UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2001
-
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission File No. 0-29245
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
----------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 65-0452156
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3750 Investment Lane, Suite 5, West Palm Beach, Florida 33407
-------------------------------------------------------------
(Address of principal executive offices)
(561) 863-8446
--------------
(Issuer's telephone number)
-----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,612,813 shares of Common Stock as
of November 12, 2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
September 30,
2001
-----------
Current assets:
Cash $ 78,300
Resricted cash related to notes payable 150,687
Accounts receivable, net 751,564
Inventory 268,350
Prepaids and other current assets 74,290
-----------
Total current assets 1,323,191
-----------
Property and equipment, net 72,153
Other assets:
Due from related parties 5,431
Deferred tax asset 50,550
Other assets, net 33,946
-----------
Total other assets 89,927
-----------
Total assets $ 1,485,271
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 862,019
Accrued expenses 191,791
Notes payable 214,167
Capital leases, current portion 26,976
-----------
Total current liabilities 1,294,953
-----------
Capital leases, less current portion 9,970
-----------
Total liabilities 1,304,923
-----------
Stockholders' equity:
Common stock, $0.001 par value, 30,000,000 shares
authorized; 3,609,813 shares issued and outstanding 3,610
Additional paid-in capital 832,832
Accumulated deficit (656,094)
-----------
Total stockholders' equity 180,348
-----------
Total liabilities and stockholders' equity $ 1,485,271
===========
1
See accompanying notes to condensed financial statements.
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenue $ 1,449,703 $ 1,193,056 $ 4,390,014 $ 4,019,490
Cost of sales 378,969 270,740 1,335,993 1,002,576
----------- ----------- ----------- -----------
Gross profit 1,070,734 922,316 3,054,021 3,016,914
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 1,045,564 1,029,477 3,467,679 2,649,058
Depreciation and amortization 8,270 10,760 25,707 22,649
----------- ----------- ----------- -----------
Total operating expenses 1,053,834 1,040,237 3,493,386 2,671,707
----------- ----------- ----------- -----------
Income (loss) from operations 16,900 (117,921) (439,365) 345,207
----------- ----------- ----------- -----------
Interest income 2,446 892 4,159 1,640
Interest expense (8,168) (12,747) (22,616) (12,747)
----------- ----------- ----------- -----------
Profit (loss) before income taxes 11,178 (129,776) (457,822) 334,100
Benefit (provision) for income taxes -- (11,823) 42,662 (49,239)
----------- ----------- ----------- -----------
Net profit (loss) $ 11,178 $ (141,599) $ (415,160) $ 284,861
=========== =========== =========== ===========
Net profit (loss) per share - basic $ -- $ (0.04) $ (0.11) $ 0.08
=========== =========== =========== ===========
Net profit (loss) per share - diluted $ -- $ (0.04) $ (0.11) $ 0.08
=========== =========== =========== ===========
Weighted average number of shares - basic 3,604,813 3,459,311 3,612,617 3,526,141
=========== =========== =========== ===========
Weighted average number of shares - diluted 3,604,813 3,459,311 3,612,617 3,526,141
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------
2001 2000
--------- ---------
Net cash provided by (used in) operating activities $ (77,330) $ 157,309
--------- ---------
Cash flows from investing activities:
Purchase of trademark (25,000) --
Purchase of property and equipment (3,525) (19,285)
--------- ---------
Net cash used in investing activities (28,525) (19,285)
--------- ---------
Cash flows from financing activities:
Proceeds on issuance of common stock -- 7,363
Proceeds on line of credit 100,000 --
Payments on lines of credit (35,833) --
Payments on capital leases (5,384) (18,297)
Payments to related parties (213) (10,000)
--------- ---------
Net cash provided by (used in) financing activities 58,570 (20,934)
--------- ----------
Net increase (decrease) in cash (47,285) 117,090
Cash at beginning of period 125,585 154,246
--------- ---------
Cash at end of period $ 78,300 $ 271,336
========= =========
See accompanying notes to condensed financial statements.
3
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Health & Nutrition
Systems International, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Regulation S-B. Accordingly, they do not include all of the information and
footnotes required for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for the
interim periods presented have been included.
These results have been determined on the basis of generally accepted accounting
principles and practices applied consistently with those used in the preparation
of the Company's Annual Financial Statements for the year ended December 31,
2000. Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.
It is recommended that the accompanying condensed financial statements be read
in conjunction with the financial statements and notes for the year ended
December 31, 2000, found in the Company's Form 10-KSB for the fiscal year ended
December 31, 2000.
NOTE 2 - NOTES PAYABLE
On December 15, 2000 the Company received a short-term loan from a bank.
Interest accrues at a rate of 8.1% per annum and the loan is collateralized by a
Company certificate of deposit in the amount of $150,000. The note was
originally payable in eleven installments of $2,500 plus accrued interest
beginning January 15, 2001. The unpaid balance at September 30, 2001 was
$127,500. On November 9, 2001, the Company and the bank modified the original
note and the bank lent the Company the difference between the original principal
amount of the loan and the amount then-outstanding. All unpaid principal and
accrued interest is due December 15, 2001.
On January 12, 2001 the Company received a short-term loan from a bank in the
amount of $100,000. Interest accrues at a rate of 7.73% per annum and the loan
is collateralized by a $100,000 certificate of deposit owned by Steve Pomerantz,
the Company's Chief Executive Officer. The note was payable in eleven
installments of $1,666.67 plus accrued interest beginning February 12, 2001 and
may be prepaid in part or in full prior to its maturity date without penalty.
The loan matures January 12, 2002. The unpaid balance at September 30,2001 was
$86,667. That amount was reduced by the proceeds of the November 9th
modification of the other bank loan, discussed above, in the approximate amount
of $25,000. Mr. Pomerantz has advised the Company that he wishes to have his
collateral returned to him on the maturity date of this loan. Accordingly, the
Company will be required to repay the loan to the bank on its maturity date. In
the event that the Company is unable to repay the loan, the bank will take the
collateral.
