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 June 30, 2002
--------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission File No. 000-29245
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
----------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida
(State or other jurisdiction of incorporation or organization)
65-0452156
(I.R.S. Employer Identification Number)
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: 3,632,813 shares of Common Stock as
of August 2, 2002.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
HEALTH AND NUTRITION SYSTEMS INTERNATIONAL, INC.
INDEX
Page
----------------
Facing Sheet........................................................................... Cover Page
Index.................................................................................. ii
Part I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheet
June 30, 2002 ........................................................... 1
Condensed Statements of Operations
Three months and six months ended June 30, 2002 and
June 30, 2001............................................................ 2
Condensed Statements of Cash Flows
Six months ended June 30, 2002 and June 30, 2001......................... 3
Notes to Condensed Financial Statements....................................... 4 - 6
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations................................................ 6 - 12
Part II - Other Information
Item 1. Legal Proceedings........................................................ 12 -13
Item 2. Changes in Securities.................................................... 13
Item 3. Defaults Upon Senior Securities.......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders...................... 13
Item 5. Other Information........................................................ 13
Item 6. Exhibits and Reports on Form 8-K......................................... 14
Signature.............................................................................. 15
ii
PART I
ITEM 1. FINANCIAL STATEMENTS.
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC
CONDENSED BALANCE SHEET
(UNAUDITED)
-----------
ASSETS
------
JUNE 30, 2002
-------------
Current assets:
Cash $ 10,523
Accounts receivable, net 277,131
Inventory 463,520
Prepaids and other current assets 63,457
-----------
Total current assets 814,631
-----------
Property and equipment, net 53,125
-----------
Other assets, net 31,926
-----------
Total other assets 31,926
-----------
Total assets $ 899,682
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 847,243
Accrued expenses 66,594
Capital leases, current portion 6,317
Notes payable, current portion 271,155
-----------
Total current liabilities 1,191,309
-----------
Notes payable, less current portion 331,165
-----------
Total liabilities 1,522,474
-----------
Stockholders' deficit:
Common stock, $ 0.001 par value, authorized 30,000,000
shares; 3,632,813 shares issued and outstanding 3,630
Additional paid-in capital 834,812
Accumulated deficit (1,461,234)
-----------
Total stockholders' deficit (622,792)
-----------
Total liabilities and stockholders' deficit $ 899,682
===========
See accompanying notes to condensed financial statements.
1
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue $ 1,227,433 $ 1,435,227 $ 2,292,337 $ 2,940,311
Cost of sales 326,683 457,980 639,074 957,024
----------- ----------- ----------- -----------
Gross profit 900,750 977,247 1,653,263 1,983,287
----------- ----------- ----------- -----------
Operating expense:
General and administrative expense 434,274 621,580 769,508 1,195,804
Advertising and promotion 308,298 883,217 675,910 1,226,311
Depreciation and amortization 7,617 9,176 15,233 17,437
----------- ----------- ----------- -----------
Total operating expense 750,189 1,513,973 1,460,651 2,439,552
----------- ----------- ----------- -----------
Income (loss) from operations 150,561 (536,726) 192,612 (456,265)
----------- ----------- ----------- -----------
Other income (expense):
Interest income
-- -- -- 1,713
Interest expense (11,775) (6,197) (13,379) (14,448)
----------- ----------- ----------- -----------
Total other income (expense) (11,775) (6,197) (13,379) (12,735)
----------- ----------- ----------- -----------
Income before income taxes 138,786 (542,923) 179,233 (469,000)
----------- ----------- ----------- -----------
Benefit (provision) for income taxes -- 74,897 -- 42,662
Net (loss) income $ 138,786 $ (468,026) $ 179,233 $ (426,338)
=========== =========== =========== ===========
Net income (loss) per share - basic $ 0.04 $ (0.13) $ 0.05 $ (0.12)
=========== =========== =========== ===========
Net income (loss) per share - diluted $ 0.04 $ (0.13) 0.05 $ (0.12)
=========== =========== =========== ===========
Weighted average number of shares - basic 3,632,813 3,605,813 3,632,813 3,605,813
=========== =========== =========== ===========
Weighted average number of shares - diluted 3,632,813 3,605,813 3,632,813 3,605,813
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
-----------
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
--------- ---------
Net cash provided by (used in) operating activities $ 11,905 $ (93,104)
--------- ---------
Cash flows from investing activities:
Investment in trademarks -- (25,000)
Purchases of property and equipment -- (4,531)
--------- ---------
Net cash used in investing activities -- (29,531)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments on) notes payable (68,834) 76,666
Repayments on capital leases (14,480) (10,913)
Repayments to related parties -- (213)
--------- ---------
Net cash provided by (used in) financing activities (83,314) 65,540
--------- ---------
Net decrease in cash (71,409) (57,095)
Cash, beginning of period 81,932 125,585
--------- ---------
Cash, end of period $ 10,523 $ 68,490
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Conversion of accounts payable to notes payable $ 700,000 $ --
========= =========
See accompanying notes to condensed financial statements.
