Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS-INTRODUCTION
The MNI Group Inc. ("The Company") has primarily been engaged in the development and distribution of nutritional and health products for humans and pets. During the past fiscal year, while conducting its existing business, the Company elected to focus its efforts on the development of a proprietary brand of specially formulated phyto-estrogen and micronutrient nutritional supplements targeting the various life cycles experienced by women and based on current nutritional knowledge. The Company also began development of a woman's internet site "womenshealthnetwork.com" which is intended to provide comprehensive health care information for women on a broad range of conditions.
The Company's strategy is to provide comprehensive healthcare information on a variety of conditions important to women to help them evaluate their health choices. As part of this overall strategy, the Company intends to sell its proprietary line of nutritional supplements as well as other complementary products and services on its web site. The Company believes its strategy is consistent with certain trends that are emerging with respect to women's health.
INDUSTRY TRENDS AND STRATEGY
The Company believes that the markets for nutritional products for women are expanding. By responding to these trends, the Company believes that it can become a premier marketer of health and nutritional products for women and can establish its Internet site as a widely recognized source of health information and products.
o The expanding roles of OB/GYNs and the Nurse Practitioners and Physician Assistants focused on women's health create a market opportunity for the Company, which the Company intends to leverage through a marketing program targeting these professionals;
o The Company believes that there is a significant and growing population of women who are dissatisfied with their health care. The establishment of the Company's web site with detailed health information developed in conjunction with its Medical Advisory Board, is intended to provide women and their clinicians with enhanced awareness about the conditions affecting women and the treatment options available;
o The Company believes that women are seeking an on-line forum where they can find credible information and purchase products that address their individual needs. The Company is designing its Internet site to include, among other components, hosted chat rooms (monitored by members of its Medical Advisory Board).
The Company has had a very limited operating history in the women's health care arena on which to base an evaluation of its business and prospects.
INDUSTRY OVERVIEW/NUTRITIONAL SUPPLEMENTS
The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products that are generally intended to enhance the body's performance and well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients. With certain limited exceptions, the sale of nutritional supplements are not subject to FDA approval prior to sale. See "Government Regulation" below.
Sales in the vitamin/supplement market in which the Company's products compete totaled approximately $14.68 billion in 1999(Nutrition Business Journal), and is experiencing a double digit annual growth rate, (N/Sight, The Hartman Group; Winter 1998-9.). The Company believes the growth in the nutritional supplement market is driven by several factors, including (i) the general public's heightened awareness and understanding of the connection between diet and health, (ii) the aging population, particularly the baby-boomer generation, which is more likely to consume nutritional supplements, (iii) product introduction in response to new scientific research and (iv) the nationwide trend toward preventive medicine.
WOMEN'S MARKET
The Company, in developing its new products, elected to focus on the women's market because women are the primary household shoppers and are predominately the primary health care decision-makers for their family.
Management believes that women are highly interested and informed about health care issues, but are not as satisfied as men with the information or the level of communication they receive from their health care provider. Additionally, several studies have found that, in comparison to men, women generally receive less thorough evaluations for complaints, less explanation in response to questions and fewer interventions from their health care provider. In the face of these conditions, many women have sought out alternative remedies.
It is estimated that 40 percent of women increasingly believe they need supplements to ensure proper health. Part of this belief stems from dissatisfaction with the cost and quality of treatment experienced within the mainstream medical community as described above. In addition, increased knowledge and exposure to the benefits of natural remedies has also helped drive women's interest in the dietary supplement industry.
While many of the women's products currently on the market are skewed toward an older generation, manufacturers now recognize that as younger women become more interested in maintaining their current good health status, the market may shift toward total health nutrition products as well as intervention. The Company believes that its branded line of products is broad enough to appeal to all groups of women. Management is aware that this is a highly competitive market and, as described below, believes it must target specific market niches in order to successfully market its products.
MARKETING AND DISTRIBUTION STRATEGY
In order to take advantage of the burgeoning interest in women's health issues and alternative treatment, the Company has developed a two-pronged marketing strategy as well as its Internet strategy. The Company recognizes that the success of its strategy will be dependent upon the quality of its products; its ability to establish brand name recognition for its products; its ability to continue to develop new products; and the ability of its management and the people associated with the Company to implement and execute its strategy. There is no certainty that the Company will be successful in implementing its strategy. In addition, the market for nutritional supplements is extremely competitive. There are a significant number of companies with substantially greater resources and with established brands presently being marketed.
PROFESSIONAL MARKET - NURSE-PRACTITIONERS AND PHYSICIANS
As the amount of money spent on alternative health care continues to increase health care professionals have recognized the importance of non-traditional approaches to health care. Although ten years ago it would have been extremely unusual to find physicians dispensing products, with the advent of managed care, physicians have become acutely aware of opportunities to enhance their revenues from their practices.
The principal professional groups to be initially targeted are Nurse Practitioners and OB/GYN's.
NURSE PRACTITIONERS
NP's are registered nurses with advanced clinical and academic training at the master levels. There are approximately 50,000 nurse practitioners, in the country, 12,500 of whom own and operate their practice or clinic or run the primary care segment of the physician's practice (THE NURSE PRACTITIONER. Market Dynamics stats) Others work in managed care, hospitals and group practices. The Nurse Practitioner has become a valuable resource for primary health care. Through state certification, NPs may work autonomously from physicians and provide comprehensive primary health care physical exams, diagnosis, and appropriate pharmaceutical treatment. They account for more than 175 million patient visits yearly, write over 200 million prescriptions for all drug classes, and maintain their own liability coverage. The NPs incorporate education, early detection and prevention of disease, reduction of risk behaviors, and a philosophic approach to health in the treatment of their patients. A recent survey finds that approximately 93% of Nurse Practitioners use a form of alternative medicine in their practice. Their patient base includes many of the health care consumers who are disenfranchised with traditional medical care and seek a holistic approach. Government and independent studies have shown that Nurse Practitioners provide a greater range and quality of care than all other healthcare providers, appealing to those consumers who tend to seek more personalized treatment with a focus on prevention.
The Company believes that with the number of patient visits and the NP's recognition of alternative health care as integral to a comprehensive program of medical treatment, the NPs offer a very large potential market for the Company's line of products.
The Company intends to target this market through trade shows, and by creating alliances with institutions/hospitals that are either engaged in using NPs as primary care providers or have on-site facilities specifically engaged in dealing with woman's health issues. In this market, the Company intends to sell its products under the brand name FemChoice(TM). The Company's strategy is to build brand name recognition and become recognized for delivering the broadest line of quality products for women. There are two organizations that serve as trade associations for NP's (American Nurse Practitioners and Nurse Practitioners for Woman's Health). Each of these associations has a trade monthly magazine with an aggregate of approximately 60,000 monthly subscribers. The Company intends to promote its products through these publications with particular emphasis on creating brand name recognition as well as promoting its Internet site. The Company also has hired an NP whose primary job will be to market the Company's line of products to the NPs. Initially the NP will focus on NPs with practices in the NY/NJ metropolitan area. In addition, the Company will participate in industry trade shows.