4
NOTE 3 - FACTORING ARRANGEMENTS
The Company factors certain of its accounts receivable. It entered into a new
agreement with a commercial finance company in September 2001. The factor
purchases receivables for a percentage of the face amount of certain invoices
and the Company maintains a reserve account with the factor of 20% of the
outstanding receivables held by the factor. The factor will rebate the reserve
for receivables paid subject to a discount of prime plus 1.75% for net funds
employed on the last day of each calendar month, plus a additional fees of 1.75%
to 3.35% on invoices beyond the agreed upon terms.
NOTE 4 - INCOME TAXES
Income tax provision consists of the following at September 30:
2001 2000
--------- ---------
Current $ -- $ 121,423
Deferred (42,662) (31,327)
Decrease in valuation allowance -- (40,857)
--------- ---------
Provision (benefit) for income taxes $ (42,662) $ 49,239
========= =========
Under FAS No. 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The
significant components of deferred tax assets as of September 30, 2001 and 2000
are as follows:
September 30,
-------------------
2001 2000
------- -------
Deferred tax asset:
Net operating losses $50,550 $ --
Accounts receivable reserves -- 18,863
Stock issued for services -- 53,321
------- -------
Total deferred tax asset 50,550 72,184
------- -------
Deferred tax liabilities -- --
------- -------
Net deferred tax asset before valuation allowance 50,550 72,184
Valuation allowance -- --
------- -------
Net deferred tax assets $50,550 $72,184
======= =======
5
A reconciliation of income tax expense (benefit) provided at a combined federal
and state statutory rate of 39.5% to income tax expense is as follows:
September 30,
----------------------
2001 2000
-------- --------
Taxes computed at combined federal and state
tax rate $ -- $ --
Change in valuation allowance -- (40,857)
Net operating loss benefit (51,814) 54,825
Other, net 9,152 35,271
-------- --------
$(42,662) $ 49,239
======== ========
As of September 30, 2001, the Company had used the net operating loss carry
forward of $131,175 available for use on its future corporate federal income tax
returns.
NOTE 5 - LEGAL MATTERS
The Company has filed a Complaint for Declaratory 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. The
uncertainty affects 325,000 shares (after reverse split) of common stock not
included in the outstanding shares as of September 30, 2001. Depending on the
outcome of this action, the number of outstanding shares may increase causing
dilution of the present shareholders. During the three months ended June 30,
2001, the defendants filed a counter claim. The Company has moved to dismiss the
counter claim.
On October 19, 2001, the Company reached a settlement agreement with Mr.
Acquaviva and paid $4,500. Mr. Acquaviva filed a stipulation for dismissal with
prejudice and the case was dismissed.
The Company filed a motion to dismiss the KMS complaint against certain officers
of the Company. This motion was denied. The court did not rule on the breach of
contract claim against the Company. Efforts by the Company at mediation and
settlement negotiations have not been successful.
6
Item 2. Management's Discussion and Analysis or Plan of Operation.
This Quarterly Report on Form 10-QSB contains forward-looking statements. 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 contained in
our Form 10-KSB for the year ended December 31, 2000, filed with the Securities
and Exchange Commission. 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 together with our unaudited Financial Statements contained in
Part I, Item 1 and the related Notes in this Form 10-QSB, and our audited
Financial Statements and the related Notes contained in our Form 10-KSB for the
fiscal year ended December 31, 2000 filed with the Securities and Exchange
Commission.
OVERVIEW
During the third quarter of 2001, we continued to implement the Company's
strategic plan to diversify our product line by developing and promoting new
products, Acutrim Natural A.M. and P.M., Fat Cutter and Carbolizer. This
strategy is aimed at minimizing the impact of a shift in consumer preferences
with regard to any one of our products, a change in retailer attitude with
respect to any of our products, or any other cause of reduced sales either for a
particular product or in a particular geographical area. Our third quarter
operating results continue to show the impact of our significant marketing
expenditures associated with the launch of these new products.
Although our revenue in the third quarter 2001 increased 22% over revenue in the
third quarter 2000, we are cautious about our fourth quarter results of
operations in light of the deteriorating economic environment and the uncertain
effects of the terrorist attacks of September 11, 2001. 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
these terrorist attacks and the government's response to them have had
short-term and may have long-term adverse effects on our revenues, results of
operations, financial condition and prospects. The terrorist attacks have had an
immediate impact on our business as a result of the contraction in consumer
confidence and a negative impact on the retail environment generally. We, as
well as most other companies operating in the same market sector may see a
decline in sales due to a consumer perception that under these present
circumstances the purchase of diet-related products is marginally less important
than other household expenditures. Additional terrorist attacks or
7
related events, such as bioterrorism, could adversely impact all consumer
businesses, including ours. It is not possible at this time to predict the
longer-term effects of the attacks, or the impacts of actions taken in response
to the attacks, on general economic, political and public safety conditions and
our results of operations.
As we have previously disclosed, we are dependent on factoring our receivables
in order to support our working capital needs. Our contract with Bank of America
expired September 6, 2001 and was not renewed. We presently factor certain of
our accounts receivable pursuant to a new agreement with Alliance Financial
Capital. See "Liquidity and Capital Resources."
Recent events have also included renewed interest by the FDA with regard to
regulating ephedra. This interest has been accompanied by adverse publicity. As
of September 30, 2001, 20% of our gross revenue was generated by sales of
products containing ephedra. We cannot predict the effects of these events our
revenues, results of operations, financial condition and prospects. See
"Commitments and Contingencies."
RESULTS OF OPERATIONS
REVENUE FROM SALES:
Revenue from sales for the three month period ended September 30, 2001 were
$1,449,703, which is an increase of $256,647 or 22 %, as compared to revenue
from net sales of $1,193,056 for the three months ended September 30, 2000. The
increase was due to sales of our new products, Acutrim Natural A.M. and P.M.,
Carbolizer and Fat Cutter. It should be noted, however, that the increase was
partially offset by significant decreases in sales of Carbcutter (20%) and Thin
Tab (80%) as compared to sales of those products for the three months ended
September 30, 2000. For the third quarter of 2001, GNC accounted for $416,402 or
29% of sales, Target accounted for $180,147 or 12% of sales, and Walgreens
accounted for $166,059 or 12% of sales. No other account represented more than
10% of sales during the third quarter of 2001.
