UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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[ ] 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.
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(Exact name of Small Business Issuer as specified in its Charter)
Florida 65-0452156
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3750 Investment Lane, Suite 5, West Palm Beach, Florida 33407
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(Address of principal executive offices)
(561) 863-8446
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(Issuer's telephone number)
(Former name, former address and former fiscal year,
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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 May 11, 2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
HEALTH AND NUTRITION SYSTEMS INTERNATIONAL, INC.
INDEX
Page
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Facing Sheet Cover Page
INDEX.............................................................................................................i
PART I - FINANCIAL INFORMATION....................................................................................1
Item 1. Financial Statements............................................................................1
Condensed Statements Of Operations (Unaudited) for the three months ended
March 31, 2001 and 2000.........................................................................2
Condensed Statements Of Cash Flows (Unaudited) for the three months ended
March 31, 2001 and 2000.........................................................................3
Notes To Condensed Financial Statements.........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................6
PART II - OTHER INFORMATION.......................................................................................7
Item 1. Legal Proceedings...............................................................................7
Item 2. Changes in Securities and Use of Proceeds.......................................................8
Item 3. Defaults Upon Senior Securities.................................................................8
Item 4. Submission of Matters to Vote of Security Holders...............................................8
Item 5. Other Information...............................................................................8
Item 6. Exhibits and Reports on Form 8-K................................................................9
-i-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
(UNAUDITED)
================================================================================
ASSETS
March 31, 2001
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Current assets:
Cash $ 79,618
Restricted cash related to notes payable 150,687
Accounts receivable, net 810,561
Inventory 271,920
Prepaids and other current assets 165,831
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Total current assets 1,478,617
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Property and equipment, net 86,840
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Other assets:
Due from related parties 5,431
Other assets, net 33,475
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Total other assets 38,906
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Total assets $ 1,604,363
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Current liabilities:
Accounts payable $ 604,797
Accrued expenses 60,436
Notes payable 239,167
Capital leases, current portion 20,772
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Total current liabilities 925,172
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Capital leases, less current portion 17,545
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Stockholders' equity:
Common stock, $0.001 par value, 30,000,000 shares authorized; 3,632,813
shares issued and outstanding 3,633
Additional paid-in capital 857,259
Retained earnings (199,246)
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Total stockholders' equity 661,646
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Total liabilities and stockholders' equity $ 1,604,363
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See accompanying notes to condensed financial statements.
2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
Three Months Ended
March 31,
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2001 2000
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Revenue $ 1,505,084 $ 1,367,460
Cost of sales 499,044 402,036
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Gross profit 1,006,040 965,424
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Operating expense:
General and administrative expenses 917,318 619,435
Depreciation and amortization expenses 8,261 9,198
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Total operating expenses 925,579 628,633
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Income from operations 80,461 336,791
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Interest income 2,040 13,003
Interest expense (8,578) --
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Profit before income taxes 73,923 349,794
Provision for income taxes 32,235 102,864
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Net profit $ 41,688 $ 246,930
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Net profit per share - basic $ 0.01 $ 0.07
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Net profit per share - diluted $ 0.01 $ 0.07
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Weighted average number of shares - basic 3,608,935 3,394,947
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Weighted average number of shares - diluted 3,807,735 3,736,819
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See accompanying notes to condensed financial statements.
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HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
Three Months Ended
March 31,
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2001 2000
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Net cash provided by (used in) operating activities $(102,773) $ 30,391
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Cash flows from investing activities:
Repurchase of common stock -- (3,000)
Purchase of trademark (25,000) --
Purchase of property and equipment (2,883) (46,340)
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Net cash used in investing activities (27,883) (49,340)
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Cash flows from financing activities:
Proceeds on issuance of common stock -- 4,000
Proceeds on line of credit 100,000 --
Payments on lines of credit (10,834)
Proceeds on capital leases -- 21,612
Payments on capital leases (4,013) (1,748)
Payments to related parties (464) (3,000)
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Net cash provided by financing activities 84,689 20,864
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Net increase (decrease) in cash (45,967) 1,915
Cash at beginning of period 125,585 154,247
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Cash at end of period $ 79,618 $ 156,162
========= =========
See accompanying notes to condensed financial statements.
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HEALTH & 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,
2000. Operating results for the three months ended March 31, 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.
NOTE 2 - NOTES PAYABLE
- ----------------------
In December 15, 2000 the Company received a short-term loan from a bank.
Interest accrues at 8.1% per annum and the note is collateralized by two
certificate of deposits totaling approximately $150,000. The unpaid balance at
March 31, 2001 was $142,500.
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 is
personally guaranteed by Mr. Steve Pomerantz. The loan matures January 12, 2002.
The balance at March 31, 2001 was $96,667.
NOTE 3 - PURCHASE OF ASSETS
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On January 12, 2001, Health & Nutrition Systems International, Inc. purchased
the Heritage Consumer Products, LLC "Acutrim" trademark for $25,000 and
outstanding inventory of its Acutrim Natural AM and Acutrim Natural PM products
for $155,000 from Fleet National Bank. In connection with the purchase, Heritage
Consumer Products assigned to Health & Nutrition Systems International, Inc.,
all of it rights, title and interest in the "Acutrim" trademark and two related
trademarks. Accumulated amortization on the "Acutrim" trademark was $416 at
March 31, 2001.