3
HEALTH AND NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
------------------------------------------------------------------------
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,
2001. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002.
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, 2001, found in the Company's Form 10-KSB.
NOTE 2 - NOTES PAYABLE
- ----------------------
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. The loan was
personally guaranteed by a former officer of the Company. This loan was repaid
on January 12, 2002.
On January 15, 2002 the Company received a short-term loan from a bank in the
amount of $23,400. Interest accrued at a rate of 4.75% per annum and was
collateralized by a certificate of deposit in the amount of $23,400 owned by a
former officer of the Company who is also a member of the Board of Directors.
The loan due on July 15, was payable in monthly installments of $4,167. As of
June 30, 2002, the balance due was $2,567. This loan was repaid in July, 2002.
On April 11, 2002, the Company entered into an agreement with Garden State
Nutritionals (GSN), the sole manufacturer of its products, to repay $700,000
owed to them as of the date of the agreement and delivered a promissory note to
GSN for the amounts owed to them. The repayment schedule requires equal
quarterly payments, without interest, over the next eight quarters, starting
June 1, 2002. In connection with this agreement, the Company granted a blanket
second priority lien on the Company's assets to GSN under a Security Agreement,
4
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 occurrence of any of the following events shall constitute
a default under this promissory note: (i) the failure of the Company to pay when
due any payment of principal and such failure continues for fifteen (15) days
after Lender notifies the Company in writing; (ii) if the Company files for or
is granted certain relief pursuant to or within the meaning of the United States
Bankruptcy Code or any other federal or state law relating to insolvency or
relief of debtors (a "Bankruptcy Law") and (iii) Christopher Tisi ceases to be
President and Chief Executive Officer of the Company (unless a replacement
reasonably acceptable to Lender is obtained within thirty days).
This debt has been recorded as a note payable with an imputed interest rate of
9% and with the interested calculated over the term in the amount of $73,747.
The Cost of Goods was discounted by $73,747 due to the fact that GSN is
providing an interest-free note, which equals a discount of the full amount of
such interest. GSN granted the Company a waiver on the quarterly payment due
June 1, 2002 in the amount of $87,500. This amount shall be due and payable on
March 1, 2004.
Also on April 11, 2002, the Company entered into an exclusive manufacturing
agreement with GSN pursuant to which GSN provided the Company with a $450,000
line of credit, on current invoices, with 60-day terms.
NOTE 3 - FACTORING AGREEMENTS
- -----------------------------
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 factored receivables. 15% of
the face of the factored receivables will be reserved. Fees include 2.125% of
each purchased receivable and a funds usage fee of 2% over the prime rate. 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 first lien on Company assets. The agreement is also
secured by a personal guarantee by the President/Chief Executive Officer.
NOTE 4 - LEGAL MATTERS
- ----------------------
In 2000, the Company sued 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 cyberpiracy. The former director
and KMS counterclaimed alleging a breach of distribution agreement by the
Company. In December 2000, this counter suit was dismissed as inappropriate for
adjudication in a federal court. On April 26, 2002, a summary judgment motion
was file and was denied.
The court held a pretrial conference on July 26, 2002, and the matter is
scheduled for trial in mid-August 2002.
In December 2000, KMS sued the Company and three of its officers and directors,
in state court alleging that the Company breached a distribution agreement with
KMS. The suit is in its early stages and management cannot assess the likely
5
outcome of the litigation or determine if the outcome would materially impact
the Company's financial condition or results of operations. The Company has
filed a counterclaim seeking declaratory relief with respect to the validity of
the distribution agreement.
The Company intends to vigorously prosecute its action against the former
officer and director of the Company and KMS and to vigorously defend the actions
against it by KMS.
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 of results of operations.
NOTE 5 - GOING CONCERN
- ----------------------
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company sustained significant
losses during the year ended December 31, 2001. In addition, the Company had
negative cash flows from operations and adverse liquidity ratios.