Revenue from sales for the nine month period ended September 30, 2001 were
$4,390,014, which is an increase of $370,524 or 9%, as compared to net sales of
$4,019,490 for the nine months ended September 30, 2000. The increase was due to
sales to new retailers and sales of additional product lines to existing
retailers. This increase was partially offset by the significant decrease in
sales of Carbcutter (35%) and Thin Tab (68%) as compared to sales of those
products for the nine months ended September 30, 2000. For the nine month period
ended September 30, 2001, GNC accounted for $773,116 or 18% of sales, Rite aid
accounted for $517,568 or 12 % of sales, Walgreens accounted for $508,060 or 12%
of sales, and Eckerds accounted for $459,310 or 10% of sales. No other account
represented more than 10% of sales during the period.
COST OF SALES:
Cost of sales for the three month period ended September 30, 2001 was $378,969
or 26 % of net sales, as compared to $270,740 or 23% of net sales for the three
months ended September 30, 2000. The increase in cost of sales as a percentage
of net sales was primarily attributable to new
8
sales during the third quarter of the recently-acquired Acutrim(R) branded
products, which have a higher cost of goods as a percentage of sales than our
other product lines.
Cost of sales for the nine month period ended September 30, 2001 was $1,335,993
or 30% of net sales as compared to $1,002,576 or 25% of net sales for the nine
months ended September 30, 2000. The increase in cost of sales as a percentage
of net sales was primarily attributable to new sales during the period of
Acutrim(R) branded products, which have a higher cost of goods as a percentage
of sales than our other product lines.
GROSS PROFIT:
Gross profit for the three month period ended September 30, 2001 was $1,070,734,
which is an increase of $148,418 or 16%, as compared to gross profit of $922,316
for the three months ended September 30, 2000. The increase in gross profit is
primarily due sales of our new products Acutrim Natural A.M. and P.M.,
Carbolizer and Fat Cutter, partially offset by the decrease in sales of
Carbcutter. As a percent of net sales, gross profit was 74% for the three months
ended September 30, 2001, compared to 77% for the three month period that ended
September 30, 2000. The decrease in gross profit as a percent of sales was
primarily due to the lower gross profit margin of our new Acutrim(R) product
line.
Gross profit for the nine month period ended September 30, 2001 was $3,054,021,
which is an increase of $37,107 or 1%, as compared to gross profit of $3,016,914
for the nine months ended September 30, 2000. The increase in gross profit is
primarily due to sales of our new products: Acutrim Natural A.M. and P.M.,
Carbolizer and Fat Cutter, offset by a decrease in sales of Carbcutter. As a
percent of net sales, gross profit was 70% for the nine months ended September
30, 2001, as compared to 75% for the nine months ended September 30, 2000. The
decrease in gross profit as a percent of sales is primarily due to the lower
gross profit margin of our new Acutrim(R) product line.
OPERATING EXPENSES:
Operating expenses were $1,053,834 for the three month period that ended
September 30, 2001, representing an increase of $13,597, as compared to
$1,040,237 for the three months ended September 30, 2000. As a percent of net
sales, operating expenses were 73% for the three months ended September 30,
2001, compared to 87 % for the three months ended September 30, 2000. The
decrease in operating expenses as a percentage of sales was primarily
attributable to the reduction in personnel expenses and marketing expenses for
the third quarter of 2001.
Operating expenses were $3,493,386 for the nine months ended September 30, 2001,
representing an increase of $821,679, as compared to $2,671,707 for the nine
months ended September 30, 2000. As a percent of net sales, operating expenses
were 80% for the nine months ended September 30, 2001, compared to 66% for the
nine months ended September 30, 2000. The increase in operating expenses was
attributable to a variety of factors, including increased marketing expenses,
legal expenses and sales expenses.
9
NET PROFIT (LOSS) FROM OPERATIONS:
Net profit from operations was $16,900 for the three month period that ended
September 30, 2001, as compared to a net loss from operations of $(117,921) for
the three months ended September 30, 2000. Net profit was $11,178 or $.003 per
share for the three months ended September 30, 2001, as compared to a net loss
of $(141,599) or $(.04) per share for the three months ended September 30, 2000.
The increase in income from operations was primarily due to sales of our new
products, our success in using new retailers and reduced operating expenses.
Net loss from operations was $(439,365) for the nine months ended September 30,
2001, as compared to a net profit from operations of $345,207 for the nine
months ended September 30, 2000. Net loss was $(415,160) or $(.12) per share for
the nine months ended September 30, 2001, as compared to a net profit of
$284,861 or $.08 per share for the nine months ended September 30, 2000. The
decrease in income from operations was due to a variety of factors, including
higher marketing expenditures to support the launch of our new products, legal
expenditures relating to ongoing litigation, sales expenses, and accounting
expenditures.
LIQUIDITY & CAPITAL RESOURCES
At September 30, 2001, we had a working capital surplus of $28,238 compared to a
working capital surplus of $538,027 at September 30, 2000. The decrease in
working capital is primarily due to a year to date net loss and an increase in
accounts payable.
Net cash used in operating activities for the nine month period that ended
September 30, 2001 was $(75,333), compared to net cash provided by operating
activities of $157,309 for the nine months ended September 30, 2000. The
decrease in cash is primarily due to a net operating loss year to date,
increased marketing expenditures for the launch of our new products and
increased legal expenditures.
Cash used in investing activities was $(28,525) for the nine months ended
September 30, 2001, as compared to $19,285 that was used in investing activities
for the nine months ending September 30, 2000. Cash used for investing
activities this year was mainly used to purchase the Acutrim trademark. Cash
used for the comparable period ending September 30, 2000 was used for the
purchase of equipment.