PHYSICIANS (OB/GYNS)
The Company believes that many women now use OB/GYNs as their primary care physician and that as the OB/GYNs role expands its focus on women's overall health, they will begin to recommend nutritional supplements to their patients, In view of the fact that approximately 54% of approximately 57 million U.S. (women between the ages of 35 and 69) are regularly visiting an OB/GYN the Company believes targeting the OB/GYN offers significant potential. As of April 4, 2000, in the United States and its protectorates, there were approximately 40,000
OB/GYNs of which 23,500 are Board certified (WWW.ACOG.ORG, source: American Physician Characteristics and Distribution in the US 2000-2001). Initially the Company will market to the OB/GYNs through trade shows and trade journals.
NETWORK MARKETING
Network Marketing covers any type of selling that uses independent representatives working on commission and further permits the independent representative to recruit other independent distributors and to draw a commission from the sales of those recruits. In 1998, Network Marketing sales attributable to personal care and wellness products were $4.38 billion (Nutrition Business Journal (Volume IV, No. 6, Industry Overview 1999).
The Company has distribution relationships with several network marketing groups, including Natural Health Options (NHO"). This group is focused on growing its network marketing force in the African American market. NHO was formed in late 1998 and to date has been selling the Company's preexisting line of nutritional products described below. The Company anticipates that NHO will begin to offer the FEM CHOICE products within the first quarter of 2000. There is no assurance that NHO will be successful in developing its network marketing program.
The Company is also working with other network marketing companies that are similarly focused on developing certain market niches. There is no assurance that this distribution strategy will be successful.
INTERNET STRATEGY
Management believes that the increasing focus on the alternative health market for women provides a significant opportunity for the development of an Internet strategy.
MARKET OPPORTUNITY
The Company's proposed Internet site, womenshealthnetwork.com is intended to enable consumers (principally women) to better manage their personal health with comprehensive, relevant and timely content. The Company intends to establish its network as a recognized and comprehensive source of healthcare information for women and services on the Internet. The business model is to generate revenues from a variety of sources. (i) e-commerce transactions, such as sales of nutritional supplements (principally the Company's FemChoice branded line of products) (ii) sharing of revenues with other companies that have formed alliances with the Company to offer their products and services on the womenshealthnetwork.com site.
Other sources of revenue may come from the sale of the Company's products (under private label) to other Internet health sites. The Company will label all of its products in both English and Spanish, and all information about the products will be available in both languages. In addition, the Company believes that if it achieves sufficient traffic, other opportunities include the offering of CME (Continuing Medical Education) courses for professionals and using its database (assuming visitors when registering at site elect to "opt in") for targeted marketing programs.
OVERALL INTERNET BUSINESS STRATEGY
The Company's internet business strategy incorporates the following key elements:
o Establish the womenshealthnetwork.com brand so that consumers associate trustworthiness and credibility with our company (The Company also has obtained the domain name for womenshealth.com in SPANISH "SaludDeMujer");
o Provide consumers with high quality peer reviewed healthcare information to attract users to womenshealthnetwork.com and promote their loyalty to the website;
o Syndicate content through affiliates to promote traffic growth;
o Develop an on-line healthcare community to allow users with similar health-related experiences to exchange information and gather news and knowledge in a secure, anonymous environment;
o Provide consumers with unique features such as one that educates consumers on the interaction among various drugs and other substances;
o Provide an attractive website designed to attract women;
o Facilitate e-commerce transactions offered by merchants, manufacturers and service providers to a highly targeted community of health-conscious consumers, including dual labeling in Spanish to appeal to the Hispanic market which is a rapidly growing market in the U.S. for nutritional supplements;
o User-friendly site, Internet sites are frequently designed with sophisticated users and state of the art equipment in mind. womenshealthnetwork.com will be designed for the lowest common denominator both in machines and in expertise;
o The site will virtually navigate itself - utilizing point and click algorithms. The site will guide even the novice Web surfer to his or her destination, user will be able to navigate site without being constantly required to navigate through advertising and product offerings;
o The site will provide personal tracking - If desired, a visitor to the site can enter his name and e-mail address. From that point forward, the site will recognize that visitor by name when they return; this feature goes a long way towards creating a user-friendly site. Eventually the registered visitor will be updated automatically with information pertinent to his or her concern;
o Personal tracking will build a targeted e-mail database;
o The key aspect of the Company's projected site will be to provide the latest information on various alternative treatments for woman's health issues as opposed to the more common approach of providing more limited information with a focus on selling products; and
o The site will provide access to members of the Company's Medical Advisory Board (as described below) during monitored chat room sessions. The site will also list information on upcoming educational events and lectures across the country.
MARKETING STRATEGY
The Company's site is intended to become a directory for women seeking health information (a "hub" site). Hub sites have a characteristic that allows them to be promoted inexpensively on the Internet. They are viewed as conduits for information and not advertiser driven. The Company initially will not carry any advertising on its site.
The Company's strategy will utilize a variety of on-line and off-line marketing initiatives focused on building brand name awareness, drawing traffic to the site maximizing the amount of traffic to the site and minimizing the cost of acquiring visitors.
To increase brand visibility, the Company will initially concentrate on promoting its website through an offline strategy of promoting its products and website through targeted magazines for professionals such as OB/GYNs, and Nurse Practitioners and through newsletter programs to targeted groups.
PRODUCTS
The Company has developed a total of 31 products (described below) to be offered under its branded FEM CHOICE((TM)) label.
1. MENOPAUSE (Capsule) A support and replenishing formula designed to help alleviate symptoms of hot flashes, irritability and mood swings.
2. PMS (Capsule) A synergistically balanced formula providing a natural approach to provide support for the relief of PMS and menstrual discomforts such as mood and water.
3. OSTEO CARE (Capsule) This extensively researched nutrient has shown in clinical studies its ability to support bone health and increase bone mineral density.
4. JOINT MAINTENANCE (Caplet) A unique blend of ingredients that work together to provide the building blocks needed to maintain healthy joint cartilage and decrease the pain associated with joint disease.
5. CHOLESTEROL CONTROL FORMULA (CAPSULE) Contains all the ingredients that work together in the body to help maintain a healthy cholesterol level and keep the heart strong and healthy.
6. WILD MEXICAN YAM EXTRACT (CAPSULE) Contains progesterone like components making it useful for helping with PMS and menopause.
