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Form 10KSB for HEALTH & NUTRITION SYSTEMS INTERNATIONAL INC


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14-Apr-2004

Annual Report


ITEM 6. MANAGEMENT`S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

FORWARD LOOKING STATEMENTS


The following discussion of our results of operations and financial condition should be read along with our Consolidated Financial Statements listed in Item 8 and the Notes to them appearing elsewhere in this Form 10-KSB.


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


We recognize revenue when

o Persuasive evidence of an arrangement exists

o Shipment has occurred

o Price is fixed or determinable, and

o Collectability is reasonably assured

Subject to these criteria, except with respect to customers that buy our products on "pay on scan terms," we recognize revenue at the time of shipment of the relevant merchandise. "Pay on scan" sales are


treated as consignment sales by us. In the case of these consignment sales, we record revenues, and remove the items from inventory when the customer reports the sales to us. Normally we are notified of the customer`s sales through periodic sales reports, payments or when the customer reorders the relevant product.

On December 31, 2003, we had approximately $286,000 of inventory on consignment relating to its "pay on scan" sales. At December 31, 2002, we had no inventory on consignment.

Included in the net sales in the accompanying financial statements for the twelve months ended December 31, 2003 and 2002 are reductions for returns and allowances, sales discounts, new store opening discounts and co-op advertising and promotions in the amounts of $1,882,460 and $1,514,299 , respectively. The increase in sales reductions in year 2003 was primarily due to the sales returns and allowances, co-op advertising and promotions.


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.


CUSTOMER LIABILITY ESTIMATES


The Company estimates and accrues expenses and liabilities for co-op advertising and promotions and returns and allowances for outdated products as a reduction of sales. The liability is maintained until the customer takes the deduction against payments due. This liability is netted against the accounts receivable account on the balance sheet. The amount at December 31, 2003 was $863,301 and December 31, 2002 was $792,079.

We may incur a liability to a customer in three ways:

o We and the customer may agree that if the customer includes an

advertisement for our products in the customer`s advertising
circulars, we will discount our products to the customer during
the period of time surrounding the use of the circulars;

o Some of our customers have a policy that requires us to fund
cooperative advertising and promotions in an amount equal to 10%
to 15% of the gross revenue generated within the year; and

o In some cases, if the dating of our product in inventory at the
customer`s location expires, the customer may seek a credit from
us.

We record the liability when we determine that the customer is taking an action that will result in an expense to the Company in the future. For example, when we agree to fund an advertising promotion

in a given month, we create a liability for that promotion. We also establish reserves for returns we believe likely. Typically, these liabilities remain outstanding for three to six months.


OVERVIEW


We believe that industry trends as well as factors specific to us will impact our future results. Following are some key points that we believe are important in understanding our position today, and our outlook for the future.


TRENDS IN OUR INDUSTRY


According to the Nutrition Business Journal, revenues from the sale of dietary supplements in year 2003 were up approximately 2 percent from those reported in year 2002. Particularly, because of their popularity, increased consumer use of low carbohydrate diets will benefit products like ours. Our product formulae are not proprietary. Similar formulations to our flagship product, Carb Cutter(R), have been developed and have achieved full distribution at all of our customers. Substantially all of our competitors have greater resources and name recognition than we do. Many of our competitors sell, in addition to diet products, a broad range of health and nutrition products. Many of our competitors sell to the same customers as we do. In addition to our existing competitors, we believe some of these potential competitors will begin to market carbohydrate diet assisting products. In this respect, the very popularity of the low carbohydrate diets may encourage additional stronger competitors to compete with us. In addition, GSN, our sole manufacturer, sells similar products to our competitors, often with similar formulations.

We try to differentiate our products through the mixture of ingredients in our products and the amounts of such ingredients contained in our products. We also trademark our proprietary brand names. We believe that this helps us to maintain consumer loyalty to our brand rather than to a specific ingredient or combination of ingredients. We also strive to differentiate our products by providing distinctive packaging. None of our efforts in differentiating ourselves, however, will insure that existing or potential competitors will not erode our market share.

The most significant barrier to entry within our industry is the difficulty of establishing a new product. This involves significant commitment to advertise the product, participate in trade shows, build inventory, and pay the cost of entry with slotting fees and or free merchandise. Test marketing also requires a significant commitment of time and capital. Those factors effect us as well as our competition. Many of our competitors are significantly better capitalized and have significantly more human resources than us.


REVENUE AND INCOME


Net revenues for the twelve months-ended December 31, 2003 increased by $2,984,358 to $6,552,206 compared to net revenues of $3,567,848 in 2002. Net Revenue from two of our major customers increased by $2,556,363. Increases in both the co-op-advertising and promotions and the in-house advertising in the respective amounts of $282,090 and $1,003,489 significantly contributed to the increase in net revenue. During the twelve months ended December 31, 2003, six companies accounted for 83.5% of our net revenues compared to 64.8% in 2002. Two of our largest customers accounted for 61% of the net revenue in 2003 compared to 41.5% for our two largest customers in 2002. Although we are encouraged by the increase in net revenues generally, the increased concentration of our business in fewer customers makes us more vulnerable to changes in their purchasing practices or, in some cases, the customers` reluctance to do business with suppliers if those suppliers represent too large a part of the suppliers total sales.