Net cash provided by financing activities for the nine months ended September
30, 2001 was $58,570, as compared to $(20,934) cash used in financing activities
for the nine months ended September 30, 2000. During the nine month period
ending September 30, 2001, the company received the proceeds of a $100,000 bank
loan that is collateralized by a certificate of deposit owned by Steve
Pomerantz, the Company's Chief Executive Officer. Interest accrues at a rate of
7.73% per annum and the loan matures January 12, 2002. The unpaid balance at
September 30,2001 was $86,667. That amount was reduced during November by
approximately $25,000, which the Company borrowed under a second bank loan which
is secured by the Company's certificate of deposit. Mr. Pomerantz has advised
the Company that he intends to retrieve his collateral on the maturity date of
this loan. Accordingly, the Company will be required to repay the loan to the
bank on its maturity date. In the event that the Company is unable to repay the
loan, the bank will use the proceeds from Mr. Pomerantz' certificate of deposit
to satisfy the
10
Company's debt. The second bank loan matures on December 15, 2001. The Company
expects that the bank will extend the maturity date of the loan to December 15,
2002 on the same terms and conditions. In the event the bank does not, the
Company would use its certificate of deposit to pay off the loan.
Our factoring agreement with Bank of America expired September 6, 2001. We need
to continue to factor our large pharmacy chain accounts and large health food
store accounts because we do not have sufficient working capital to sustain
operations if we collect these accounts receivable ourselves. Accordingly, we
negotiated a new factoring agreement and now sell most of our large pharmacy
chain accounts receivable and large health food store accounts receivable to
Alliance Financial Capital. Alliance Financial Capital will advance to us eighty
percent of the value of those accounts, up to a maximum of $1,000,000 of
receivables. The reserve of twenty percent will be rebated to us as the
receivables are paid, subject to a discount equal to: (i) Prime Rate plus 1.75%
on net funds employed on the last day of each calendar month, plus (ii) (a)
1.75% for the initial 30 days per invoice amount and (b) 1.60% for each
subsequent 30 day period or part thereof per invoice amount. The agreement also
permits Alliance Financial Capital to reduce the amount advanced to us (and
thereby increase the reserve) in the event of certain contingencies. We pay an
annual facility fee equal to one percent of the $1,000,000 credit limit. This
agreement expires September 12, 2002, but shall renew automatically unless we
terminate it. Our CEO, Steve Pomerantz, and our President, Chris Tisi, have
personally indemnified Alliance Financial Capital regarding the validity of the
accounts receivable being factored and certain other related matters.
We will continue to be dependent on factoring our receivables in order to
support our working capital needs for the foreseeable future. There is no
assurance that we will be able to factor our accounts receivable in the future
at commercially reasonable discount rates that will provide us sufficient
working capital or allow us to make a profit. Out inability to factor our
receivables at commercially reasonable terms would have a material adverse
effect on our results of operations.
Under current cash flow conditions, there is no assurance that we will be able
to meet payment terms from suppliers. Our inability to meet such payment terms
would have a material adverse effect on the company.
It is possible that the Company's current cash and cash flow from operations may
be insufficient to meet its anticipated cash needs. To the extent our internal
cash flow, supplier credit lines and factoring arrangement are not sufficient,
we may need to raise additional capital in order to meet working capital needs.
We may attempt to raise additional equity or capital, either through private
placements or asset based loans. We have no current arrangements with respect to
sources of additional equity financing and there can be no assurance that
additional equity or debt financing will be available to us on commercially
reasonable terms, or at all. In the event our internal cash flow, supplier
credit lines, factoring arrangement and capital raising are inadequate to meet
our cash flow requirements, we may need to curtail operations.
Commitments and Contingencies
Regulatory Matters - Our products Fatcutter, ThinTab and Carbolizer, contain
ephedra, also known as "Ma Huang," an herb which contains naturally-occurring
ephedrine. These products
11
represented approximately 20% of our gross revenue for the nine months ended
September 30, 2001. Ephedra containing products have been the subject of adverse
publicity in the United States and other countries relating to alleged harmful
effects.
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 Fatcutter, ThinTab and Carbolizer 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 has not publicly responded to this petition.
The FDA will, most likely, attempt to issue a new proposed rule with respect to
dietary supplements that contain ephedrine alkaloids. However, it is uncertain
what restrictions the new proposed rule might contain or when a new proposed
rule will be issued. In the Company's opinion, it is unlikely that a final
regulation will be issued by the FDA during 2001. Consequently, management is
unable at the present time to predict the ultimate resolution of these issues,
or their ultimate impact on the Company's results of operations or financial
condition.
Product Liability - We, 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 maintain product
liability insurance coverage. It may become increasingly difficult to obtain and
maintain product liability insurance coverage for products containing ephedra at
current premiums.
Although no material product liability claims have been asserted against us, if
they are in the future, our product liability insurance coverage could prove to
be inadequate and these claims could result in material losses.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Sam Acquaviva vs. HNS International Marketing, Inc.
As previously reported, the Company was named as a defendant in Sam
Acquaviva vs. HNS International Marketing, Inc. et al., Case No. 99 CVS 7343
filed in Mecklenburg County, North Carolina Superior Court on May 13, 1999. On
October 19, 2001, a settlement agreement was reached. Although we denied any
liability to Mr. Acquaviva, to avoid the uncertainty and expense of litigation
we paid $4,500.00 to Mr. Acquaviva. Mr. Acquaviva has filed a stipulation of
dismissal with prejudice with the court and the case has been dismissed.
Health and Nutrition Systems, International, Inc., Steven Pomerantz and Anthony
F. Musso, Plaintiffs, vs. Milton H. Barbarosh, Ricki Barbarosh, Stenton Leigh
Group, Inc., Stenton Leigh Capital Corp., and EAI Partners, Inc., Defendants
As previously disclosed, the Company and two of its officers and shareholders,
Steven Pomerantz and Anthony Musso, sued Milton H. Barbarosh and Ricki Barbarosh
(Milton's wife) and three corporations which are owned or controlled by Mr.