7. CANDIDA CARE (CAPSULE) This revolutionary formula contains the most researched, cutting-edge ingredients to provide nutritional support for yeast control
8. GENINSTEIN 1000 MG (TABLET) Standardized soy Isoflavonoid extract. A nutrient dense "Phytohormone" (Plant Estrogens) that may be helpful in menopausal symptoms.
9. CRANBERRY CONCENTRATE (SOFTGEL) The natural and concentrated benefits of cranberries without the unnecessary sugars and colors found in juices. A definite need in acidifying urine and preventing bacteria from adhering to the bladder walls, a common female problem.
10. NUTRITION PLUS (TABLET) A phytonutrient powerhouse! An advanced formula designed to help meet the nutritional dietary supplement needs of women.
11. SUPER FOLIC ACID (CAPSULE) 800 mcg of Folacin, a heart healthy supplement for women and a positive aid during menopause when women are less efficient in absorbing nutrients.
12. INNER BEAUTY FOR HAIR, NAILS AND SKIN (TABLET) Nourishes, strengthens, and supplies the nutrients needed for healthy lustrous hair, glowing skin, and shiny nails.
13. SUPER PRIMROSE OIL (CAPSULE) Three (3) times the G.L.A. content of regular Evening Primrose Oil: 1300 mg/135 mg G.L.A.
14. PRO-GREENS (POWDER) An advanced Probiotic whole food, multi-nutrient, concentrated powder.
15-17. THE HEALTHY NUT (SNACK) SALTED, UNSALTED AND HONEY ROASTED FLAVORS (three flavors). A natural snack high in protein and phytonutrients.
18. KAVA KAVA (CAPSULE) Eases tension, relaxes muscles and helps contribute to a good night's sleep.
19. Huperzine A Complex contains an ingredient being tested in clinical trials in the United States for the treatment of memory loss associated with aging.
20. PHYTO-TONIC (LIQUID) A true health formula dietary supplement.
21. NATURAL PLANT ESTROGENS (TABLETS) The natural way to help women who have an estrogen imbalance.
22. SUPER EPA (SOFTGEL)Omega 3 fatty acids consisting of Eicosapentaenoic Acid (EPA) and Docosahexaenoic Acid (DHA) provide benefits for the heart and circulatory system.
23. OLIVE LEAF EXTRACT (CAPSULE) is similar in molecular configuration to well-established antioxidants such as the bioflavonoids, grape seed compounds, pycnogenol, soy isoflavones and green tea catechins.
24. COLON ENHANCER (CAPSULE) contains natural, gentle fibers that help keep the entire gastrointestinal system functioning smoothly, while promoting the growth of helpful bacteria in the intestines.
25. BLACK CURRANT SEED OIL (SOFTGEL) A comprehensive source of Omega 3 and Omega 6 (Essential Fatty acids). Important in the production of prostaglandins.
26. CELLU-SHRINK (CAPSULE) is made from plant extracts and other dietary supplements. Works below the surface, where cellulite occurs.
27. ESSENTIAL OILS (SOFTGEL) Provides Omega 3, 6 and 9 Essential Fatty Acids.
28. FEVERFEW (CAPSULE) Feverfew is derived from the Latin term for "chase away fevers." Provides anti-inflammatory properties.
29. COLLAGEN PLUS (LIQUID) nutritionally supports body structure and provides energy. Enhances lean body mass.
30. DONG QUAI (CAPSULE) Often called the "female ginseng", Dong Quai is an all-purpose herb used for a wide range of female complaints. This herb has been popular for centuries for its ability to invigorate and revitalize the body.
31. USRDA CALCIUM 1200 (WAFERS) A delicious chewable wafer flavored with malted milk. Provides the calcium necessary to prevent bone loss in women.
OTHER PRODUCTS
The Company is seeking to create alliances with other companies for the purpose of broadening the number of products that can be purchased at its website. The products/services to be offered will be consistent with the Company's strategy of providing women with quality information. For example, the Company will
produce a module on its web site to represent a company which offers a medical intervention weight reduction program. The Company will share (on an agreed basis) a percentage of the revenues from sales of these products on its site. The percentage will be determined shortly.
There is no assurance that the Company will be able to successfully negotiate agreements with other providers of products/services or that if agreements are entered into, revenues from such agreements will be generated.
MEDICAL ADVISORY BOARD
As part of the Company's strategy to create brand awareness of its site, and develop a reputation for quality healthcare information, it has formed a Medical Advisory Board consisting of:
Marianne J. Legato, M.D.,F.A.C.P., Chairperson is Professor of Clinical Medicine at Columbia University's College of Physicians and Surgeons and founder and Director of the Partnership for Women's health at Columbia. She is one of the nation's leading advocates for women's
health. She was a charter member of the Advisory Committee of the Office of Research on Women's Health of the National Institutes of Health (NIH) and is co-chair of that Office's Task Force on Research on Women's Health for the 21st Century. She also chaired the Sixth Annual Congress on Women's Health in Washington. D.C., in 1998.
She has served on NIH cardiovascular study sections and the basic science council of the American Heart Association. She was a director of the American Heart Association's New York Affiliate as well as a trustee of the New York Academy of Medicine. She is the founder and editor-in-chief of the new medical journal, Journal of Gender Specific Medicine.
Among her recent publications are Gender-Specific Physiology: How Real Is It? How Important Is It? International Journal of Fertility 42(1): 19-29, 1997; Gender-Specific Aspects of Obesity, International Journal of Fertility 42 (3): 184-197, 1997; Women's Perceptions of Their General Health, with Special Reference to Their Risk of Coronary Artery Disease: Results of a National Telephone Survey, Journal of Women's Health 6 (2): 189-198, 1997; Cardiovascular Disease in Women: Gender-Specific Aspects of Hypertension and the Consequences of Treatment, Journal of Women's Health 7(2):199-209, 1998; Women's Health: Not for Women Only, International Journal of Fertility 43 (2): 65-72, 1998.
Her groundbreaking work on women's health has led to several awards. Her book, The Female Heart: The Truth About Women and Heart Disease, won the Blakeslee Award of the American Heart Association. The most recent awards include being named as a "Health Hero" by American Health for Women and as "The Woman That Makes a Difference" by the New Your Women's Medical Association for 1997.
She is the author of Gender-Specific Aspects of Human Biology for Practicing Physicians (Future); What Women Need to Know: From Headaches to Heart Disease and Everything in Between (Simon & Schuster); and The Female Heart: The Truth About Women and Heart Disease (Simon & Schuster). She serves on the editorial boards of Cardiovascular Risk Factors, The Journal of Women's Health, Medicine and Behavior, and Prevention Magazine. She is the health advisor to The Ladies' Home Journal, and More magazines.
