February 14, 2001; Commission File
Number 0-29245).
10.13 Irrevocable Proxy dated July 13, 2000 (incorporated by reference to Exhibit 2 of Christopher
Tisi, Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on January February
14, 2001; Commission File Number 0-29245).
10.14 Waiver dated January 31, 2001 (incorporated by reference to Exhibit 3 of Christopher Tisi,
Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on January
February 14, 2001; Commission File Number 0-29245).
10.15 Joint Filing Agreement dated February 13, 2001 (incorporated by reference to Exhibit 4 of
Christopher Tisi, Steven Pomerantz, Tony Musso, and Tony D'Amato's Schedule 13D, filed on
January February 14, 2001; Commission File Number 0-29245).
10.16 Exclusive Manufacturing Agreement dated April 11, 2002 between the Company and Garden State
Nutritionals, a division of VitaQuest International, Inc. (incorporated by reference to
Exhibit 10.16 of Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002;
Commission File Number 000-29245).
10.17 Security Agreement dated April 11, 2002 between the Company and Garden State Nutritionals, a
division of VitaQuest International, Inc. (incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-KSB, filed on April 12, 2002; Commission File Number
000-29245).
10.18 Health & Nutrition Systems International, Inc. 1998 Stock Option Plan (incorporated by
reference to Exhibit 10.18 of Registrant's Annual Report on Form 10-KSB, filed on April 12,
2002; Commission File Number 000-29245).
10.19 Promissory Note dated April 11, 2002 between the Company as borrower and Garden State
Nutritionals as lender (incorporated by reference to Exhibit 10.19 of
Registrant's Annual Report on Form 10-KSB, filed on April
12, 2002; Commission File Number 000-29245).
10.20 Subordination Agreement dated April 11, 2002 among the Company, LSQ Funding Group, L.C. and
Garden State Nutritionals (incorporated by reference to Exhibit 10.20 of Registrant's Annual
Report on Form 10-KSB, filed on April 12, 2002; Commission File Number 000-29245).
10.21 Amendment No. 1 dated April 29, 2002 to the Employment Agreement between the Company and
Christopher Tisi effective as of January 1, 2002 (incorporated by reference
to Exhibit 10.21 of Registrant's Annual Report on Form 10-KSB/A-1, filed on April 30, 2002;
Commission File Number 000-29245).
10.22 Amendment No. 1 dated April 29, 2002 to the Severance Agreement between the Company and Steven
Pomerantz effective as of January 1, 2002 (incorporated by reference to Exhibit 10.2 of
Registrant's Annual Report on Form 10-KSB/A-1, filed on April 30, 2002; Commission File Number
000-29245).
10.23 First Amendment to Shareholders' Agreement among Tony D'Amato, Christopher Tisi and
the Company dated April 24, 2002 (incorporated by reference to Exhibit 4 of
Christopher Tisi, Steven Pomerantz and Tony D'Amato's Schedule 13D, filed on April 29, 2002;
Commission File Number 0-29245).
10.24 Irrevocable Proxy dated April 24, 2002 (incorporated by reference to Exhibit 5 of Christopher
Tisi, Steven Pomerantz and Tony D'Amato's Schedule 13D, filed on April 29, 2002; Commission
File Number 0-29245).
10.25 Option Agreement effective as of February 12, 2002 between the Company and Christopher Tisi
(incorporated by reference to Exhibit 10.25 of Registrant's Annual Report
on Form 10-KSB/A-1, filed on April 30, 2002; Commission File Number 000-29245).
10.26 Indemnification Agreement between Ted Alflen and the Company dated as of January 1, 2002
(incorporated by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-QSB,
filed on November 14, 2002; Commission File Number 000-29245).
10.27 Indemnification Agreement between Darryl Green and the Company dated as of January 1, 2002
(incorporated by reference to Exhibit 10.2 of Registrant's Quarterly Report on Form 10-QSB,
filed on November 14, 2002; Commission File Number 000-29245).
14.1 Code of Ethics
16.1 Letter from Butner & Kahle, CPA dated September 6, 2000 (incorporated by reference to Exhibit
16.4 of Registrant's Current Report on Form 8-K filed on September 7, 2000; Commission File
Number 000-29245).
24 Power of attorney (included on signature page)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.1
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Health & Nutrition Systems
International, Inc. (the "Company") on Form 10-KSB/A-2 for the fiscal period
ending December 31, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Christopher Tisi, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Christopher Tisi
---------------------
Christopher Tisi
Chief Executive Officer
April 30, 2004
Exhibit 99.2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Health & Nutrition Systems
International, Inc. (the "Company") on Form 10-KSB/A-2 for the fiscal period
ending December 31, 2002 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Al Dugan, Controller (Principal Accounting
Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Al Dugan
-----------------------------------------
Al Dugan
Controller (Principal Accounting Officer)
April 30, 2004