Barbarosh, Stenton Leigh Group, Inc., Stenton Leigh Capital Corp., and EAI
Partners, Inc. in state court (the Fifteenth Judicial Circuit of Florida in and
for Palm Beach County). Mediation is scheduled in that case for early December
2001.
J.C. Herbert Bryant, III and KMS-Thin Tab 100, Inc.
The Company has previously reported that it and three of its officers were sued
in state court by KMS-Thin Tab 100, Inc. ("KMS"). On May 8, 2001, a judge
sitting in the Fifteenth Judicial Circuit of Florida in and for Palm Beach
County granted HNS's motion to dismiss all counts in KMS's complaint against
certain officers of the Company without prejudice. Subsequently, KMS revised and
re-filed its complaint. On August 8, 2001 the judge heard oral arguments on the
motion to dismiss KMS's re-filed complaint against those officers and, without
making any determination on the merits, denied the motion. The Court did not
consider or rule on KMS's breach of contract claim against HNS. Efforts by the
Company at mediation and through settlement negotiations have thus far proven
unsuccessful.
In addition to the particular legal matters discussed above, the Company, from
time to time, is a party to routine litigation incidental to its business.
Management does not believe that any of these pending legal proceedings,
individually or in the aggregate, will materially impact the Company's financial
condition or results of operations.
Item 2. Changes in Securities.
None.
13
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Index and Exhibits:
10.1 Accounts Receivable Financing Agreement between Alliance
Financial Capital, Inc., and the Company dated September 12, 2001.
(b) Reports on Form 8-K during the fiscal quarter ended September 30,
2001: None.
14
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: November 14, 2001
HEALTH & NUTRITION SYSTEMS
INTERNATIONAL, INC., a Florida corporation
(Registrant)
/s/ STEVEN POMERANTZ
-------------------------------------
Steven Pomerantz
Chief Executive Officer and Treasurer
15
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
------------------------
FORM 10-Q QUARTERLY REPORT
FOR THE FISCAL QUARTER ENDED:
SEPTEMBER 30, 2001
-------------------------
EXHIBITS
Exhibit 10.1
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
Alliance Financial Capital. Inc. (hereby "AFC"), a California corporation,
having its offices at 700 Airport Boulevard, Burlingame, California 94010 and
the undersigned SELLER (hereafter "SELLER") hereby agree as follows:
A. On a transaction-by-transaction basis and at each party's sole and absolute
discretion, AFC hereby agrees to buy SELLER'S accounts receivable (hereafter
"accounts") on a discounted basis, including, without limitation, full power to
collect, compromise, sue for, assign, or in any manner enforce collection
thereof, in the name of AFC, or otherwise. Each transaction for said purchase
and sale of accounts should be on a daily batch basis, which is defined as all
original invoices submitted to AFC by SELLER on a particular day. AFC shall
purchase said accounts, subject to the foregoing, as a group (hereafter "BULK")
and each of said Bulks shall be treated as a separate transaction on AFC's books
and records, which shall be accounted for as between AFC and SELLER separately
and independently from all other such transactions entered into between AFC and
SELLER. Each of said transactions shall be supported by a Bulk Assignment
Schedule, an exemplar of which is attached hereto and made a part hereof by this
reference as Exhibit "A," executed by SELLER, setting forth the transaction
amount, (which is defined as the total gross face amount of all invoice(s)
included in each transaction), the consideration (hereafter "ADVANCE") paid by
AFC therefor, the contingency reserve, and the discount, therefor. Each of said
Bulk Assignment Schedules shall be deemed a separate sale and assignment of
accounts, regardless of the number of invoices listed therein, and shall
incorporate the terms, conditions and provisions of this agreement.
B. AFC shall advance to SELLER toward the purchase of said accounts, the
following percentage of each BULK, less sales tax, so long as SELLER is not in
breach of this agreement: eighty percent (80%) up to the Account Credit Limit,
(defined as the maximum amount of accounts purchased and unpaid at any time), of
one million dollars ($1,000,000.00).
C. SELLER makes the following representations, warranties and covenants with
respect to each such transaction which may be entered into between AFC and
SELLER hereafter:
1. SELLER shall be the sole and absolute owner of said account(s), and
shall have the full legal power to make said sales, assignments and
transfers.
2. Said accounts shall be presently due and owing to SELLER with terms
not to exceed net sixty (60) days, the amount(s) thereof shall not be
in dispute, the payment of said account(s) shall not be in dispute, or
contingent upon the fulfillment of this, or any other contract(s),
past or future, and SELLER shall not know, or have reason to believe
that the account debtor(s) is unable to remit payment within terms.
3. There shall not be any set-off or counterclaims against said
account(s), and said account(s) shall not have been previously
assigned or encumbered by SELLER in any manner whatsoever.
4. AFC shall have the right to reduce contingencies (the total of each
Bulk, less ADVANCE and net discount) and to apply contingencies, as
defined hereafter, from any transactions to any other transaction(s)
between the parties by the amount of any dispute(s), discount(s),
return(s), defense(s), or offset(s) taken by any account debtor(s). If
contingencies are inadequate, AFC shall have the right to deduct said
amount(s) from any other billing rights purchased by AFC from SELLER
to demand payment of any other accounts receivable of SELLER, whether
or not purchased by AFC, and/or demand reimbursement from SELLER.
5. Said account(s) shall be the property of and shall be collected by
AFC, but if for any reason any amount(s) thereof should be paid to
SELLER by any of said account debtor's, SELLER shall immediately
deliver all such checks or other instruments in kind to AFC.
6. AFC shall have the power of endorsement for any purpose on any and all
checks, drafts, money orders, or any other instruments in AFC's
possession and payable to SELLER. SELLER hereby appoints AFC its agent
for said purpose.
7. SELLER shall promptly advise AFC, in writing, if SELLER's place of
business is changed, a new place is added or record keeping is
changed.
8. SELLER shall provide to AFC an accounts receivable/accounts payable
aging report on the first and the fifteenth day of each month, and a
current income statement, balance sheet and bank account(s)
statement(s) by the fifteenth day of each month, for the previous
month.