WENDY KLEIN, MD, FACP Program Director of the Dept. of Internal Medicine Women's Health Residency Track. Associate Professor of Internal Medicine & OB/GYN Virginia Commonwealth University, Richmond VA.
MARY DEKKER NETTLEMAN, MD Associate Dean for Primary Care Virginia Commonwealth University, School of Medicine, Richmond Professor and Division Chair of General Internal Medicine Virginia Commonwealth University, School of Medicine, Richmond
ELLEN SHAW DE PAREDES, MD Professor of Radiology, Chief of Breast Imaging Section Medical College of Virginia, Richmond President, Virginia chapter of the American College of Radiology-current Author of: ATLAS OF FILM - SCREEN MAMMOGRAPHY Urban and Schwarzenberg Publishing Co., Baltimore, Maryland. 1988, 364 pages ATLAS OF FILM - SCREEN MAMMOGRAPHY, 2nd Edition Williams and Wilkins, Baltimore. 1992, 650 pages
PETER D. VASH, MD, M.P.H. Assistant Clinical Professor of Medicine, UCLA Medical Center Board Certified Internist Specialist in eating Disorders and Endocrinology
ROBERT STENSON, MD One of 750 Gynecological Oncologists worldwide American College of Obstetricians and Gynecologists, Diplomate (F.A.C.O.G.) Director of Gynecological Oncology at Holy Name Hospital, Teaneck, NJ
RALPH E. MARCUS, MD Chief of Rheumatology and Medical Director, Osteoporosis Program Hackensack University Medical Center, Hackensack, NJ Chief of Rheumatology and Medical Director, Osteoporosis Program Women's Outpatient Center, Holy Name Hospital, Teaneck, NJ
FRANK E. VOGEL, PH.D., MD Chief, Interventional Radiology, Holy Name Hospital, Teaneck, NJ Assistant Professor of Radiology New York University Medical Center, New York, NY
ALEXIS FITZSIMMONS, R. N.-C., B.S.N., M.S.N., W.H.N.P. Director, Women's Outpatient Center, Holy Name Hospital, Teaneck, NJ
ISAAC GREENBERG, PH.D. Instructor, Dept. of Psychiatry (Psychologist) Harvard Medical School Department of Psychiatry Beth Israel Deaconess Medical Center, Boston, MA
LINDA ARPINO, M.A., C.D.N., R.D. Community Nutritionist and Professor New York State Dietetic Board of Directors
GARY D. WASSERMAN, MD Attending Urologist, Englewood Hospital and Medical Center, Englewood, NJ Attending Urologist, Holy Name Hospital, Teaneck, NJ
ANDREW M. SPECTOR, DMD, FAGD, FICOI Clinical Associate Professor, Surgical and Prosthetic Implantology Program New York University, New York, NY
FAYE E. WILLIAMS, ESQ., PH.D. President & CEO of Natural Health Options, Inc., Washington, DC Former Counsel to the US Congress
CYNTHIA STAMPER GRAFF President and CEO of Lindora, Inc., Costa Mesa, CA Founder of the Lean for Life Foundation, a non profit organization that promotes obesity research, educational programs, and funds weight control services to selected low income, morbidly obese, men, women and teenagers who meet the criteria.
The Company selected the members of the Advisory Board to take advantage of the professional's extensive experience in dealing with various women's health issues. Each of the members of the Medical Advisory Board have executed a letter agreement with the Company pursuant to which they agree to serve on the Medical Advisory board. As an inducement to each of the members of the Board other than Dr. Legato, they have received option grants totaling between 10,000 and 150,000 options.
In connection with her agreement to become Chairperson of the Company's Medical Advisory Board effective March 24, 2000, Dr. Legato will be paid $250,000 over the three year term of the agreement. In addition, the Company granted Dr. Legato and her assignee options to purchase a total of 3,985,000 shares of common stock of the Company at an exercise price of $0.875 per share. The options have a term of five years and vested 20% upon grant, with an additional 20% vesting on each six month anniversary of the date of grant (with accelerated vesting in the event of a sale of the Company), subject to Dr. Legato's continued performance under the consulting agreement during the vesting period with respect to the unvested portion of the options, except as provided in the consulting agreement. The Company has agreed to register the shares underlying the options granted to Dr. Legato under the Securities Act of 1933, as amended, on a Form S-8 Registration Statement. Pursuant to Dr. Legato's consulting agreement with the Company, options to purchase an additional 515,000 shares of common stock of the Company, on substantially the same terms as Dr. Legato's options, were granted to the Department of Medicine at Columbia University College of Physicians and Surgeons and to certain persons who will assist Dr. Legato in the performance of her duties under the consulting agreement.
PRINCIPAL CUSTOMERS
One customer, Life Plus International, was responsible for approximately $75,800 in sales for the year ended January 31, 2000, representing approximately 17% of total sales. For the year ended January 31, 1999, two customers were responsible for $523,000; Life Plus International for approximately $291,000 representing approximately 31% of total sales and Family Health Network for approximately $232,000 representing approximately 25% of total sales and in the year ended January 31, 1998, two customers were responsible for approximately $540,300 in sales, Life Plus International for approximately $400,000 representing approximately 43% of total sales and Equinox International for approximately $140,000, representing approximately 15% of total sales.
MANUFACTURING
The Company does not have a manufacturing facility, but relies on third parties to manufacture its products. The third party manufacturers are responsible for receipt and storage of raw material production and packaging and labeling of finished goods. At present, the Company is dependent upon four manufacturers for the production of all of its products. To the extent the manufacturers should discontinue their relationship with the Company, the Company's sales could be adversely impacted.
COMPETITION
The market for nutritional supplements and Internet Sites concentrating on health issues is highly competitive with few barriers to entry.
The Company will be competing with many health sites and nutritional supplement manufacturers as well as specialty health retailers, drug stores, supermarkets, and mass merchandisers. Many of the Company's potential competitors have significantly greater marketing and financial resources. The Company's Internet site, womenshealthnetwork.com, will compete with other Internet sites focused on women's health as well as sites focused on health care issues in general. While the Company believes the health information market is large enough to support many companies, the Company's ability to succeed will be dependent upon providing compelling Internet content to attract users and develop brand name recognition. The principal factors in attracting users will be dependent upon the quality and depth of the information on the site and the ability to attract users through various marketing approaches.
INTELLECTUAL PROPERTY
The Company regards the protection of copyrights, trademarks and other proprietary rights that it may own or license as material to its future success and competitive position. The Company intends to rely on a combination of laws and contractual restrictions such as confidentiality agreements to establish and protect its proprietary rights. Laws and contractual restrictions, however, may not be sufficient to prevent misappropriation of proprietary rights or deter others from independently developing products that are substantially equivalent or superior.