Net income for the twelve months ended December 31, 2003 compared to the same period in 2002, increased by $668,753, from $27,606 to $696,359. However, of that amount, approximately $275,000 was a gain from the sale of our Acutrim(R) product line. That means our operating income for the same twelve month period increased by $393,753.

In 2003, our operating income was $472,932, after expensing $244,421 of incentive compensation for our CEO. This bonus is based on a formula contained in his employment agreement dated January 1, 2002, as follows:

o 5% of the increase in net revenues for the period as measured

against the corresponding period the year before, plus

o 10% of net income for the period.
In 2003, we have been able to increase our net revenues and maintain control over our administrative costs. The general and administrative expenses for year ended December 31, 2003 were $2,113,918 or 32% of net revenues versus $1,524,678 or 42% of net revenues for the same period in 2002. While administrative costs rose, their rate of increase was less than the rate of our rise in revenue. As discussed in more detail below, we expect our administrative costs to increase in 2004.


INSURANCE


Insurance for the products we sell has become significantly more expensive. The policy becoming effective in March 2004 carries a premium over twenty times higher than for our prior policy, and because it is written on a "claims made" rather than an "occurrence" basis, does not provide as much continuity of coverage as we historically have enjoyed. We purchased $5,000,000 worth of coverage for 2004, as opposed to the $6,000,000 we had in 2003. While we believe the level of coverage to be adequate to meet the needs of our customers and provide us with appropriate risk protection, there is no assurance that we will be able to obtain coverage in the future. We do not believe that we will be able to secure "claims made" coverage in the foreseeable future.


INCREASED COSTS


The increasing oversight mandated by the Sarbanes-Oxley Act coupled with changes we have made in response to the occurrences giving rise to the earnings restatement for the third quarter of 2003 have led to the following.

o Our auditor, Daszkal Bolton, will be required to spend more time

in assessing our internal controls and assisting us in
implementing other provisions of the Sarbanes-Oxley Act.

o The audit committee has expanded their review and interaction
with management.

o Our costs for legal and other professional services, including
the retention of professionals to consult on areas related to
Sarbanes-Oxley, will rise significantly.


ADEQUATE WORKING CAPITAL


Our working capital situation improved in 2003, but cash constraints continue to limit our ability to grow. In addition, a change in our sole manufacturer`s informal overtime financing arrangements with us could make it difficult or impossible to support our current level of sales. In addition, the loss or reduction in sales to any of our key customers would negatively impact our working capital. Management and the Board of Directors continue to explore alternative sources of capital to fund operations and support potential growth, but we have not identified any financing sources superior to or as good as that provided to us by our sole manufacturer.


DIVERSIFICATION


In 2003, we continued to implement our Company`s strategic plan of diversifying our product line by developing and promoting new products. For example, in 2003, we received initial orders for our new Carb Cutter(R) Phase 2 product, and, by year`s end, introduced Zoom(R). It is too early to determine whether customers will accept Carb Cutter(R) Phase 2 on a long term basis, or whether Zoom(R) product will be successful. This strategy is intended to minimize 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. Despite the introduction of new products, we remain significantly dependent on a single brand, the original Carb Cutter(R).


RECENT DEVELOPMENTS


In July of 2003, the Board of Directions determined to consider strategic alternatives to either enhance or replace our neutraceutical business. The Board intends to continue to assess what steps can be taken to realize greater value for our shareholders. These include the possibility of acquiring additional businesses for stock and/or the sale of the Company or substantially all of its assets, including the ongoing possibility of such a sale to Mr. Tisi or an entity controlled by him.

On November 26, 2003, we entered into an agreement with TeeZee, Inc., a Company wholly owned by Mr. Tisi, to sell substantially all of our assets, subject to approval by our shareholders, for $411,000 in cash and notes and the assumption of substantially all of our liabilities. Prior to entering into the definitive agreement, the Board of Directors considered strategic alternatives with particular attention to the risks associated with our diet-related nutraceuticals business and the increasingly challenging regulatory, legal and insurance environment for the nutraceuticals industry, and weighed them against the offer from TeeZee, Inc. and determined that, at that time, the proposed sale was in the best interests of our shareholders. The Board also hired an investment advisory firm, Capitalink, to render an opinion as to the fairness of the transaction, from a financial point of view. Mr. Tisi subsequently informed us that based upon the expiration of his employment agreement on December 31, 2003, if the sale was not approved by our shareholders, he would terminate his employment with us. In February, we restated our earnings for the third quarter of 2003, which lowered our reported earnings for the period. At that time, Mr. Tisi also told the Board he was willing to continue to serve as our chief executive officer - subject to the execution of a definitive agreement - even if the Board decided not to accept his offer. Capitalink thereafter rescinded its fairness opinion which was based in part on the third quarter results. As a result, on February 23, 2003, we terminated the agreement with Tee Zee, Inc. Tee Zee, Inc. has left open its offer to purchase substantially all of our assets. The Board of Directors is continuing to review Mr. Tisi`s offer, in light of developments subsequent to the termination of the agreement, principally with reference to our future prospects and Mr. Tisi`s new agreement to remain as our CEO through December 31, 2005.

On April 9, 2004, and effective as of December 31, 2003, Mr. Tisi, our CEO, entered into a new two-year employment agreement with us. The terms of Mr. Tisi`s contract increased his base salary from


$147,000 to $164,000, and continues to allow him to earn a bonus based on increases in revenue, and net income. Provisions dealing with Mr. Tisi`s ability to compete with the Company have been modified in our favor. Mr. Tisi`s agreement to continue with us through December 31, 2005 significantly increases our flexibility in considering ways to enhance shareholder value, including the possible sale of the Company or substantially all of its assets.