9. SELLER will comply with and perform any term, obligation, covenant, or
condition contained in this agreement, or in any of the related
documents, and will comply with and perform any term, obligation,
covenant or condition contained in any other agreement between SELLER
and AFC.
10. Any warranty, representation or statement made or furnished to AFC by
SELLER, or on SELLER's behalf under this agreement, or the related
documents, shall not be false or misleading in any material respect,
either now or at the time made or furnished, or will become false or
misleading at any time thereafter.
D. A gross discount of twenty percent (20%) shall he held in a reserve account
(Reserve) by AFC from the collection of each invoice. SELLER however shall be
entitled to a rebate (gross discount less net discount) regarding each invoice,
which shall be deducted from said gross discount, if such invoice amount is paid
within 90 days by said account debtor(s), subject to retention by AFC of such
amount as AFC deems appropriate to secure all of SELLER's obligations to AFC.
The net discount shall be computed as follows:
NET DISCOUNT:
Prime Rate plus one and three quarter percent (1.75%) on net funds employed.
This portion of the net discount shall be deducted from the Reserve on the last
day of each calendar month during the term of this agreement and shall be based
on a three hundred and sixty (360) day year. (For the purpose of this Agreement,
the Prime Rate is as published every day in the Wall Street Journal. Should the
Prime Rate be published in more than one section of the Wall Street Journal, the
rate that is highest will be valid. Should the published Prime Rate change from
the previous day, the Prime Rate of this Agreement so shall change to match the
published rate, effective that day.) Additional discount of one and three
quarter percent (1.75%) for the initial thirty (30) days or a part thereof per
invoice amount, and one and six tenths percent (1.6%) for each subsequent thirty
(30) day period or a part thereof, per invoice amount. Redirected payment fee:
If a payment for any purchased invoice is sent by an account debtor directly to
SELLER, a fee equal to fifteen percent (15%) of the invoice amount shall be
deducted by AFC from the reserve account of SELLER, unless the payment is sent
to AFC, in its original form, within five (5) business days. This fee is not a
penalty, but is liquidated damages, to compensate AFC for additional
administrative and collection expenses, interest costs and other damages
resulting from such action. SELLER agrees and acknowledges that fifteen percent
15% is a fair estimate of those damages. Annual facility fee of one percent 1%
of the account credit limit. For each funding request less than five thousand
dollars ($5,000) a charge of two hundred and fifty dollars ($250) will be
deducted from the reserve account of SELLER. Should SELLER request an expedited
funding, which is defined as an advance taking place on the same day as the
invoices are presented, a charge equal to the greater of one half of one percent
(.5%) of the amount presented for financing, or two hundred and fifty dollars
($250) will be deducted from the reserve account of SELLER.
TERM:
The term of this agreement shall be for twelve (12) months from the date of the
initial advance with a minimum average net funds employed balance equal to
twenty percent (20%) of the account credit limit for each calendar month.
($200,000) If the minimum average daily account balance is not met in any month,
AFC will charge additional fees to be deducted from the reserve account. The
additional fees will be calculated by deducting the average daily balance in any
calendar month and subtracting it from the minimum average daily account balance
as set forth in this agreement. The result, if a positive number, will be
multiplied by the net discount calculated by assuming this amount was
outstanding and accruing fees for each day of the calendar month, and will be
deducted from the Reserve. This term shall renew automatically in twelve (12)
month increments unless a written request for termination is received by AFC,
sent certified mail, return receipt requested, at least thirty (30) days prior
to the renewal date. Should SELLER request a termination of this agreement at
any time and for any reason, SELLER acknowledges that AFC has the right to
collect minimum monthly fees by assuming that the minimum average daily balance
was outstanding and accruing fees for each month remaining in the term, not as a
penalty, but as liquidated damages, to compensate AFC for loss of profits,
recovery of expenses and other damages resulting from such
2
premature termination. SELLER agrees and acknowledges that it would be very
difficult or impossible to calculate such amounts, and that full payment of the
minimum monthly fee for each month in the remainder of the term is a fair
estimate of those damages. For any portion of any month remaining in the term,
the minimum monthly obligation shall be prorated accordingly.
All checks received by AFC will be credited on the actual date of receipt. The
collection period, regarding each specific invoice, shall he calculated by
counting the days from the date of each ADVANCE through and including five (5)
business days after the date upon which the total monies collected from said
account debtor(s), is equal to or greater than the sum of the ADVANCE and the
net discount (gross discount less rebate). AFC shall remit to SELLER its
contingency reserve (all sums collected in excess of a sum equal to the net
discount and advance) regarding each invoice, providing SELLER is not in default
or breach of this agreement.
E. Should any of the above warranties expressed by SELLER be inaccurate, or if a
material adverse change occurs in SELLER's financial or other condition, or AFC
believes the prospect of payment or performance of this agreement is impaired,
and AFC declares SELLER to be in default of this agreement, fees shall accrue at
one and one half times the contractually negotiated rate until such time as AFC,
at its sole discretion, declares the default to be cured. Should any of the
above warranties expressed by SELLER be inaccurate, and it becomes necessary for
AFC to utilize an attorney to enforce its rights against SELLER, SELLER agrees
that such attorneys' fees shall be borne by SELLER. This includes, but is not
limited to, AFC's attorney's fees and, AFC's legal expenses, whether or not
there is a lawsuit, associated with the voluntary or involuntary bankruptcy of
SELLER or the principal(s) of SELLER, including efforts to modify or vacate any
automatic stay or injunction, petitions for the use of cash collateral,
reorganization of SELLER, fees incurred by AFC in the collecting of an account
for which there has been a breach of any representations, warranties or
covenants as set forth in this agreement, or a partial or total failure or delay
in payment by an account debtor for any reason, including insolvency,
bankruptcy, or the financial inability to pay, or other actions, including
appeals, on behalf of SELLER or AFC. Seller also will pay any court costs, in
addition to all other sums provided by law.