PATENTS. The Company owns four issued patents for its collagen Hydrolysate product. These are for (1) METHOD OF PROVIDING HIGH-PROTEIN NUTRITION BY THE ORAL ADMINISTRATION OF A PREDIGESTED PROTEIN COMPOSITION, (2) METHOD OF COMPOSITION FOR PREVENTING NUTRITIONAL DEFICIENCY, (3) METHOD OF TREATING NUTRITIONAL DEFICIENCY DURING CARDIAC CACHEXIA, DIABETES, HYPOGLYCEMIA, GASTROENTEROLOGY, LIPID, CELL GLYCOGEN AND KERATIN RELATED SKIN CONDITIONS AND ALCOHOLISM, and (4) METHOD OF TREATING OBESITY BY THE ORAL ADMINISTRATION OF A PREDIGESTED PROTEIN COMPOSITION. Some of the products that the Company offers incorporate patented technology owned by others, but most of the Company's products are not protected by patents.
COPYRIGHTS. The Company has applied for copyright registration for the Womens Health Network.com logo and the FemChoice brand. Proof of use has been filed and the Company awaits final approval.
TRADEMARKS AND DOMAIN NAMES. The Company owns the FemChoice and womenshealthnetwork.com, womanshealthnetwork.com, femchoice.com, whnnetwork.com, menshealthnetwork.com, kidshealthnetwork.com, genderhealth.net, gendermed.com, gendermed.net, genderspecificmed.com, genderspecificmed.net and saluddemujer.com. domain names. The Company has registered the .cc for several of these names. The .cc is a new domain name extension.
Under current domain registration practices, no one else can obtain an identical domain name, but can obtain a similar name or the identical name with a different suffix such as "net" or "org", The relationship between regulations governing domain names and the laws protecting trademarks and similar proprietary rights is evolving. Internet regulatory bodies regulate domain names and the present regulations may be subject to change.
In addition, the regulation of domain names in the United States and in foreign countries is subject to change. There are plans to establish additional top-level domain names, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, the Company may not acquire or be able to maintain its domain names in all of the countries in which it intends to conduct business, and the Company could be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of its domain names or trademarks.
While the Company intends to take the actions that it believes are necessary to protect its proprietary rights, it may not be successful in doing so. In addition, the Company may be dependent on the owners of the proprietary rights it licenses to protect those rights. Moreover, the Company and its licensors may face challenges to the validity and enforceability of proprietary rights and may not prevail in any litigation regarding those rights.
The Company is also subject to the risk of adverse claims and litigation alleging infringement of the proprietary rights of others. While the Company is not currently involved in any such claims, there can be no assurance against future infringement claims by third parties. The resolution of any such infringement claims may result in protracted and costly litigation, regardless of the merits of such claims. Moreover, any such resolution may require the Company to obtain a license to use those proprietary rights or possibly to cease using those rights altogether. Any of these events could have a material adverse effect on the Company's business, financial condition and results of operations.
TECHNOLOGY
The Company will rely upon third parties for its hardware and software. It is the Company's intention to employ existing software to manage its proposed e-commerce business. Effective March 29, 2000, the Company entered into two agreements with New Light Productions in Hawthorne, New York. Pursuant to the agreements, New Light will develop the web site and thereafter manage the site for the Company. The development agreement calls for development of the web site at a cost of $215,625.00 payable in four installments as follows: 25% ($53,906) due upon work commencement; 25% ($53,906) due upon acceptance of design document; 25% ($53,906) due upon acceptance of a working version of the site; and 25%($53,906) due upon final acceptance of the site and related deliverables. Management anticipates that the site will be operational by June 30, 2000. Pursuant to the hosting agreement, New Light will host the site for one year for a fee of $4590 payable as follows: $450 per month less a 15% discount.
GOVERNMENT REGULATION
The formulation, manufacture and labeling of the Company's products are subject to regulation by one or more federal agencies, including, principally, the Food and Drug Administration ("FDA"). These activities are also regulated by various agencies of the states and localities in which the Company's products are sold.
Principally through the efforts of the dietary supplement industry, on October 25, 1994, the Dietary Supplement Health and Education Act of 1994 was signed into law. The law amends the Federal Food, Drug, and Cosmetic Act and, in the judgment of the Company, is favorable to the dietary supplement industry. First and foremost, the legislation creates a new statutory class of "dietary supplements". This new class includes vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet. A dietary supplement which contains a new dietary ingredient, one not on the market as of October 15, 1994, will require evidence of a history of use or other evidence of safety establishing that it will reasonably be expected to be safe, such evidence to be provided by the manufacturer or distributor to the FDA before it may be marketed. The legislation also recognizes the need for the dissemination of information about the link between nutrition and health and provides that publications, which are not false and misleading and present a balanced view of available scientific information on a dietary supplement, may be used in connection with the sale of dietary supplements to consumers. Among other changes, the new law prevents the further regulation of dietary ingredients as "food additives" and allows the use of statements of nutritional support on product labels and in other labeling.
On September 23, 1997, the FDA issued final new regulations to implement the 1994 legislation. Among other things, these new regulations establish a procedure for dietary supplement companies to notify the FDA about the intended marketing of a new dietary ingredient or about the use in labeling of statements of nutritional support. The regulations also establish a new format for nutrition labeling on dietary supplements. The new format became mandatory on March 23, 1999, and the Company revised all of its dietary supplements labels to be in compliance by that date.
The FDA and other federal authorities are reviewing alternative approaches to assure the safety of vitamins, minerals, herbals and other products sold as dietary supplements. Increased regulatory oversight could subject us and other manufacturers and distributors of dietary supplements to increased production and compliance costs and possibly require capital expenditures. Future regulation affecting dietary supplements could result in a recall or discontinuance of certain products.
EMPLOYEES
The Company presently has 5 employees. To support future anticipated growth, the Company expects to hire additional employees, especially in the area of sales and marketing.
RECENT DEVELOPMENT
In November 1999, the Company completed a private placement for the principal amount of $1,521,250 of 10% Convertible Debentures ("Debentures") due October 1, 2000. Under the terms of the Debentures, the principal dollar amount is convertible by the holders at $.075 per share. The Debentures must be converted upon the Company amending its Certificate of Incorporation to increase its authorized capitalization to not less than 35,000,000 shares of Common Stock. The funds received by the Company will be adequate to conduct operations over the next 12 months, however, in order to fully implement the Company's strategy, the Company intends to seek additional capital in the second quarter of 2000. There can be no assurance the Company will be successful.
PREVIOUS BUSINESS OPERATIONS
During the fiscal year ending January 31, 2000, the revenues generated by the Company resulted from the sale of existing products, including pet products, home remedy products and nutritional supplements.
