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, 2002
[ ] 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
(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 September 12, 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
September 30, 2002 ........................ 1
Condensed Statements of Operations
Three months and nine months ended
September 30, 2002 and
September 30, 2001......................... 2
Condensed Statements of Cash Flows
Nine months ended September 30, 2002
and September 30, 2001........ 3
Notes to Condensed Financial Statements......... 4-5
Item 2. Management's Discussion and Analysis of
Financial Conditions and
Results of Operations.................. 5-11
Item 3. Controls and Procedures.................... 11
Part II - Other Information
Item 1. Legal Proceedings.......................... 12
Item 2. Changes in Securities...................... 12
Item 3. Defaults Upon Senior Securities............ 12
Item 4. Submission of Matters to a Vote of
Security Holders................ 12
Item 5. Other Information.......................... 12
Item 6. Exhibits and Reports on Form 8-K........... 13
Signature................................................ 14
ii
PART I
ITEM 1. FINANCIAL STATEMENTS.
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC
CONDENSED BALANCE SHEET
(UNAUDITED)
-----------
ASSETS
------
SEPTEMBER 30, 2002
------------------
Current assets:
Cash $ 57,987
Accounts receivable, net 224,688
Inventory 567,072
Prepaids and other current assets 5,873
-----------
Total current assets 855,620
-----------
Property and equipment, net 46,214
-----------
Other assets, net 31,221
-----------
Total other assets 31,221
-----------
Total assets $ 933,055
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable $ 1,034,802
Accrued expenses 98,072
Capital leases, current portion 5,909
Notes payable, current portion 309,781
-----------
Total current liabilities 1,448,564
-----------
Notes payable, less current portion 202,116
-----------
Total liabilities 1,650,680
-----------
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 (1,556,067)
-----------
Total stockholders' deficit (717,625)
-----------
Total liabilities and stockholders' deficit $ 933,055
===========
See accompanying notes to condensed financial statements.
1
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue $ 1,031,982 $ 1,441,531 $ 3,300,697 $ 4,247,259
Cost of sales 399,898 378,969 1,038,972 1,335,993
----------- ----------- ----------- -----------
Gross profit 632,084 1,062,562 2,261,725 2,911,266
----------- ----------- ----------- -----------
Operating expense:
General and administrative expense 324,038 541,964 1,093,547 1,737,768
Advertising and promotion 326,922 495,428 949,209 1,587,156
Depreciation and amortization 7,617 8,270 22,850 25,707
----------- ----------- ----------- -----------
Total operating expense 658,577 1,045,662 2,095,606 3,350,631
----------- ----------- ----------- -----------
Income from operations (26,493) 16,900 166,119 (439,365)
----------- ----------- ----------- -----------
Other income (expense):
Lawsuit settlement (50,836) - (50,836) -
Interest income
- 2,446 - 4,159
Interest expense (17,505) (8,168) (30,884) (22,616)
----------- ----------- ----------- -----------
Total other income (expense) (68,341) (5,722) (81,720) (18,457)
----------- ----------- ----------- -----------
Income (loss) before income taxes (94,834) 11,178 84,399 (457,822)
----------- ----------- ----------- -----------
Benefit (provision) for income taxes - - - 42,662
Net income (loss) $ (94,834) $ 11,178 $ 84,399 $ (415,160)
=========== =========== =========== ===========
Net income per share - basic $ (0.03) $ 0.00 $ 0.02 $ (0.11)
=========== =========== =========== ===========
Net income per share - diluted $ (0.03) $ 0.00 $ 0.02 $ (0.11)
=========== =========== =========== ===========
Weighted average number of shares - basic 3,632,813 3,604,813 3,632,813 3,612,617
=========== =========== =========== ===========
Weighted average number of shares - diluted 3,632,813 3,604,813 3,632,813 3,612,617
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
2
HEALTH & NUTRITION SYSTEMS INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(UNAUDITED)
-----------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2002 2001
--------- ---------
Net cash provided by (used in) operating activities $ 161,843 $ (77,330)
--------- ---------
Cash flows from investing activities:
Investment in trademarks - (25,000)
---------
Purchases of property and equipment - (3,525)
--------- ---------
Net cash used in investing activities - (28,525)
--------- ---------
Cash flows from financing activities:
Proceeds from (repayments on) notes payable (170,900) 66,167
Repayments on capital leases (14,888) (5,384)
Repayments to related parties - (213)
--------- ---------
Net cash provided by (used in) financing activities (185,788) 58,570
--------- ---------
Net decrease in cash (23,945) (47,285)
Cash, beginning of period 81,932 125,585
--------- ---------
Cash, end of period $ 57,987 $ 78,300
========= =========
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
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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 nine months ended September 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 - 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 with the
Company. On September 19, 2002, the Company announced the settlement of all
litigation between HNS and J.C. Herbert Bryant and KMS-Thin Tab 100, Inc.