F. SELLER hereby authorizes AFC, at its sole discretion, and on prior written
notice to SELLER, to set funding limits for each account debtor. AFC may, in its
sole discretion, elect to reduce the advance percentage of any account debtor as
part of its credit evaluation of the account debtor, AFC shall have the right in
its sole discretion after 90 days from the invoice date, or if any of the
representations, warranties or covenants are inaccurate, and reasonable notice
to SELLER, to demand payment from SELLER, for any unpaid invoices sold, assigned
and transferred to AFC by SELLER, pursuant to the terms and conditions hereof,
or to proceed against SELLER or against any account debtor(s) for the collection
or offset of any unpaid invoice or amount due. SELLER agrees that in the event
an invoice goes past 90 days of the invoice date, or if any account debtor
asserts at any time any deduction, dispute, contingency, offset, or counterclaim
with respect to any invoice. SELLER shall remunerate AFC with additional
verified invoices or financial reimbursement for the amount advanced with
respect to a particular invoice, plus all accrued fees with respect to a
particular invoice, plus an adjustment fee of one percent (1%) of the amount of
the invoice. As security for the payment of AFC's fees and other charges and for
the payment of advances made by AFC to or on behalf of SELLER. SELLER hereby
grants a security interest in and to the following described property, whether
now or hereafter owned or existing, leased, consigned by or to, acquired by
Seller and regardless of where located: (1) All accounts, deposit accounts,
contract rights, chattel paper, general intangibles, instruments, documents,
letters of credit, bankers acceptances, drafts, claims, causes of action, rights
in and under insurance policies, rights to tax refunds and inventory and all
proceeds of the foregoing, including Seller's rights to any returned or rejected
goods; (2) All Seller's rights to monies, refunds, and other amounts, due from
whatever source, including Seller's right of offset and recoupment; (3) All
goods, including but not limited to equipment, farm products, machinery,
furniture, furnishings, fixtures, tools, supplies, motor vehicles, and (4) All
proceeds of the foregoing, whether due to voluntary or involuntary disposition,
including insurance proceeds and reserving the right to file and prosecute
lawsuits, pertaining thereto, in SELLER's or AFC's name or otherwise; (5) All
books and records relating to the same; (6) Seller irrevocably appoints Buyer
and any of Buyer's officers as Seller's attorney to execute such financing
statements, continuations and amendments and to take such other actions as Buyer
deems appropriate to perfect and continue the perfection of the security
interest granted hereunder.
G. AFC warrants that it will use its best efforts to collect the amounts due
under this Agreement, and SELLER agrees that AFC may, in its sole discretion,
settle, compromise, or otherwise accept payment of less than the full
3
amount, if in its judgment such action is necessary to effect collection. SELLER
agrees that the amount of such reduction shall be applied as a reduction of the
contingency reserve.
H. If it should become necessary for AFC to enforce its rights against the
account debtor(s) SELLER agrees that AFC may apply a maximum sum equal to the
total unpaid contingency reserve of SELLER, to compensate AFC for its attorney's
fees therefore. AFC may correct patent errors herein or in any BULK Assignment
Schedule executed by SELLER and fill in blanks. Any provision hereof contrary
to, prohibited by or invalid under applicable laws or regulations shall be
inapplicable and deemed omitted herefrom, but shall not invalidate the remaining
provisions hereof. The laws of the State of California shall govern the
validity, interpretation, enforcement and effect of this agreement, and SELLER
hereby consents to the exclusive jurisdiction of all courts in the County of San
Mateo, in the State of California. AFC AND SELLER EACH HEREBY WAIVE ITS
RESPECTIVE RIGHT TO TRIAL BY JURY OF ANY CONTROVERSY OR CLAIM. SELLER
acknowledges receipt of a true copy and waives acceptance hereof. If the SELLER
is a corporation, this agreement is executed pursuant to the authority of its
Board of Directors. AFC and SELLER as used in this agreement include the heirs,
executors, or administrators, successors or assigns of those parties. The
obligations of SELLER and guarantors herein shall be joint and several. AFC is
hereby authorized to obtain periodic Experian credit reports concerning all
signatories hereof. AFC may inspect and audit SELLER's and guarantor's books and
records during normal business hours, the actual cost of which shall be
reimbursed by SELLER to AFC.
I. SELLER agrees to reimburse AFC for any of its out-of-pocket incidental costs
and expenses, including but not limited to costs for wire transfers of funds,
credit reports, delivery services, lockbox maintenance, document searches,
postage, quarterly on site account auditing fees (not to exceed five hundred and
seventy five dollars ($575) per day, maximum of three (3) days) per audit, and
other services. Quarterly off site auditing consists of auditing of the accounts
receivable and financial statements, bank statements, accounts
receivable/payable aging reports, and any other reports that may be required to
provide AFC with information necessary to the audit process. Failure by SELLER
to provide any documentation as stipulated in Paragraph C, Number 8 of this
Agreement will result in SELLER being liable for the maximum charge for on site
auditing during that quarter, whether an on site audit has taken place or not.
Should SELLER provide all documentation as stipulated in Paragraph C. Number 8
of this Agreement, an on site audit will not take place unless the SELLER is
declared in default by AFC, or there is a material deterioration in the
performance of SELLER. For purposes of this agreement, each quarter will be each
ninety (90) day period of time from the date of the initial advance. Should
SELLER wish to dispute any action taken by AFC at any time during the term of
this agreement, SELLER must request a review in writing of the action within
ninety (90) days of its occurrence. Should SELLER fail to submit its request for
a review within ninety (90) days, SELLER waives any right to have the action
reviewed. SELLER authorizes AFC to initiate any credits to my account(s), or
debits from my account(s) via wire transfer or Automated Clearing House (ACH)
transfer for the purpose of making advances, or to disburse other bindings, or
to correct any errors that may have been made in connection with the transfer of
any funds into my account(s).
J. This agreement contains the entire agreement between the parties with respect
to the contemplated transactions, and it may not be modified or any of its terms
waived, except by an instrument in writing signed by the party or parties to be
charged, and no collateral representations, whether oral or written, shall
survive execution of this agreement.
IN WITNESS, WHEREOF, the parties have duly executed this ACCOUNTS RECEIVABLE
FINANCING AGREEMENT this 12th day of September 2001 at Burlingame, California.