The Company's continuation is dependent upon its ability to control costs and
attain a satisfactory level of profitability with sufficient financing
capabilities or equity investment.
There is 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 form the outcome of
this uncertainty.
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-SB filed with the Securities and Exchange Commission. We do not
undertake any obligation to update any such factors or to publicly announce the
result of any revision to any of the forward looking statements contained herein
to reflect future events or developments.
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-SB filed
with the Securities and Exchange Commission.
6
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.
Cost of sales includes outbound freight cost. Included in the net sales in the
accompanying financial statements for the six months ended June 30, 2002 and
2001 are returns and allowances and sales discounts in the amounts of $241,490
and $124,219 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
We continued to implement the Company's strategic plan to diversify our product
line by developing and promoting new products. 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.
7
NET SALES
Net sales for the three months ended June 30, 2002 were $1,227,433, a decrease
of $207,794 or 14%, as compared to net sales of $1,435,227 for the three months
ended June 30, 2001. The decrease was primarily due to a decrease in sales to
several of our customers. For the three months ended June 30, 2002, the revenues
with respect to our largest vendors were as follows: (i) Eckerd accounted for
$84,274 or 7% of sales: (ii) GNC accounted for $296,933 or 24% of sales; (iii)
Rite Aid accounted for $102,443 or 8% of sales; (iv) Walgreens accounted for
$235,755 or 19% of sales; and CVS accounted for approximately $62,316 or 5% of
sales. No other account represented more than 5% of sales during the quarter.
Net sales for the six months ended June 30, 2002 were $2,292,337, a decrease of
$647,974 or 22%, as compared to net sales of $2,940,311 for the six months ended
June 30, 2001. The decrease was primarily due to the economic slowdown during
the three months ended March 31, 2002 during which sales were down 29% from the
three months ended March 31, 2001. The sales in the three months ended June 30,
2002 were down only 14%, as mentioned above. GNC sales increased $287,853 for
the six months ended June 30, 2002, compared to six months ended June 30, 2001.
Our largest customers sales were as follows for the six months ended June 30,
2002: (i) Rite Aid accounted for $212,868 or 9% of sales; (ii) GNC accounted for
$644,566 or 28% of sales; (iii) Walgreens accounted for $404,358 or 18% of
sales; (iv) Eckerd accounted for $165,986 or 7% of sales, (v) CVS accounted for
$132,633 or 6% of sales; and (vi) Target accounted for $119,996 or 5% of sales.
No other account represented more than 5% of sales during the six months ended
June 30, 2002.
COST OF SALES
Cost of sales for the three months ended June 30, 2002 was $326,683 or 27% of
net sales as compared to $457,980 or 32% of net sales for the three months ended
June 30, 2001. The cost of sales was reduced in the amount of $73,747, which
represents imputed interest on the Company's note with Garden State. The cost of
sales as a percentage of net sales without the $73,747 discount was 33%.
Cost of sales for the six months ended June 30, 2002 was $639,074 or 28% of net
sales as compared to $957,024 or 33% of net sales for the six months ended June
30, 2001. The cost of sale was reduced in the amount of $73,747, which
represents imputed interest on the Company's note with Garden State. The cost of
sales as a percentage of net sales without the $73,747 discount was 31%.
GROSS PROFIT
Gross profit for the three months ended June 30, 2002 was $900,750 a decrease of
$76,497 or 8% compared to gross profit of $977,247 for the three months ended
June 30, 2001. As a percent of net sales, gross profit was 73% for the three
months ended June 30, 2002 and 69% without the $72,747 reduction, compared to
68% for the three months ended June 30, 2001. The increase in gross profit was
primarily due to the decrease in the cost sales because of the reduction
attributable to imputed interest on the Garden State note mentioned above.
8
Gross profit for the six months ended June 30, 2002 was $1,653,263 a decrease of
$330,024 or 17%, compared to gross profit of $1,983,287 for the six months ended
June 30, 2001. As a percent of net sales, gross profit was 72% for the six
months ended June 30, 2002, compared to 67% for the six months ended June 30,
2001. The decrease in gross profit dollars was primarily due to the decrease in
cost of goods sold because of the reduction attributable to imputed interest on
the Garden State note mentioned above.