Commencing in the first quarter of 2000, the Company intends to focus on the sale of its new line of branded products FemChoice(TM) although it will continue to sell its other products if ordered. The Company does not intend to aggressively market its preexisting products.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Inapplicable.
Item 2.
Item 2. PROPERTIES
The principal executive offices of the Company are located at 10 West Forest Avenue, Englewood, New Jersey 07631, where it occupies approximately 7,500 square feet at an annual rental of $60,000 under a lease which expired in December 1999. The Company has renewed the lease for a period of five years commencing January 1, 2000. The annual rent for the initial three years is $65,625 and for the fourth and fifth year of the lease is $67,500.
Approximately 2,500 square feet of this facility house the Company's administrative offices with the balance utilized for shipping and warehousing. The Company presently subleases a portion of its space to non-affiliated persons. The Company also has arrangements with co-packers pursuant to which such suppliers manufacture, package and ship the Company's products to major customers. The Company believes its present facility is adequate for its present and reasonably foreseeable future operational needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
None.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended January 31, 2000.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock is currently traded over NASDAQ's Electronic Bulletin Board. Information as to the range of high and low bid quotations for the Company's Common Stock, for the periods indicated, as furnished by national Quotation Bureau incorporated, is set forth below:
BID ----------------------------------------- THREE MONTHS ENDED HIGH LOW
January 31, 1998 .3125 .3125 April 30, 1998 .40 .20 July 31, 1998 .19 .125 October 31, 1998 .09 .062 January 31, 1999 .062 .062 April 30, 1999 .03 .03 July 31, 1999 .07 .07 October 31, 1999 .25 .25 January 31, 2000 1.062 1.062
The above bid quotations represent prices between dealers and do not include actual retail mark-ups, mark-downs or commissions and may not represent actual transactions.
(b) As of March 31,2000, there were approximately 75 record holders of the Company's Common Stock.
(c) The Company has not declared any cash dividends on its Common Stock and it has no intention to pay cash dividends in the foreseeable future.
Item 6.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data for the Company and its wholly owned subsidiaries. This data is qualified in its entirety by the more detailed consolidated financial statements of the Company included elsewhere herein. The following selected consolidated financial data were derived from audited consolidated financial statements of the Company and should be read in conjunction with the statements included elsewhere herein.
STATEMENTS OF OPERATIONS DATA:
BALANCE SHEET DATA:
Item 7:
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
JANUARY 31, 2000
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes included elsewhere in the report. This discussion contains certain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors.
2000 - 1999
The results from continuing operations exclude the results of operations of K.O.S. Industries, Inc. (KOS) a former subsidiary. The Company terminated its agreement with KOS on December 31, 1998.
Sales for the year ended January 31, 2000 were $443,200 as compared with sales of $939,700 for the year ended January 31, 1999, a decrease of 52.8%. Cost of sales decreased from $527,700 for the year ended January 31, 1999, or 56.2% of sales, to $267,600, or 60.4% of sales, for the year ended January 31, 2000. Selling, general and administrative expenses increased 42.5% to $645,600 from $453,200. This was due to an increase in legal fees of approximately $50,000; cost associated with the issuance of the 10% Convertible Subordinated Debentures of approximately $26,000; an increase in travel, promotion and trade show expenses of approximately $27,000 and costs related to the introduction of new products of approximately $39,000. In addition, the Company incurred a general increase in salaries, rent and other operating costs of approximately $50,400. The decline in sales was due principally to the Company's decision to de-emphasize sales of its existing products and focus its efforts on the development of its women's line of products as well as the creation of an internet site devoted to women's health. The Company has expended $167,200 towards such development. For the year ended January 31, 2000, the Company incurred an operating loss of $643,600 as compared to an operating loss of $42,300 for the year ended January 31, 1999. The Company had a loss from continuing operations of $729,300 or ($.18) per share, as compared to a loss of $82,400 or ($.02) per share for the year ended January 31, 1999. The Company's gain from discontinued operations in 1999 was $15,700 resulting in a net loss of $66,700 for 1999 as compared to a net loss of $244,200 in 2000. The net loss for the year ended January 31, 2000 reflects the forgiveness of debt in the aggregate amount of $337,500 and the extinguishment of the minority interest of $147,600. (See Note 10 - to notes to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS) Interest expense was $94,700 and interest income was $9,000 for the
year ended January 31, 2000, as compared to interest expense of $40,100 during the comparable period of 1999 primarily due to interest on the $1,521,250 principal amount of 10% Convertible Subordinated Debentures outstanding.
1999 - 1998
The results from continuing operations exclude the results of operations of K.O.S Industries, Inc. (KOS) a former subsidiary. The Company terminated its agreement with KOS on December 31, 1998.
The Company had an operating loss from continuing operations of $82,400 and a net loss of $66,700 for the year ended January 31, 1999, as compared to an operating loss of $181,100 and a net loss of $206,600 for the prior year. The decrease in loss was primarily due to a decrease in general and administrative expenses of $82,300.
Sales for the year ended January 31, 1999 increased by $6,800 or less than 1% from $932,900 to 939,700. Cost of sales decreased by $28,200 or by 5% from $555,900 to $527,700. This resulted in an increased gross profit margin from 40% to 44%. Selling, general and administrative expenses decreased 15% from $535,500 to $453,200. This decrease was primarily due to a reduction in professional fees and other costs associated with the KOS acquisition and incurred in the year ended January 31, 1998.
The Company's loss from continuing operations decreased from $181,100 to $82,400 or approximately 55%. The loss from discontinued operations was $25,500 for the year ended January 31, 1998 as compared to a gain of $15,700 for the current year. The Company's net loss decreased to $66,700, or $.01 per share the year ended January 31, 1999 as compared to a loss of $206,600 or $.05 per share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, the Company had cash of $649,700 as compared to cash of $5,000 on January 31, 1999. During the first quarter of 1999, the Company determined that in order to sustain its existing business operations and to successfully implement its plan of developing a line of women's products and an Internet web site devoted to women's health that additional capital would be required. During the year ended January 31, 2000, the Company completed the private placement of $1,521,250 principal amount of 10% Convertible Subordinated Debentures (including $390,000 of unsecured advances received during the second quarter which were converted into 10% Convertible Subordinated Debentures). The Convertible Subordinated Debentures are convertible into shares of common stock at $.075 per share and the holders of the Convertible Subordinated Debentures must automatically convert their debentures at such time as the Company amends its certificate of incorporation to increase its authorized common stock (now 10,000,000) to an amount sufficient to permit the conversion of the debentures. See Note 4 to notes to CONSOLIDATED FINANCIAL STATEMENTS. The Company will require additional funds to complete the launch of its internet site and commence marketing of its line of women's products. There can be no assurance the Company will be successful in raising such funds and that if additional funds are raised, that the Company's existing business operations will improve, or that the development of the line of women's products and the website for women's health will be successful. The inability to raise additional funds will materially effect the future business operations of the Company.