Mr. Tisi has developed relationships with our customers, vendors and other industry participants that have enabled us to maintain our operations, and, in the last year, grow our business. The loss of his services would severely impair our ability to function as we currently do. In addition to being our CEO, Mr. Tisi is responsible for our product development, marketing, operations and finance. We have reviewed, and continue to review, supplementing Mr. Tisi`s activities with additional executive capacity, but working capital limitations limit our ability to identify and recruit appropriate candidates.

The Board has recently expanded the role of our Chairman, James Brown. Mr. Brown, who has to date focused primarily on opportunities that might strategically enhance shareholder value, will have more day-to-day interaction on areas such as financial management and strategic direction. For these services we increased Mr. Brown`s compensation in February 2004 from $3,000 per month to $8,000 per month through July 31, 2004.


RESULTS OF OPERATIONS


Beginning with the year ended December 31, 2002, we stopped reporting our financial results based on gross revenues and began reporting based on net revenues. We report our net revenue after subtracting:

o co-op advertising and promotions given to the customers to

promote the product and improve sales;

o cash discounts;
o slotting fees and new store discounts; and

o returns and allowances;

These amounts were formerly included in gross revenues and for comparison purposes net revenue numbers are not presented prior to 2002 because they are unavailable.

In 2003, the amount of the subtraction was $1,837.460 compared to $1,514,299 in 2002, an increase of 21% compared to an increase in net revenue of 84%. The increase in the amount of the subtraction was less than the amount of increase in net revenues because some of our new major customers do not ask us to participate in co-op-advertising and other promotions and, we believe, because of the greater efficiency of advertising associated with greater volume.


NET REVENUES


Year ended December 31, 2003 compared with Year ended December 31, 2002

Net revenues for the twelve months-ended December 31, 2003 increased by $2,984,358 to $6,552,206 versus the comparable period in 2002 of $3,567,848. Net revenue from two of our major customers increased by $2,556,363 and accounted for 61% of our net revenue in 2003 compared to 44.5% of our net revenue account for by our two largest customers in 2002. Increases in the co-op-advertising and promotions, and in-house advertising, in the amounts of $282,090 and $1,003,489 respectively, significantly contributed to the increase in net revenue. During the twelve months ended December 31, 2003, six customers accounted for 83.6% of our net revenues, compared to 64.8%.


Year ended December 31, 2002 compared with Year ended December 31, 2001

Net revenues for the twelve months-ended December 31, 2002 decreased by $272,541 to $3,567,848 versus the comparable period in 2001 of $3,840,389, also because of a soft market and reduced advertising.

During the twelve months ended December 31, 2002, six companies accounted for 64.8% of our gross revenues. GNC, our largest account, accounted for 20.5% of gross revenues versus the comparable period in 2001 of 20.8%.


COST OF SALES


Year ended December 31, 2003 compared with Year ended December 31, 2002

Cost of sales for the twelve months ended revenues for December 31, 2003 was $2,514,758, or 38.4% of net revenues, compared to $1,511,826, or 42.4% of net revenues for the twelve months ended December 31, 2002. The decrease in cost of sales as a percentage of net revenues is primarily attributed to higher sales of Carb Cutter(R), which has lower cost of goods that the company average. The purchase of larger quantities also enabled the company to obtain better prices on major components.

Year ended December 31, 2002 compared with Year ended December 31, 2001

Cost of sales for the twelve months ended December 31, 2002 was $1,511,826, or 42.4% of net sales, compared to $1,903,755, or 49.6% of net sales for the twelve months ended December 31, 2001. The decrease in cost of sales as a percentage of net sales is primarily attributed to higher sales of Carb Cutter(R), which had a formula change in 2002 decreasing the cost of goods sold. Additionally, the cost of sales was reduced by $73,747, which represents imputed interest on our Note with GSN. The cost of sales as a percentage of net sales without this discount is 44.4%.


GROSS PROFIT:


Year ended December 31, 2003 compared with Year ended December 31, 2002

Gross profit for the twelve months ended December 31, 2003 was $4,037,448 an increase of $1,981,426, or 96.4% compared to gross profit of $2,056,022 for the twelve months ended December 31, 2002. As a percent of net sales, gross profit was 61.7% for the twelve months ending December 31, 2003, as compared to 57.6% for the twelve months ended December 31, 2002. The increase in gross profit dollars is primarily attributable to the increase in net revenue and the decrease in cost of goods as explained above.

Year ended December 31, 2002 compared with Year ended December 31, 2001

Gross profit for the twelve months ended December 31, 2002 was $2,056,022 an increase of $119,388, or 6.2%, compared to gross profit of $1,936,634 for the twelve months ended December 31, 2001. As a percent of net sales, gross profit was 57.6% for the twelve months ending December 31, 2002, as compared to 50.4% for the twelve months ended December 31, 2001. The increase in gross profit dollars is primarily attributed to the decrease in cost of goods as explained above.