OPERATING EXPENSES
Operating expenses were $750,189 for the three months ended June 30, 2002,
representing a decrease of $763,784, compared to $1,513,973 for the three months
ended June 30, 2001. As a percent of net sales, operating expenses were 61% for
the three months ended June 30, 2002, compared to 105% for the three months
ended June 30, 2001. The general and administrative expenses were $434,274 for
the three months ended June 30, 2002 compared to $621,580 for the three months
ended June 30, 2001 or a decrease of $187,306. The advertising and promotion
expenses for the three months ended June 30, 2002 was $308,298 compared to
$883,217 for the three months ended June 30, 2001 or a decrease of $547,919.
Operating expenses were $1,460,651 for the six months ended June 30, 2002,
representing a decrease of $978,901, compared to $2,439,552 for the six months
ended June 30, 2001. As a percent of net sales, operating expenses were 64% for
the six months ended June 30, 2002, compared to 83% for the six months ended
June 30, 2001.The general and administrative expenses were $769,508 for the six
months ended June 30, 2002 compared to $1,195,804 for the six months ended June
30, 2001 or a decrease of $426,296. The advertising and promotion expenses for
the six months ended June 30, 2002 were $675,910 compared to $1,226,311 for the
six months ended June 30, 2001 or a decrease of $550,401.
NET PROFIT (LOSS) FROM OPERATIONS
Net profit from operations was $150,561 for the three months ended June 30,
2002, compared to a net loss from operations of $(536,726) for the three months
ended June 30, 2001. Net profit was $138,786 or $0.04 per share for the three
months ended June 30, 2002, as compared to a net loss of $(468,026) or $(0.13)
per share for the three months ended June 30, 2001. Net profit from operations
was $192,612 for the six months ended June 30, 2002, as compared to a net loss
from operations of $(456,265) for the six months ended June 30, 2001. Net profit
was $179,233 or $0.05 per share for the six months ended June 30, 2002, as
compared to a net loss of $(426,338) or $(0.12) per share for the six months
ended June 30, 2001. The increase in profit for the three and six months ended
June 30, 2002 was due primarily due to the decrease in operating expenses.
LIQUIDITY & CAPITAL RESOURCES
At June 30, 2002, the Company had a working capital deficit of ($376,378)
compared to a $7,059 working capital surplus at June 30, 2001. At March 31,
2002, the Company had a working capital deficit of ($504,246) compared to
($376,378) at June 30, 2002. This is an improvement of $127,568 in the three
months ended June 30, 2002 compared to the three months ended March 31, 2002.
9
Net cash provided by operating activities for the six months ended June 30, 2002
was $11,905 compared to $(93,104) used in operating activities for the six
months ended June 30, 2001. The resulting increase in cash is primarily due to a
net profit realized during the six months ended June 30, 2002, due to cost
cutting measures undertaken by management.
Cash used in investing activities was $ 0 for the six months ended June 30, 2002
compared to $(29,531) used in investing activities for the six months ending
June 30, 2001. Cash used for investing activities in year 2001 was mainly due to
the purchase of the Acutrim trademark.
Net cash used in financing activities for the six months ended June 30, 2002 was
$(83,314) compared to net cash provided by financing activities of $65,540 for
the six months ended June 30, 2001. During the six months ended June 30, 2002,
the Company repaid note payments of $68,834 and capital lease payments of
$14,480. During the six months ended June 30, 2001, the Company received a
$100,000 line of credit and repaid $23,334 on the line of credit.
Our factoring arrangement provides us with cash at the time of shipment of the
product. Absent a factoring arrangement, we would be required to carry these
accounts receivable for approximately 30 to 90 days. Other than as described
below, factoring is the only available financing alternative available to us at
this time.
On April 11, 2002, the Company entered into an agreement with Garden State
Nutritionals (GSN), sole manufacturer, to repay $700,000 owed to GSN as of the
date of the agreement. The repayment schedule requires equal quarterly payments,
without interest, over the next eight quarters, 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 occurrence of any of the following events shall constitute a default
under this promissory note: (i) the failure of Company to pay when due any
payment of principal and such failure continues for fifteen (15) days after
Lender notifies the Company in writing; (ii) the Company files for or is granted
certain relief pursuant to or within the meaning of the United States Bankruptcy
Code or any other federal or state law relating to insolvency or relief of
debtors (a "Bankruptcy Law") and (iii) Christopher Tisi ceases to be the
President and Chief Executive Officer of the Company (unless a replacement
reasonably acceptable to Lender is obtained within thirty days)
The GSN debt has been recorded as a note payable with an imputed interest rate
of 9% per anum 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. GSN granted the Company a waiver on the
first quarterly payment due June 1, 2002 in the amount of $87,500. This amount
shall be due and payable on March 1, 2004.