THIS FORM 10-K AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY THE COMPANY OR ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND MEMBERS OF ITS MANAGEMENT, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN FORWARD-LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. The Company intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, prospective investors are urged not to place undue reliance on written or oral forward-looking statements of the Company. The Company undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements to reflect future developments. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
The Company provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following:
THE COMPANY HAS RECENTLY INSTITUTED ITS NEW BUSINESS STRATEGY. ITS BUSINESS MUST EXPAND FOR IT TO ATTAIN PROFITABILITY.
The Company has only recently commenced the implementation of its new business strategy. The Company may not successfully complete the transition to successful operations or profitability pursuant to its new strategy. The Company may encounter problems, delays and expenses in implementing its new business strategy. These may include, but not be limited to, unanticipated problems and additional costs related to marketing, competition and product acquisitions and development. These problems may be beyond the Company's control, and in any event, could adversely affect the Company's results of operations. See "Selected Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THE COMPANY HAS A BROAD BUSINESS MODEL THAT WILL REQUIRE THE DEVELOPMENT OF MANY DIFFERENT AREAS. IF THE COMPANY FAILS TO IMPLEMENT ANY OF THE KEY ELEMENTS OF ITS BUSINESS PLAN, ITS BUSINESS MAY NOT SUCCEED.
The Company has embarked on an ambitious plan to provide products, educational programs and support systems to women to help them make better decisions regarding their health care. There is a limited market awareness of the Company and the products and services it offers. To be successful, the Company must continue to develop, coordinate and balance various elements of its business. Among other things, the Company must:
- generate market demand for the products it offers, prepare and disseminate information about women's health care and establish the FEM CHOICE brand,
- convince OB/GYNs and the nurse practitioners and physician assistants focused on women's health to recommend the products the Company offers,
- maintain and obtain rights to market and distribute products and integrate them into its business, and
- augment sales and marketing and manage different distribution channels for the products it offers.
If the Company fails to implement any of these key elements of its business plan, its business may not succeed.
IF WOMEN DO NOT USE AND THEIR CLINICIANS DO NOT RECOMMEND THE PRODUCTS THE COMPANY OFFERS, THE COMPANY MAY EXPERIENCE SIGNIFICANT LOSSES.
The products the Company offers may not achieve market acceptance. The market acceptance of these products will depend on, among other factors, their advantages over existing competing products, and their perceived efficacy and safety.
The Company's business model assumes that its marketing programs and the growth in its target market will result in increased demand for the products it offers. If its marketing programs do not succeed in generating a substantial increase in demand for its products, the Company will be unable to realize its operating objectives. In addition, the Company's business model seeks to build on the expanding roles of OB/GYNs and the nurse practitioners and physician assistants focused on women's health, and its marketing efforts are concentrated on this group. If the clinicians the Company targets do not recommend the products the Company offers or if women do not regularly use these products, the Company may experience significant losses and its business will be adversely affected. Moreover, if the Company fails to develop the market-wide brand identity for FEM CHOICE that it is seeking, its business will be adversely affected.
THE COMPANY'S QUARTERLY FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, WHICH COULD CAUSE THE PRICE OF THE COMPANY'S STOCK TO DECLINE SIGNIFICANTLY.
The Company's quarterly operating results may fluctuate significantly based on factors such as:
- changes in the acceptance or availability of the products it offers,
- the timing of new product offerings, acquisitions or other significant events by the Company or its competitors,
- regulatory approvals and legislative changes affecting the products it offers or those of its competitors,
- the timing of expenditures for the expansion of its operations, and
- general economic and market conditions and conditions specific to the health care industry.
Due to the Company's short operating history pursuant to its new business strategy and the difficulty of predicting demand for the products it offers, the Company is unable to accurately forecast its revenues. Accordingly, the Company's operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could have a material adverse effect on the Company's stock price.
THE HEALTH CARE INDUSTRY AND THE MARKETS FOR THE PRODUCTS THE COMPANY OFFERS ARE VERY COMPETITIVE. THE COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH SIGNIFICANTLY GREATER FINANCIAL RESOURCES.
The health care industry is highly competitive. Many of the Company's competitors are large well-known health care companies that have considerably greater financial, sales, marketing and technical resources than the Company. Additionally, these competitors have research and development capabilities that may allow them to develop new or improved products that may compete with product lines the Company markets and distributes. In addition, competitors may elect to devote substantial resources to marketing their products to women and may choose to develop educational and information programs like those developed by the Company to support their marketing efforts. The Company's business, financial condition and results of operations could be materially and adversely affected by any one or more of such developments.
Competition for the self-care products the Company offers is significant. These products compete against a number of well-known brands of similar products. The Company's Internet site, competes with other Internet sites focused on women's health as well as sites focused on health in general. The Company's failure to adequately respond to the competitive challenges faced by the products it offers could have a material adverse effect on its business, financial condition and results of operations.
IF THE COMPANY DOES NOT SUCCESSFULLY MANAGE ANY GROWTH IT EXPERIENCES, IT MAY EXPERIENCE INCREASED EXPENSES WITHOUT CORRESPONDING REVENUE INCREASES.
The Company's business plan will, if implemented, result in rapid expansion of its operations. This expansion may place a significant strain on management, financial and other resources. It also will require the Company to increase expenditures before it generates corresponding revenues. The Company's ability to manage future growth, should it occur, will depend upon its ability to identify, attract, motivate, train and retain highly skilled managerial, financial, business development, sales and marketing and other personnel. Competition for these employees is intense. Moreover, the addition of products or businesses will require the Company's management to integrate and manage new operations and an increasing number of employees. The Company may not be able to implement successfully and maintain its operational and financial systems or otherwise adapt to growth. Any failure to manage growth, if attained, would have a material adverse effect on the Company's business.
THE COMPANY IS DEPENDENT ON A LIMITED NUMBER OF SOURCES OF SUPPLY FOR MANY OF THE PRODUCTS IT OFFERS. IF ONE OF IT SUPPLIERS FAILS TO SUPPLY ADEQUATE AMOUNTS OF A PRODUCT THE COMPANY OFFERS, THE COMPANY'S SALES MAY SUFFER AND IT COULD BE REQUIRED TO ABANDON A PRODUCT LINE.