NOTE 4 - STOCKHOLDERS' EQUITY
- -----------------------------
During the three months ended March 31, 2001, the Company issued 25,000 shares
of common stock to consultants as payment for services. The Company recorded
compensation for professional services of $25,750. In May 2001, the parties
agreed to terminate the consulting contract and the consultant has agreed to
return the shares of common stock. The execution of the same is expected to
occur in the near future.
3,000 shares previously cancelled in error were re-issued at March 22, 2001.
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HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
================================================================================
NOTE 5 - INCOME TAXES
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Income tax provision consists of the following:
2001 2000
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Current $ 24,347 $ 102,864
Deferred -- --
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$ 24,347 $ 102,864
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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 March 31, 2001 and 2000 are
as follows:
2001 2000
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Deferred tax asset:
Net operating losses $ - $ 9,470
Stock issued for services - 22,319
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Total deferred tax asset - 31,789
Deferred tax liabilities - -
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Net deferred tax asset before
valuation allowance - 31,789
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Valuation allowance (31,789)
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Net deferred tax assets $ - $ -
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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:
2001 2000
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Taxes computed at combined federal
and state tax rate $ 33,150 $ 138,169
Non-deductible expenses 987 4,202
Net operating loss benefit (9,790) (39,507)
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$ 24,347 $ 102,864
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As of March 31, 2001, the Company had used the net operating loss carry forward
of $24,786 available for use on its future corporate federal income tax returns.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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.
NET SALES:
Net sales for the three months ended March 31, 2001 were $1,505,084, an
increase of $137,624 or 10%, compared to net sales of $1,367,460 for the three
months ended March 31, 2000. The increase in net sales was primarily due to new
orders for the recently acquired Acutrim(R) Natural AM and PM products. The
increases in net sales was also due to increases in sales from Walgreens, Rite
Aid, Target, and CVS, which were partially offset by a decrease in sales from
GNC, which was our largest account in 2000. Chain store sales accounted for
$1,379,283 or 92% of our sales during the quarter. HNS Direct (sales direct to
the independent retailer) were $75,696 or 5% of our sales during the quarter.
Rite Aid accounted for $246,817 or 16 % of sales for the quarter, Walgreens
accounted for $173,076 or 11% of sales for the quarter, Target accounted for
$160,573 or 11% of sales for the quarter. No other account represented more than
10% of sales during the quarter. Carbcutter(TM) and Acutrim(R) are expected to
establish additional shelf positions in regional and national accounts in 2001.
Sales growth is contingent on competition, marketing expenditures, the economy
as a whole and the continued market acceptance of Carbcutter(TM) and Acutrim(R).
Carbolizer(TM) and Fatcutter(TM) are in the introductory phase and, therefore,
no projections can be made for either new product.
COST OF SALES:
Cost of sales for the three months ended March 31, 2001 was $499,044 or
33% of net sales, compared to $402,036 or 29% of net sales for the three months
ended March 31, 2000. The increase in cost of sales as a percent of net sales
was primarily attributable to new sales from recently acquired Acutrim(R),which
has a higher cost of goods as a percent of net sales compared to Carbcutter(TM).
We expect cost of goods sold as a percent of net sales to decrease if there is
market acceptance of our new products Carbolizer(TM) and Fatcutter(TM). Also,
cost of goods sold as a percent of net sales could decrease if Carbcutter(TM)
sales increase at a faster rate than Acutrim(R) sales.
GROSS PROFIT:
Gross profit for the three months ended March 31, 2001 was $ 1,006,040
an increase of $40,616 or 4 %, compared to gross profit of $965,424 for the
three months ended March 31, 2000. As a percent of net sales, gross profit was
67 % for the three months ended March 31, 2001, compared to 70 % for the three
months ended March 31, 2000. The increase in gross profit dollars is a result of
new sales from Acutrim(R) . The decrease in gross profit as a percent of sales
is primarily due to the lower gross profit margin of Acutrim(R).
OPERATING EXPENSES:
Operating expenses were $925,579 for the three months ended March 31,
2001, representing an increase of $296,946, compared to $628,633 for the three
months ended March 31, 2000. As a percent of net sales, operating expenses were
61% for the three months ended March 31, 2001, compared to 46% for the three
months ended March 31, 2000. The increase in operating expenses was primarily
attributable to higher co-op, slotting fees, sales promotion and advertising
expenditures for the first quarter of 2001 verses co-op, slotting fees, sales
promotion and advertising expenditures for the first quarter 2000.
7
NET PROFIT FROM OPERATIONS:
Net profit from operations was $41,688 or $.01 per share for the three
months ended March 31, 2001, as compared to a net profit from operations of
$246,930 or $.07 per share for the three months ended March 31,2000. The
decrease in income from operations for the quarter was primarily due to higher
co-op, slotting fees, sales promotion and advertising expenditures during the
quarter.