The settlement agreement generally requires Bryant and KMS to transfer the
registration and ownership of the domain names Thintab.com, Thintab.cc and
Carbcutter.cc to HNS and to take other action to eliminate confusion over the
ownership of the Thin Tab@ name. Additionally, it provides for each of the
adverse parties to generally release the others.
As part of the settlement, HNS entered into a distribution agreement with
Bryant, beginning on September 26, 2002 and ending on September 25, 2007,
permitting Bryant to purchase certain of its products from HNS and to
exclusively distribute those products in Florida from Orlando south. HNS also
has agreed not to sell its products directly to certain KMS customers. HNS
booked a legal settlement expense of $58,836 associated with this settlement.
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.
4
NOTE 3 - 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.
NOTE 4 - RECLASSIFICATION AND CORRECTION OF AN ERROR
Certain reclassifications have bee made to the 2001 financial statements to
conform to the 2002 financial statement presentation. These reclassifications
have the effect of reducing revenue and reducing expense. Slotting fees expense
and new store discounts, charged back by customers, were previously recorded as
marketing expense. In order to correct the accounting principle, the Company
has reclassified these costs as a reduction of gross sales. These
reclassifications have no effect on reported net income.
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-KSB filed
with the Securities and Exchange Commission.
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.
5
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 nine months ended September 30, 2002
and 2001 are returns and allowances, sales discounts and new store opening
discounts in the amounts of $392,863 and $302,564 respectively. The increase in
year 2002 was primarily due to customer returns of Acutrim PM, which the Company
discontinued.
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.
The financial statements contain a reclassification of expenses from the
classification advertising and promotion to sales discounts. These
reclassifications have the effect of reducing revenue and reducing expense.
Items such as slotting fees and new store discounts, charged back by the
customer, were classified as marketing expenses. The amounts associated with the
reclassification are: three months ended September 30, 2002 and 2001 were
$48,777 and $8,172 respectively and for the nine months ended September 30, 2002
and 2001 were $72,399 and $142,755 respectively.
NET SALES
Net sales for the three months ended September 30, 2002 were $1,031,982, a
decrease of $409,549 or 28%, as compared to net sales of $1,441,531 for the
three months ended September 30, 2001. The decrease was primarily due to a
general market decline affecting the sales to
6
several of our largest customers. For the three months ended September 30, 2002,
the revenues with respect to our largest customers were as follows: (i) Wal-Mart
accounted for $388,296 or 36% of sales: (ii) GNC accounted for $123,402 or 11%
of sales; (iii) Rite Aid accounted for $66,083 or 6% of sales; and (iv) CVS
accounted for $111,879 or 10% of sales. No other account represented more than
5% of sales during the quarter.