OPERATING EXPENSES:


Year ended December 31, 2003 compared with Year ended December 31, 2002

Operating expenses were $3,564,516 for the twelve months ended December 31, 2003, compared to $1,980,493 for the twelve months ended December 31, 2002, representing an increase of $1,584,023. As a percent of net sales, operating expenses were 54.5% for the twelve months ended December 31, 2003, compared to 55.5% for the twelve months ended December 31, 2002. Advertising and promotion expenses were $1,428,838 for the twelve months ended December 31, 2003, compared to $425,349 for the twelve months ended December 31, 2002, representing an increase of $1,003,489. As a percent of net sales, advertising and promotion expenses were 21.8% for the twelve months ended December 31, 2003, compared to 11.9% for the twelve months ended December 31, 2002. General and administration expenses were $2,113,918 for the twelve months ended December 31, 2003, compared to $1,524,678 for twelve months ended December 31, 2002, representing an increase of $589,243. This increase was primarily due to the increases in:

o broker commissions of $85,644, due to the increase in our volume

of business;

o officer`s bonus of $243,468, based on the increase in revenue
and the net income;

o consulting fees of $61,821, of which $37,000 was on account of
investment banking advisory services in connection with our
consideration of strategic alternatives, and the remainder of
which was on account of information technology enhancements;

o legal & professional fees of $69,642 due to the costs of the
proposed transaction with TeeZee, Inc. and the restatement of
earnings for the third quarter; and

o research and development expenses of $104,340, for three product
studies.

Year ended December 31, 2002 compared with Year ended December 31, 2001
Operating expenses were $1,980,493 for the twelve months ended December 31, 2002, compared to $3,313,837 for the twelve months ended December 31, 2001, representing a decrease of $1,333,344. As a percent of net sales, operating expenses were 55.5% for the twelve months ended December 31, 2002, compared to 86.3% for the twelve months ended December 31, 2001. Advertising and promotion expenses were $425,349 for the twelve months ended December 31, 2002, compared to $881,541 for the twelve months ended December 31, 2001, representing a decrease of $456,192. Expenditures of $901,600 and $1,523,943 for the years 2002 and 2001, respectively, which were previously classified as advertising and promotion expenses were classified to revenues. These expenses in 2001 were primarily due to expenses associated with the new product launches of Fat Cutter and Carbolizer(TM) as well as expenses associated with expanding the distribution of our other products. General and administration expenses were $1,524,678 for the twelve months ended December 31, 2002, compared to $2,400,680 for twelve months ended December 31, 2001, representing a decrease of $876,002. This decrease was primarily a result of reductions in personnel expenditures, factoring expenditures offset in part by professional fees associated with litigation during 2002.


NET INCOME FROM OPERATIONS


Year ended December 31, 2003 compared with Year ended December 31, 2002

Net income for the twelve months ended December 31, 2003 was $696,359 or $0.19 per share, compared to $27,606 or $0.01 per share for the twelve months ended December 31, 2002. The increase in net income of $668,753 was a result of our commitment to control the operating expenses and the


increase in advertising expenditures, which attributed to the increase in gross revenues. The sale of Acutrim contributed $274,945 or 39.5% of the net income for the year.

Year ended December 31, 2002 compared with Year ended December 31, 2001

Net income for the twelve months ended December 31, 2002 was $27,606 or 01 per share, compared to a net loss of $(1,399,533) or $(.39) per share for the twelve months ended December 31, 2001. The increase in income was a direct result of our commitment to reduce the operating expenses, resulting in a decrease of $1,333,344 over the prior year.


CARRY FORWARD LOSS


We have a net operating loss carryforward, as of December 31, 2003 of $366,052 for tax purposes to offset future taxable income. The net operating loss carryforward expires in 2022.


LIQUIDITY & CAPITAL RESOURCES


During the twelve months ended December 31, 2003, the Company has continued to control costs, and maintained profitability, with net income from operations of $472,982. Although we anticipate high administrative costs in 2004, based on these results, and assuming we can maintain our current financing arrangements with GSN, providing us with the informal availability or up to $1,000,000 in credit, and continued expense control, we believe that our operations will provide sufficient cash to support our activities for the next 12 months. However, if GSN determines to alter the informal arrangements extending our limit of credit or our operations fail to generate positive cash flow, it is likely we would not be able to continue our operations, or their current level or as all.

At December 31, 2003, the Company had a positive working capital of $167,140, compared to the prior year end, at December 31, 2002, of a working capital deficit of $702,970, an improvement of $810,110 and is primarily the result of increased net income, including the sale of our Acutrim(R) product line.

At December 31, 2003, the Company had inventory of $1,159,470, compared to $438,375 at December 31, 2001. The increased inventory, of $721,095, was primarily the result of increased stocking and delivery requirements due to the increased sales on all items and the stocking requirements of Phase 2 which accounted for 34% of the total inventory.

Net cash provided by operating activities for the twelve months ended December 31, 2003 was $441,777 compared to $190,329 provided by operating activities for the twelve months ended December 31, 2002. The resulting increase in cash provided was primarily due to the increases in the net income and the satisfaction of accounts payable upon the issuance of the amended promissory note to GSN.

Net cash from investing activities was $269,986. The funds were provided from the sale of the Acutrim(R) trademark.

Net cash used in financing activities for the twelve months ended December 31, 2003 was $718,421 compared to net cash used by financing activities of $257,493 for the twelve months ended December 31, 2002. This is primarily attributable to payments made to Garden State Nutritionals on account of the outstanding note payable.