ALLIANCE FINANCIAL CAPITAL, INC. (SELLER) Health & Nutrition Systems
International, Inc.
---------------------------------
By: By: /s/ Steven Pomerantz
------------------------------ ----------------------------------------
(Signature) (Signature)
Its: Its: CEO
----------------------------- ------------------------------------
(Title) (Title)
Witness: /s/ Albert Dugan
----------------------------------
4
VALIDITY INDEMNIFICATION
------------------------
Re: Health & Nutrition Systems International, Inc. ("SELLER") and Alliance
Financial Capital, Inc. (AFC) Accounts Receivable Financing Agreement and
related documents of even date.
The undersigned are the officers of SELLER and in order to induce AFC to extend
factoring accommodations to the "SELLER", pursuant to the Agreements with the
"Seller", the undersigned hereby warrants, represents and promises to AFC as
follows:
The undersigned acknowledges and agrees that "Seller" has made the following
representations, warranties and promises to AFC:
1. All "Seller" accounts which have been or will be reported to AFC by or
on behalf of the "Seller" under the Agreements and in which AFC holds
a security interest ("Accounts"), whether such reports are in the form
of accounts receivable aging reports, invoices, transmittals, shipping
documents, collateral reports or financial statements, are genuine and
in all respects what they purport to be, represent bona fide
obligations of "Seller's" customers arising out of the sale and
completed delivery of merchandise and or services sold by the "Seller"
(the Sold Goods/Services") in the ordinary course of its business and
in accordance with and in full and complete performance of customer's
(each, and "Account Debtor") order therefore.
2. All original checks, drafts, notes, letters of credit, acceptances and
other proceeds of the Accounts, received by the "Seller," will be held
in trust for AFC and will immediately be forwarded to AFC upon
receipt, in kind, in accordance with the terms of the Agreements.
3. None of the Accounts are or will be the subject of any offsets,
defenses or counterclaims of any nature whatsoever, other than those
offsets, defenses or counterclaims disclosed in writing by SELLER and
the undersigned, prior to the sale to AFC of the invoice(s) subject to
the offsets, defenses or counterclaims, and "Seller" will not in any
way impede or interfere with the normal collections and payment of the
Accounts. The disclosure of every offset, defense or counterclaim must
state in writing the maximum potential dollar value of the offset,
defense or counterclaim that could be taken by an account debtor
against an invoice or series of invoices prior to submission for sale.
4. "Seller" is presently solvent. "Solvent" means "Seller's" assets
exceed its liabilities and "Seller" is able to pay its debts as they
come due.
5. The Sold Goods/Services are and will he up to the point of sales, the
sole and absolute property of the "Seller," and the Accounts and Sold
Goods Services will be free and clear of all liens and security
interests, except the security interest of "Seller."
6. The due dates of the Accounts will be as reported to AFC by or on
behalf of the "Seller."
7. "Seller" will promptly report to AFC all disputes, rejections, returns
and resale of Sold Goods/Services and all credits allowed by the
"Seller" upon all Accounts.
8. All reports that AFC receives from the "Seller," including BUT NOT
LIMITED TO those concerning its Accounts and its inventory, will be
true and accurate except for minor inadvertent errors.
9. "Seller" will not sell its inventory except in the ordinary course of
business.
10. "Seller" understands and acknowledges that in the event a bankruptcy
petition is filed by or against "Seller", "Seller" cannot sell to AFC
any receivables without first obtaining bankruptcy court approval.
"Seller" agrees to immediately notify AFC if' "Seller" files or has
filed against it any petition for relief under bankruptcy laws.
"Seller" agrees it will not sell any receivables or accept any advance
from AFC after Seller becomes subject to any bankruptcy law without
first having obtained bankruptcy court approval on terms satisfactory
with Purchaser.
The undersigned hereby indemnities AFC and holds AFC harmless (continuously and
irrevocable for so long as the "Seller" is indebted to AFC), from any direct or
indirect damage or loss including any costs (including reasonable attorney's
fees and expenses) incurred by AFC in relation to such damage or loss which AFC
may sustain as a result of the breach of any of the above representations,
warranties or promises or of Alliance Financial Capital Inc.'s reliance (whether
or not such reliance was reasonable) upon any misstatement (whether or not
intentional), fraud, deceit, or criminal act on the part of any officer,
employee, or agent of the "Seller." The undersigned also agrees to reimburse AFC
for any costs (including reasonable attorney's fees and expenses) incurred by
AFC in the enforcement of this Validity Indemnification, provided AFC prevails
in its dispute against the Validity Indemnitors. All such sums will be paid by
the undersigned to AFC on demand. Nothing herein contained shall be in any way
impaired or affected by any change in or amendment of any of the Agreements.
This agreement shall be binding upon the undersigned, and the undersigned's
personal representatives, successors, and assigns. The laws of the State of
California shall govern the validity, interpretation, enforcement and effect of
this agreement, and SELLER hereby consents to the exclusive jurisdiction of all
courts in the County' of San Mateo, in the State of California.
Upon receipt of a certified letter, return receipt requested, notifying AFC that
the employment with the SELLER of any of the undersigned has been terminated for
any reason, AFC will immediately suspend funding. The responsibilities of the
undersigned relative to this indemnification will extend only to invoices
purchased up to the date of the receipt of this letter.
IN WITNESS WHEREOF, the parties have duly executed this VALIDITY INDEMNIFICATION
this 6th day of September, 2001 at Burlingame, California.
Christopher Tisi Steven Pomerantz
- ----------------------------------- -----------------------------------
(Print Name of Validity Indemnitor) (Print Name of Validity Indemnitor)
/s/ Christopher Tisi /s/ Steven Pomerantz
- ----------------------------------- -----------------------------------
(Signature of Validity Indemnitor) (Print Name of Validity Indemnitor)
- ----------------------------------- -----------------------------------
(Social Security Number) (Social Security Number)
- ----------------------------------- -----------------------------------
(Driver's License Number) (Driver's License Number)
2