Net sales for the nine months ended September 30, 2002 were $3,300,697, a
decrease of $946,562 or 22%, as compared to net sales of $4,247,259 for the nine
months ended September 30, 2001. The decrease was primarily due to a general
market decline affecting the sales to several of our largest customers. The
gross sales in the three months ended March 31, 2002 were down 29% from the
three months ended March 31, 2001. The gross sales in the three months ended
June 30, 2002 were down 14% from the three months ended June 30, 2001. The gross
sales in the three months ended September 30, 2002 were down 25% from the three
months ended September 30, 2001. Our largest customers sales were as follows for
the nine months ended September 30, 2002: (i) Rite Aid accounted for $278,951 or
8% of sales; (ii) GNC accounted for $767,968 or 23% of sales; (iii) Walgreens
accounted for $432,762 or 13% of sales; (iv) Eckerd accounted for $217,604 or 7%
of sales, (v) CVS accounted for $244,512 or 7% of sales; and (vi) Target
accounted for $185,526 or 6% of sales and (vii) Wal-Mart accounted for $388,296
or 12% of sales. No other account represented more than 5% of sales during the
nine months ended September 30, 2002.
COST OF SALES
Cost of sales for the three months ended September 30, 2002 was $399,898 or 39%
of net sales as compared to $378,969 or 26% of net sales for the three months
ended September 30, 2001. The cost of sales was increased in the amount of
$28,516, which represents the write off of inventory associated with the product
line Carbolizer, which has been discontinued. The cost of sales as a percentage
of net sales without the $28,516 write-off was 36%.
Cost of sales for the nine months ended September 30, 2002 was $1,038,972 or 31%
of net sales as compared to $1,335,993 or 31% of net sales for the nine months
ended September 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 and
increased by $28,516 because of the inventory write-off of our Carbolizer
product. The cost of sales as a percentage of net sales without the adjustments
for $73,747 and $28,516 was 33%.
GROSS PROFIT
Gross profit for the three months ended September 30, 2002 was $632,084 a
decrease of $430,478 or 41% compared to gross profit of $1,062,562 for the three
months ended September 30, 2001. As a percent of net sales, gross profit was 61%
for the three months ended September 30, 2002, compared to 74% for the three
months ended September 30, 2001. The decrease in gross profit was primarily due
to the increase in the cost of sales, which includes the write off of inventory
associated with our Carbolizer product and the increase in sales returns and
allowances. Without the inventory write-off the gross profit percentage would
have been 64%.
7
Gross profit for the nine months ended September 30, 2002 was $2,261,725 a
decrease of $649,541 or 22%, compared to gross profit of $2,911,266 for the nine
months ended September 30, 2001. As a percent of net sales, gross profit was 69%
for the nine months ended September 30, 2002, compared to 69% for the nine
months ended September 30, 2001. The decrease in gross profit dollars was
primarily due to the decrease in revenue for the nine months ended September 30,
2002.
OPERATING EXPENSES
Operating expenses were $658,577 for the three months ended September 30, 2002,
representing a decrease of $387,085, compared to $1,045,662 for the three months
ended September 30, 2001. As a percent of net sales, operating expenses were 64%
for the three months ended September 30, 2002, compared to 73% for the three
months ended September 30, 2001. The decrease in operating expenses is due to
the cost cutting efforts of the Company. The general and administrative expenses
were $324,038 for the three months ended September 2002 compared to $541,964 for
the three months ended September 30, 2001 or a decrease of $217,926. The
advertising and promotion expenses for the three months ended September 30, 2002
was $326,922 compared to $495,428 for the three months ended September 30, 2001
or a decrease of $168,506.
Operating expenses were $2,095,606 for the nine months ended September 30, 2002,
representing a decrease of $1,255,025, compared to $3,350,631 for the nine
months ended September 30, 2001. As a percent of net sales, operating expenses
were 63% for the nine months ended September 30, 2002, compared to 79% for the
nine months ended September 30, 2001.The general and administrative expenses
were $1,093,547 for the nine months ended September 30, 2002 compared to
$1,737,768 for the nine months ended September 30, 2001 or a decrease of
$644,221. The advertising and promotion expenses for the nine months ended
September 30, 2002 were $979,209 compared to $1,587,156 for the nine months
ended September 30, 2001 or a decrease of $607,947.