In early April 2002, we entered into an agreement with GSN, our sole manufacturer, pursuant to which we agreed to repay to GSN amounts owed to them as of the date of the agreement. The amount


was represented by a promissory note of approximately $700,000. Our repayment schedule required equal monthly payments over the next twenty four months, without interest. In connection with this agreement, we granted a blanket lien on our assets to GSN. The occurrence of any of the following events constitute a default under this promissory note:

o 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;

o 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, and

o 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).

In July 2003 the Company issued an amended promissory note to Garden State Nutrition in the principal amount of $1,300,000.
The new note provided for $300,000 to be paid before December 31, 2003, with the balance due in quarterly installments of $131,410 commencing November 1, 2003 at 4.5% per annum. At December 31, 2003, the balance owed to GSN for the note is $778,579. We met the obligation with respect to the $300,000 by using the proceeds from the sale of Acutrim(R) that we received in August 2003.

In early April 2002, we entered into an exclusive manufacturing agreement with GSN that provided us with a $450,000 line of credit on current invoices, with 60 day terms. GSN has allowed us to have as much as $1,000,000 outstanding at certain times under the line of credit. At December 31, 2002, the balance owed to GSN under this line of credit was $892,878. Under our line of credit, the balance owed on December 31, 2003 was $502,424.

Our working capital constraints make it difficult to grow our business, and any reduction in informal arrangements allowing us to exceed our credit limits with Garden State Nutritional would have a materially adverse impact on us. Management and the Board are seeking additional sources to finance our business. While our cash flow from operations has improved, we believe that greater capital availability is required to facilitate future growth and to cover additional expenses.


GOVERNMENT REGULATIONS


The processing, formulation, packaging, labeling and advertising of our products are subject to regulation by one or more federal agencies, including the FDA, the FTC, the Consumer Product Safety Commission, the United States Department of Agriculture and the United States Environmental Protection Agency. These activities are also regulated by various agencies of the states, localities, and countries in which its products are sold.

Although we cannot predict what new legislation or regulations governing our activities will be enacted by legislative bodies or promulgated by agencies regulating our activities. We do know that our industry has come under increased scrutiny, principally due to the FDA`s investigation of the use of ephedra. We believe we will become subject to additional laws or regulations administered by the FDA


or other federal, state or foreign regulatory authorities. We also believe the laws or regulations which we consider favorable may be repealed or more stringent interpretations of current laws or regulations will be implemented in the future. Any or all of such requirements could be a burden and costly, to us. Future regulations could:

o require us to change the way we conduct business;

o require us to change the contents of our products;

o make us keep additional records;

o make us increase the available documentation of the properties

of our products; or

o make us increase or use different labeling and scientific proof
of product ingredients, safety or usefulness.


COMMITMENTS AND CONTINGENCIES

The Company discontinued all sales of products containing ephedra in March 2003. Our discontinued products, Fat Cutter Plus, Thin Tab(R), and formally owned Carbolizer(TM) product, contain ephedra, also known as "Ma Huang," an herb which contains naturally-occurring ephedrine. These products represented approximately 19% of our gross revenue for the twelve months ended December 31, 2002. In 2003, we sold $61,843 of ephedra-containing products.

Ephedra containing products have been the subject of adverse publicity in the United States and other countries relating to alleged harmful effects and were subsequently removed from the market due to an FDA pronouncement effective April 2004.

We market ephedrine-free products. However, these formulations may not be popular with customers accustomed to products containing ephedra. On the other hand, to the extent that sales of ephedra-containing products by our competitors cease as a result of the new FDA ban, sales of our current non-ephedra products may be positively affected.

Although we cannot predict what new legislation or regulations governing our activities will be enacted by legislative bodies or promulgated by agencies regulating our activities, we do know that our industry has come under increased scrutiny principally due to the FDA`s investigation of the use of ephedra. We believe we will become subject to additional laws or regulations administered by the FDA or other federal, state, or foreign regulatory authorities. We also believe the laws or regulations which we consider favorable may be repealed or more stringent interpretations of current laws or regulations will be implemented in the future. Any or all of such requirements could be a burden and costly, to us. Future regulations could:

o require us to change the way we conduct business;

o require us to change the contents of our products;

o make us keep additional records;

o make us increase the available documentation of the properties

of our products; or

o make us increase or use different labeling and scientific proof
of product ingredients, safety or usefulness.


PRODUCT LIABILITY


The availability of product liability coverage has decreased and its cost increased materially. The Company, like other marketers of products that are intended to be ingested, face the inherent risk of exposure to product liability claims in the event that the use of our products results in injury. We currently maintain product liability insurance coverage of $5,000,000.

The Company`s cost to procure this $5,000,000 beginning in March 2004 of coverage was over twenty times greater than the cost to procure the $6,000,000 worth of coverage in the prior year. In addition, the current coverage is on a "claims made" rather than an "occurrence" basis. Our ability to maintain appropriate products liability coverage in the future can not be guaranteed. The number of carriers offering product liability coverage to us is very limited. The loss of coverage would significantly impair our ability to continue business.

We believe that our insurance coverage will be adequate to cover any claims relating to our products. We further believe that by ceasing to sell products containing ephedra and agreeing to accepting returns of our customers existing inventory, we reduced potential liability relating to ephedra. We are not aware of any claims similar to those relating to ephedra having been made with respect to any of the other ingredients contained in our products.


CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS



THE COMPANY`S ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION DUE TO THE LACK OF

CAPITAL. BECAUSE OF THE UNCERTAINTIES IN OUR ABILITY TO SATISFY ITS FUTURE

CAPITAL NEEDS, OUR INDEPENDENT AUDITORS` REPORT ON ITS FINANCIAL STATEMENTS FOR

THE YEAR ENDED DECEMBER 31, 2003 CONTAINS AN EXPLANATORY PARAGRAPH ABOUT OUR

ABILITY TO CONTINUE AS A GOING CONCERN.



IF GARDEN STATE NUTRITIONALS, OUR SOLE MANUFACTURER, FAILS TO SUPPLY

OUR PRODUCTS IN SUFFICIENT QUANTITIES AND IN A TIMELY FASHION, OUR BUSINESS MAY
SUFFER. We currently obtain 100% of our manufactured product from a single source of supply, Garden State Nutritionals. In 2002, we entered into a two year contract with GSN to manufacture all of our products. In the event that GSN is unable or unwilling to provide us with the products in accordance with the terms of our contract, delays in securing alternative sources of supply would result in a material adverse effect upon our operations.

THE DIETARY SUPPLEMENT INDUSTRY IS HIGHLY COMPETITIVE. Many of our competitors, particularly manufacturers of nationally advertised brand name products, are larger and have resources substantially greater than we do. In the future, if not currently, one or more of these companies could seek to compete more directly with us by manufacturing and distributing their own or others` products, or by significantly lowering the prices of their existing national brand products. If one or more of our competitors significantly reduce their prices on existing products in an effort to gain market share or aggressively promote new products in an effort to enter a market, our results of operations or market position could be adversely affected. In addition, because the formulations of our products are not proprietary, similar formulations are currently being developed and marketed by these competitors.

Our products may also face competition in the future from diet-related drugs introduced by pharmaceutical companies.


WE CURRENTLY HAVE A LIMITED NUMBER OF PRODUCTS. WE CURRENTLY MARKET

SEVEN PRODUCTS, AND ARE HIGHLY RELIANT ON A SINGLE PRODUCT, THE ORIGINAL CARB
CUTTER(R). The loss of, or deterioration in the popularity of any one or more of our other brands will have a material adverse effect on our Company.



OUR FAILURE TO DEVELOP AND INTRODUCE NEW PRODUCTS COULD HAVE AN ADVERSE
EFFECT ON OUR COMPANY. We believe our ability to grow in our existing market is partially dependent upon our ability to introduce new and innovative products into these markets. Although we seek to introduce additional products in our existing markets, the success of new products is subject to a number of variables, including developing products that will appeal to customers and competing with product launches by our competitors. We cannot assure you that our efforts to develop and introduce new products will be successful or that customers will accept new products.


WE COULD BE ADVERSELY AFFECTED IF ANY OF OUR PRODUCTS OR ANY SIMILAR

PRODUCTS DISTRIBUTED BY OTHER COMPANIES SHOULD PROVE OR BE ASSERTED TO BE

HARMFUL TO CONSUMERS OR SHOULD SCIENTIFIC STUDIES PROVIDE UNFAVORABLE FINDINGS
REGARDING THE EFFECTIVENESS OF OUR PRODUCTS. All of our products have certificates of analysis supplied by our manufacturer. We are highly dependent upon our customers` and the retail consumers` perception of the overall integrity of our business, as well as the safety and quality of our products and similar products distributed by other companies, which may not adhere to our quality standards. Our ability to attract and retain customers who, in turn, attract retail consumers, could be adversely affected by negative publicity regarding our products or one or more ingredients in our products or by the announcement by any governmental agency of a regulatory initiative relating to ingredients in our products.

OUR CUSTOMERS MAY DISCONTINUE USE OF OUR PRODUCTS AT ANY TIME. Our customers order products on a purchase order basis and may discontinue the sale of our products at any time. If product sales are discontinued, we may not receive payment for units that are not paid for as of the time of discontinuation. Additionally, certain of our customers have the right to take a credit in an amount equal to the unpaid balance of the discontinued product against other products of ours that they may purchase.

OUR SUCCESS LARGELY DEPENDS UPON NATIONAL MEDIA ATTENTION. We believe that the historical growth experienced by the nutritional supplement market is based in part on the national media attention regarding recent scientific research suggesting potential health benefits from regular consumption of certain vitamins and other nutritional products. Such research has been described in major medical journals, magazines, newspapers and television programs. The scientific research to date is preliminary, and there can be no assurance of future favorable scientific results and media attention or of the absence of unfavorable or inconsistent findings. While public awareness of the positive effects of vitamins and nutritional supplements on health was heightened by widely publicized reports of scientific findings supporting such claims during 1997-1998, we believe that negative media attention focusing on questions of efficacy, safety and label claim content have had a significant adverse impact on the supplement industry over the past two years. In particular, negative publicity with respect to ephedrine products has impacted our business. The lack of growth in the nutritional supplement industry has also been caused by the lack of new "blockbuster" products and increasing competition, including intense private label expansion. There can be no assurance that these factors will not be present in the future.


WE, LIKE OTHER SELLERS OF PRODUCTS THAT ARE INGESTED, FACE AN INHERENT

RISK OF EXPOSURE TO PRODUCT LIABILITY CLAIMS IF, AMONG OTHER THINGS, THE USE OF
OURPRODUCTS RESULTS IN INJURY. We currently have product liability insurance for our operations in amounts we believe are adequate for our operations. There can be no assurance, however, that such insurance will continue to be available at a reasonable cost, if at all, or, if available, will be adequate to cover such liabilities.