LIQUIDITY & CAPITAL RESOURCES:
At March 31, 2001, we had a working capital surplus of $553,445
compared to a $487,566 working capital surplus at March 31,2000. Net cash used
in operating activities for the three months ended March 31, 2001 was
$($102,773) compared to $30,391 provided by operating activities for the period
ending March 31,2000. The resulting decrease in cash is due to greater increases
in inventory and accounts receivable compared to accounts payable. Cash used in
investing activities was $($27,883) for the three months ended March 31, 2001
compared to $ ($49,340) used in investing activities for the three months ending
March 31, 2000. Cash used for investing activities in the first quarter 2001 was
mainly applied to the purchase of the Acutrim trademark. Cash used in the first
quarter of 2000 was mainly used for the purchase of equipment. Net cash provided
by financing activities for the three months ended March 31, 2001 was $84,689 as
compared to $20,864 cash used in financing activities for the period ending
March 31, 2000. During the three months ending March 31, 2001, the Company
received a $100,000 loan, and $10,834 has been repaid with regard to all loans.
Payments were also made on capital leases.
We sell the majority of our accounts receivable to "factors" at a
discount because we do not have sufficient working capital to wait thirty to
ninety days to collect these accounts ourselves. We expect to continue to factor
our large pharmacy chain accounts and large health food store accounts in order
to support our working capital requirements. We are dependent on factoring our
receivables in order to support our working capital needs. 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. Inability to factor our receivables on
commercially reasonable terms could have a material adverse effect on our
results of operations.
We may need to raise additional capital in order to expand our
inventory levels, product lines and sales in the future, to the extent internal
cash flow, supplier credit lines and factoring arrangements are not sufficient.
We may attempt to raise additional equity or capital, either through private
placements or asset based loans. Additional capital would be directed to
expansion of inventory, improved recognition of the Company name and its brands,
development of our e-commerce site, participation in additional trade shows and
additional advertising for our new products. 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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
On April 13, 2001, 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).
8
The lawsuit is intended to resolve the uncertainty that now exists concerning
whether two blocks of the Company's common stock, which originally belonged to
Pomerantz and Musso and together comprise 235,000 post-split shares, are
currently validly issued and outstanding and, if so, the identities of the
owners of those shares.
On February 21, 2000, at the request of Pomerantz and Musso, the Company's Board
of Directors cancelled all but 25,000 (post-split) of the affected shares and
delivered the remaining 25,000 (post-split) shares to Milton H. Barbarosh to
compromise and settle any potential dispute relating to whether the lawsuit
defendants, or any of them, are entitled to ownership of some or all of the
shares. The defendants claim entitlement to the shares under the terms of
certain option and stock purchase agreements entered between Milton H. Barbarosh
and his corporations and Pomerantz and Musso, which related to advisory services
Barbarosh promised to perform for the benefit of Pomerantz, Musso and the
Company. The Company maintains that the services were not performed and
Pomerantz and Musso maintain that no consideration was received by them for
their shares.
At present, the Company is not including the 210,000 (235,000 - 25,000,
post-split) cancelled shares in our total number of shares outstanding.
Accordingly, depending on the outcome of the litigation, the number of our
outstanding shares may increase, thereby causing the dilution of our present
shareholders.
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
the Company and its officers) without prejudice.
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 and
those listed above, individually or in the aggregate, will materially impact the
Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
On March 23, 2001, we issued 25,000 shares of common stock to TKO International,
Inc., in anticipation of entering into a consulting agreement with TKO for
consulting services to be rendered by TKO. The fair market value of our common
stock at March 23, 2001 was $1.03 per share. The exemption relied upon by the
Company for these transactions is Section 4(2) of the Securities Act of 1933.
The parties have subsequently agreed to terminate discussions regarding a
possible consulting agreement, and the Company has requested that TKO return
those shares for cancellation. TKO has verbally agreed to return the shares and
the execution of documents relating to the same is expected to occur in the near
future.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
None.
Item 5. Other Information.
The Company mailed its proxy statement and copies of its annual
report to Shareholders on May 11, 2001, in anticipation of holding its 2001
Annual Meeting of Shareholders. The annual meeting will be held on Monday, June
11, 2001, at 9:00 a.m., Eastern Time, at the Hilton Hotel, 150 Australian
Avenue, West Palm Beach, Florida 33406.
On May 14, 2001, the Company issued a press release to announce that
Fatcutter(TM) Plus is now being marketed for retail sale.
9
Item 6. Exhibits and Reports on Form 8-K.
(a) Index and Exhibits
None.
(b) Reports on Form 8-K during the fiscal quarter ended March 31, 2001.
The Registrant filed a report dated January 12, 2001 on Form 8-K
on January 12, 2001, reporting an Item 2 event.
10
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: May 14, 2001
HEALTH & NUTRITION SYSTEMS
INTERNATIONAL, INC., a Florida corporation
/s/Steven Pomerantz
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Steven Pomerantz
Chief Executive Officer and Treasurer
11