NET PROFIT (LOSS) FROM OPERATIONS
Net loss from operations was $(26,493) for the three months ended September 30,
2002, compared to a net profit from operations of $16,900 for the three months
ended September 30, 2001. Net loss was $(94,834) or $(0.03) per share for the
three months ended September 30, 2002, as compared to a net profit of $11,178 or
$0.00 per share for the three months ended September 30, 2001. Net profit from
operations was $166,119 for the nine months ended September 30, 2002, as
compared to a net loss from operations of $(439,365) for the nine months ended
September 30, 2001. Net profit was $84,399 or $0.02 per share for the nine
months ended September 30, 2002, as compared to a net loss of $(415,160) or
$(0.11) per share for the nine months ended September 30, 2001. The net loss for
the three months ended September 30, 2002 was due primarily due to two items:
the inventory write-off of our Carbolizer product and the legal settlement
expense of $50,836, involving the KMS law suit. The increase in net profit for
the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2001 was the decrease in operating expenses.
8
LIQUIDITY & CAPITAL RESOURCES
At September 30, 2002, the Company had a working capital deficit of ($592,944)
compared to a $(28,238) working capital deficit at September 30, 2001.
Net cash provided by operating activities for the nine months ended September
30, 2002 was $161,843 compared to $(77,330) used in operating activities for the
nine months ended September 30, 2001. The resulting increase in cash is
primarily due to a net profit realized during the nine months ended September
30, 2002, due to the cost cutting measures undertaken by management.
Cash used in investing activities was $ 0 for the nine months ended September
30, 2002 compared to $(28,525) used in investing activities for the nine months
ending September 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 nine months ended September 30,
2002 was $(185,788) compared to net cash provided by financing activities of
$58,570 for the nine months ended September 30, 2001. During the nine months
ended September 30, 2002, the Company made note payments of $170,900 and capital
lease payments of $14,880. During the nine months ended September 30, 2001, the
Company received a $100,000 line of credit and repaid $35,833 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 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) 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 interested 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.
9
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.
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 our
discontinued Carbolizer(TM) product, 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 2002. 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
10
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.
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.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's Chairman, President and its Controller. Based upon that evaluation,
they concluded that the Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
the Company's disclosure obligations under the Exchange Act.
Change in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls since the most recent
evaluation of such controls.
11
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 with the
Company. On September 19, 2002, the Company announced the settlement of all
litigation between HNS and J.C. Herbert Bryant and KMS-Thin Tab 100, Inc.
The settlement agreement generally requires Bryant and KMS to transfer the
registration and ownership of the domain names Thintab.com, Thintab.cc and
Carbcutter.cc to HNS and to take other action to eliminate confusion over the
ownership of the Thin Tab@ name. Additionally, it provides for each of the
adverse parties to generally release the others.
As part of the settlement, HNS entered into a distribution agreement with
Bryant, beginning on September 26, 2002 and ending on September 25, 2007,
permitting Bryant to purchase certain of its products from HNS and to
exclusively distribute those products in Florida from Orlando south. HNS also
has agreed not to sell its products directly to certain KMS customers. HNS
recorded a legal settlement expense of $58,836 associated with this settlement.
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.
None.
ITEM 5. OTHER INFORMATION.
NONE
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index and Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Indemnification Agreement between Ted Alflen and the Company
dated as of January 1, 2002
10.2 Indemnification Agreement between Darryl Green and the
Company dated as of January 1, 2002
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K during the fiscal quarter ended September 30, 2002.
None.
13
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: November 14, 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)
14
CERTIFICATIONS
I, Chris Tisi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
/s/ Chris Tisi
---------------------------------
Chris Tisi
Interim Chairman of the Board and
Chief Executive Officer
15
CERTIFICATIONS
I, Al Dugan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Health &
Nutrition Systems International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
/s/ Al Dugan
-----------------------------------
Al Dugan
Controller (Principal Accounting Officer)
16