RESTRICTIVE GOVERNMENTAL REGULATIONS GOVERN THE MANUFACTURING AND
DISTRIBUTION OF OUR PRODUCTS. We are subject to numerous governmental regulations, including, but not limited to, regulations promulgated by FDA, FTC, and the Consumer Product Safety Commission, regarding the distribution, labeling, and promotion of our products. All of the ingredients that we use in our products have been reviewed by the FDA upon submission of information by others. If we intend to use any ingredient in our products that has not already been reviewed by the FDA, we would be required to


submit the new dietary ingredient to the FDA and to demonstrate a history of safe use. If the FDA does not accept the evidence of safety we present for the new dietary ingredient, the FDA could determine that such result ingredient should be regulated as a food additive and require time consuming and costly FDA approval. Additionally, under the FD&CA (including NLEA and DSHEA), the FDA has issued regulations regarding labeling and marketing of our products, and the NLEA regulates nutrient and ingredient labeling. The FTC regulates marketing practices and advertising of our products. Our business and financial results could be materially harmed by our failure to comply with these labeling and marketing regulations.

The laws and regulations relating to our products are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations and administrative and judicial interpretation of existing laws. These changes may have a dramatic effect on our business. Such changes may be applied retroactively. The ultimate timing or effect of such changes cannot be predicted. Our failure to comply with such laws, requirements, and regulations could adversely affect our business and finances.


WE DEPEND ON SIGNIFICANT CUSTOMERS FOR A LARGE PERCENTAGE OF OUR NET
SALES. Our largest customers are GNC, Wal-Mart, Walgreens, Rite Aid, Eckerd`s and CVS. We do not have written agreements with any of these customers. We cannot assure you that these customers will continue as major customers of the Company. The loss of any of these customers, or a significant reduction in purchase volume by any of these customers, could have a material adverse effect on our results of operations or financial condition.


WE BELIEVE THAT TRADEMARKS AND OTHER PROPRIETARY RIGHTS ARE AMONG OUR
MOST IMPORTANT ASSETS. In fiscal 2003, substantially all of our net sales were from products bearing proprietary brand names, such as Carb Cutter(R). Accordingly, our future success depends upon the goodwill associated with these brand names. Although our principal brand names are registered in the United States, we cannot assure you that the steps we have taken to protect our proprietary rights in our brand names will be adequate to prevent the misappropriation of these registered brand names in the United States or abroad. In addition, the laws of some foreign countries do not protect proprietary rights in brand names to the same extent as do the laws of the United States. In addition, to the extent that we rely on common law trademark rights to protect our unregistered trademarks, such common law trademark rights do not provide us with the same level of protection as afforded by a United States federal registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. Additionally, the sales of certain of our products rely on our ability to maintain and extend our licensing agreements with third parties, and we cannot assure you that these third parties can successfully maintain their intellectual property rights or that we will be successful in maintaining these licensing agreements. If we lose the right to use these licenses, our business could be materially adversely affected.

Although we are committed to enforce our various trademarks and other intellectual property rights against infringement, we cannot assure you that we will be able to successfully do so. The loss of, or deterioration in, our intellectual property rights could adversely affect our business.


WE DEPEND SUBSTANTIALLY ON THE CONTINUED SERVICES AND PERFORMANCE OF
CHRISTOPHER TISI. Our business may be hurt if Christopher Tisi, our President and Chief Executive Officer, leaves us. Although we have an employment agreement with Mr. Tisi, this does not guarantee that he will remain with us. If we lose his services, we may not be able to attract and retain additional qualified personnel to fill his position in the future.

OUR STOCK PRICE IS LIKELY TO REMAIN VOLATILE. The stock market has, from time to time, experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, the market price of our common stock, like the stock price of many



publicly traded dietary and nutritional product companies, has been, and will likely continue to be, volatile. Prices of our common stock may be influenced by many factors, including:

o investor perception of us;

o analyst recommendations;

o market conditions relating to dietary and nutritional product

companies;

o announcements of new products by us or our competitors;
o publicity regarding actual or potential developments relating to

products under development by us or our competitors;

o developments or disputes concerning proprietary rights;
o regulatory developments;

o period to period fluctuations in financial results of us and our

competitors;

o future sales of substantial amounts of common stock by
shareholders; and

o economic and other external factors.
WE ARE NOT LIKELY TO PAY DIVIDENDS. We have not paid any cash dividends on our common stock and we do not plan to pay any cash dividends in the foreseeable future. We plan to retain any earnings for the operation of our business.

[meisterfu]

Hier kurtz die aktuellen Nasdaq level 2 daten

5000 im Bid zu 0,36 5000 im Ask zu 0,47
5000 im ask zu 0,48
2500 im ask zu 0,51
2500 im ask zu 0,51
5000 im ask zu 0,55
2500 im ask zu 0,71
500 im ask zu 1
500 im ask zu 1,2
500 im ask zu 1,5
500 im ask zu 2
500 im ask zu 3

also nur noch 17500 stücke bis es abgeht ohne ende.

Letzter kurs 0,45 bei 72500 gehandelten st.

[meisterfu]

Übrigens die zahlen sind gestern nach börsenschluß gekommen, deshalb reagiert der markt erst heute.