Also, on April 11, 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.
10
During 2001, we were able to increase our credit limits, as well as improve our
payment terms, with certain vendors for 2002.
COMMITMENTS AND CONTINGENCIES
Regulatory Matters - Our products Fat Cutter(TM), ThinTab(R) and Carbolizer(TM),
contain ephedra, also known as "Ma Huang," an herb that contains naturally
occurring ephedrine. These products represented approximately 29% of our gross
revenue for the six months ended June 30, 2002. Ephedra containing products have
been the subjects 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 Fat Cutter(TM), ThinTab(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 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
The Company, like other marketers of products that are intended to be ingested,
faces the inherent risk of exposure to product liability claims in the event
that the use of our products results in injury. The Company maintains product
liability insurance coverage of $10,000,000. It may become increasingly
difficult to obtain and maintain product liability insurance coverage for
products containing ephedra at premiums that the Company can afford.
11
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.
GOING CONCERN QUALIFICATION
The Company's condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company sustained significant
losses during the year ended December 31, 2001. In addition, the Company had
negative cash flows from operations and adverse liquidity ratios.
The Company's continuation is dependent upon its ability to control costs and
attain a satisfactory level of profitability with sufficient financing
capabilities or equity investment.
There is 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 form the outcome of
this uncertainty.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
J.C. Herbert Bryant, III and KMS-Thin Tab 100, Inc.
In 2000, the Company sued 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 cyberpiracy. The former director
and KMS counterclaimed alleging a breach of distribution agreement ay the
Company. In December 2000, this counter suit was dismissed as inappropriate for
adjudication in a federal court.
In December 2000, KMS sued the Company and three of its officers and directors,
in state court alleging that the Company breached a distribution agreement with
KMS. The suit is in its early stages and management cannot assess the likely
outcome of the litigation or determine if the outcome would materially impact
the Company's financial condition or results of operations.
On April 26, 2002, a summary judgment motion was filed and was denied. The court
held a pretrial conference on July 26, 2002, and the matter is scheduled for
trial in mid-August 2002. The Company intends to vigorously prosecute its action
against Bryant and KMS and to vigorously defend the actions against it by Bryant
and KMS.
In July 2002, the Company sued KMS and Herb Bryant in the Circuit Court of the
Fifteenth Judicial Circuit in Palm Beach County, Florida for conversion of
certain of the Company's intellectual property, unfair competition, injury to
business reputation, trespass to chattel defamation, and breach of fiduciary
duties arising out of actions taken by Mr. Bryant while he was an officer and
director of the Company.
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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 of results of operations.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The annual meeting of our shareholders was held on June 24, 2002. Of the
3,632,813 shares of common stock outstanding and entitled to vote at the
meeting, 2,730,175 shares were represented in person or by proxy.
ELECTION OF DIRECTORS
On the proposal to elect Chris Tisi, Ted Alflen, Darryl Green and Steve
Pomerantz as directors until the 2003 Annual Meeting of Shareholders and until
their successors are duly elected and qualified, the nominees for Director
received the number of votes as set forth below:
For Withheld
-------- --------
Chris Tisi 2,477,091 253,084
Ted Alflen 2,475,591 254,584
Darryl Green 2,477,091 253,084
Steve Pomerantz 2,477,091 253,084
Ratification Of The Appointment Of Daszkal Bolton LLP As Independent Certified
Public Accountants.
On the proposal to ratify the appointment of Daszkal Bolton LLP as the Company's
independent auditors, 2,446,891 shares were voted for the proposal, 2,500 shares
abstained from the vote. The affirmative vote of the holders of a majority of
the total votes cast was required to approve this proposal. Based on the vote,
the proposal was approved by the shareholders.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index and Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibit 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 during the three months ended June 30, 2002:
Form 8K filed on April 29, 2002 reporting an Item 5 Event.
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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: August 12, 2002 Health & Nutrition Systems International, Inc.
By: /s/ Chris Tisi
------------------------------------
Chris Tisi
Interim Chairman of the Board,
Chief Executive Officer and President
(Principal executive officer)
15
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 Quarterly Report of Health & Nutrition Systems
International, Inc. (the "Company") on Form 10-Q for the period ending June 30,
2002 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Chris Tisi, Interim Chairman of the Board and 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/ Chris Tisi
- ---------------------------------
Chris Tisi
Interim Chairman of the Board and
Chief Executive Officer
August 12, 2002
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-Q for the period ending June 30,
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)
August 12, 2002