Gehandelt wird vorwiegend in den usa, in deutschland gibts zwar welche in Berlin, aber da ist fast nie umsatz, deshalb besser in amerika zu kaufen

[meisterfu]

Immerhin heute 92500 st schon gehandelt.

Das ist mehr als der übliche tagesumsatz

[meisterfu]

Naja die letzten 2 stunden hat sich nicht so viel getan

[meisterfu]

Sagt mal pennt ihr alle, hnns ist der hammer und ihr schlaft alle.

3 mio Umsatz steigerung und 0,19 Net income pro share aus operativem Geschäft, bei nur 0,4 im kurs.

Ich warte echt darauf, das ich später nachlesen kann, dass ihr später alle sagt, man da hätten wir dabei sein können.

Realistisches Kursziel 3,5 dollar

Etwas übertrieben aber möglich auch 5 dollar

Habt ihr keine Meinung dazu.

hier nochmasl

NET REVENUES


Year ended December 31, 2003 compared with Year ended December 31, 2002

Net revenues for the twelve months-ended December 31, 2003 increased by $2,984,358 to $6,552,206 versus the comparable period in 2002 of $3,567,848. Net revenue from two of our major customers increased by $2,556,363 and accounted for 61% of our net revenue in 2003 compared to 44.5% of our net revenue account for by our two largest customers in 2002. Increases in the co-op-advertising and promotions, and in-house advertising, in the amounts of $282,090 and $1,003,489 respectively, significantly contributed to the increase in net revenue. During the twelve months ended December 31, 2003, six customers accounted for 83.6% of our net revenues, compared to 64.8%.


Year ended December 31, 2002 compared with Year ended December 31, 2001

Net revenues for the twelve months-ended December 31, 2002 decreased by $272,541 to $3,567,848 versus the comparable period in 2001 of $3,840,389, also because of a soft market and reduced advertising.

During the twelve months ended December 31, 2002, six companies accounted for 64.8% of our gross revenues. GNC, our largest account, accounted for 20.5% of gross revenues versus the comparable period in 2001 of 20.8%.
increased by 2

[meisterfu]

Bin mal gespannt was heute passiert.

gestern immerhin 150 k gehandelt.

Verhältnismäßig viole wenn man bedenkt das es nur ca 5 mio stücke gibt.

[meisterfu]

rechne heute mit 250 k gehandelten aktien bei einem kurs von 0,75-09

[bullme]

masterfu,

könntest du bitte das aktuelle orderbuch aus den staaten reinstellen?

mfg

[meisterfu]

Aktuell 16.26 UHR level 2 nasdaq


10000 bid zu 0,35 5000 im ask zu 0,48
2500 im ask zu 0,51
2500 im ask zu 0,51
2500 im ask zu 0,55
2500 im ask zu 0,55
2500 im ask zu 0,71
500 im ask zu 1,01
500 im ask zu 1,21
500 im ask zu 1,5
500 im ask zu 3

also wenn jetzt die letzten 3 5000 blöcke bei ca 0,55 fallen, dann gehts wirklich ab ohnen ende.

Wir sind immer noch bein KGV von 2,4 !!!!!

[meisterfu]

naja immerhin 100 k gehandelt in amiland und 36 k in deutschland

[meisterfu]

na ja am schluß immerhin 15000 im bid zu 0,4 und nur noch 5000 zu 0,48 scheint also weiter zu swteigen.

ich denke wir sehen am montag deutliche kurssteigerungen richtung 1 dollar.

es sind ja keine mehr da.

nur noch 5000 zu 0,48
5000 zu 0,51
5000 zu 0,55
2500 zu 0,71
500 zu 1
500 zu 1,2
500 zu 1,5
500 zu 2
500 zu 3

also sagen wir mit den nächsten ca 30000 st die gekauft werden, gelangen wir bis auf 0,71

mit weiteren ca 30000 st sind wi dann bei 2 dollar.

also grüßle

[meisterfu]

Also bis 1,5 dollar ist doch wohlpflicht da wöären sie bei kgv von 7

Montag geht die post ab

[meisterfu]

mal sehen wie die heute eröffnen.

Denke es geht weiter aufwärts

[meisterfu]

Momentan orderbuch in usa

2500 zu 0,55
2500 zu 0,65
2500 zu 0,71
500 zu 1,01

[meisterfu]

schade aber die 1000 % haben wir immer noch nicht !

[benefactor [KommA]]

Hast du überhaupt eine Ahnung wie so ein Orderbuch aufgebaut ist? Bei den MM´s gibt es, wie auch bei Island und anderen ECN´s sehr viele Einträge, die MM´s jedoch zeigen immer nur ihre besten Angebote. Also deine Theorie mit: es steht fast nichts im Orderbuch, ist schwachsinnig.

[meisterfu]

Auserdem stehen wir kurtz vor einem deutlichen Chartausbruch.

Es muß im grunde nur noch die 0,55 fallen.

Dann ist der Chart offen und vielleicht kommen dann noch ein paar die nach dem chart traden dazu.

Ich sag nur festhalten , was glaubt ihr wie ihr euch in den a--.. beißt, wenn wir innerhalb von ein paar minuten nach dem ausbruch, an die 2 dollar ranlaufen.

[meisterfu]

bin gespannt ob wir heute aus dem chart ausbrechen.

2500 zu 0,63
2500 zu 0,65
2500 zu 0,71

und ende gelände dann 500 weise ab 1,01 bis 3 dollar

[meisterfu]

brechen wir den chart heute ?