The Company is dependent on a limited number of sources of supply for many of the products it offers. With respect to these products, the Company cannot guarantee that these third parties will be able to provide adequate supplies of products in a timely fashion. The Company also face the risk that one of its suppliers could become insolvent, declare bankruptcy, lose its production facilities in a disaster, be unable to comply with applicable government regulations or lose the governmental permits necessary to manufacture the products it supplies to the Company. If the Company is unable to renew or extend an agreement with a third-party supplier, if an existing agreement is terminated or if a third-party supplier otherwise cannot meet the Company's need for a product, the Company may not be able to obtain an alternative source of supply in a timely manner or at all. In these circumstances, the Company may be unable to continue to market products as planned and could be required to abandon or divest itself of a product line on terms which would materially adversely affect it.
THE COMPANY MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE THAT WOULD HARM ITS BUSINESS.
The Company may be exposed to product liability claims. Although the Company believes that it currently carries and intends to maintain a comprehensive multi peril liability package, the Company cannot guarantee that this insurance will be sufficient to cover all possible liabilities. A successful suit against the Company could have an adverse effect on its business and financial condition if the amounts involved are material.
THE COMPANY IS UNCERTAIN OF ITS ABILITY TO OBTAIN ADDITIONAL FINANCING FOR ITS FUTURE CAPITAL NEEDS. IF THE COMPANY IS UNABLE TO OBTAIN ADDITIONAL FINANCING, IT MAY NOT BE ABLE TO CONTINUE TO OPERATE ITS BUSINESS.
The Company may require significant amounts of additional capital to achieve its goals. The Company believes that the net proceeds from the Company's recent private offering of convertible debentures will be sufficient to meet its working capital and capital expenditure requirements through the end of calendar year 2000. The Company's future capital requirements will depend on many factors including:
- the costs of its sales and marketing activities and its education programs for clinicians and women,
- competing product and market developments,
- the costs of acquiring or developing new products,
- the costs of expanding its operations, and
- its ability to generate positive cash flow from its sales.
Additional funding may not be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to curtail significantly or defer one or more of its marketing or educational programs or to limit or postpone obtaining new products through license, acquisition or other agreements. If the Company raises additional funds through the issuance of equity securities, the percentage ownership of its then-current stockholders may be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of its common stock. If the Company raises additional funds through the issuance of additional debt securities, these new securities would have certain rights, preferences and privileges senior to those of the holders of its common stock, and the terms of these debt securities could impose restrictions on its operations. For a further discussion of expenditures and other factors that could affect the Company's need for future capital, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
THE COMPANY'S INABILITY TO OBTAIN NEW PROPRIETARY RIGHTS OR TO PROTECT AND RETAIN ITS EXISTING RIGHTS COULD IMPAIR ITS COMPETITIVE POSITION AND ADVERSELY AFFECT ITS SALES.
The Company believes that the trademarks, copyrights and other proprietary rights that it owns or licenses, or that it will own or license in the future, will continue to be important to its success and competitive position. If the Company fails to maintain its existing rights or cannot acquire additional rights in the future, its competitive position may be harmed. While some products we offer incorporate patented technology, most of the products we sell are not protected by patents.
The Company has applied for registration of a number of key trademarks and intends to introduce new trademarks, service marks and brand names. The Company intends to take the actions that it believes are necessary to protect its proprietary rights, but it may not be successful in doing so on commercially reasonable terms, if at all. In addition, parties that license their proprietary rights to the Company may face challenges to their patents and other proprietary rights and may not prevail in any litigation regarding those rights. Moreover, the Company's trademarks and the products it offers may conflict with or infringe upon the proprietary rights of third parties. If any such conflicts or infringements should arise, the Company would have to defend itself against such challenges. The Company also may have to obtain a license to use those proprietary rights or possibly cease using those rights altogether. Any of these events could harm the Company's business.
THE PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK MAY BE VOLATILE, AND THE PRICE OF THE COMMON STOCK MAY FLUCTUATE FOR REASONS UNRELATED TO THE COMPANY'S OPERATING PERFORMANCE. A SIGNIFICANT DECLINE IN THE PRICE OF THE COMMON STOCK COULD LEAD TO A CLASS ACTION LAWSUIT AGAINST THE COMPANY.
There has been a very limited public market for the Company's common stock, and the Company does not know whether investor interest in the Company will lead to the development of a more active trading market. The market prices and trading volumes for securities of emerging companies, such as the Company, historically have been highly volatile and have experienced significant fluctuations both
related and unrelated to the operating performance of those companies. The price of the Company's common stock may fluctuate widely, depending on many factors, including factors that may cause the Company's quarterly operating results to fluctuate as well as market expectations and other factors beyond the Company's control. In the past, following periods of volatility in the market price of a company's securities, class action litigation has often been instituted against that company by some of its stockholders. This type of litigation, if instituted against the Company, could result in substantial costs and a diversion of management's attention and resources, which could materially and adversely affect the Company's results of operations and financial condition.
INTERNET CAPACITY CONSTRAINTS MAY IMPAIR THE ABILITY OF CONSUMERS TO ACCESS THE COMPANY'S INTERNET SITE.
The Company's success will depend, in large part, upon a robust communications industry and infrastructure for providing Internet access and carrying Internet traffic. The Internet may not prove to be a viable commercial medium because of: inadequate development of the necessary infrastructure such as a reliable network backbone, failure to timely develop complementary products such as high speed modems, delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or increased government regulation.
If the Internet continues to experience significant growth in the number of users and the level of use, then the Internet infrastructure may not be able to continue to support the demands placed on it.
THE COMPANY'S BUSINESS IS DEPENDENT ON THE CONTINUOUS, RELIABLE AND SECURE OPERATION OF ITS INTERNET WEBSITE AND THE RELATED TOOLS AND FUNCTIONS IT PROVIDES.
The Company relies on the Internet and, accordingly, depends upon the continuous, reliable and secure operation of Internet servers and related hardware and software. Recently, several large Internet commerce companies have suffered highly publicized system failures which resulted in adverse reactions to their stock prices, significant negative publicity and, in certain instances, litigation. To the extent that the Company's service is interrupted, its users will be inconvenienced, its commercial customers will suffer from a loss in advertising or transaction delivery and its reputation may be diminished. Some of these outcomes could directly result in a reduction in the Company's stock price, significant negative publicity and litigation. The computer and communications hardware utilized by the Company are protected through physical and software safeguards. However, they are still vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. The Company's business interruption insurance may be inadequate to protect it in the event of a catastrophe. The Company also depends upon third parties to provide potential users with web browsers and Internet and on-line services necessary for access to the Company's Internet site. The Company's site users may occasionally experience difficulties with Internet and other on-line services due to system failures, including failures unrelated to the systems utilized by the Company. Any sustained disruption in Internet access provided by third parties could adversely impact the Company's business.
Item 8:
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of The MNI Group Inc.
We have audited the accompanying consolidated balance sheet of The MNI Group Inc. as of January 31, 2000 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of The MNI Group Inc. as of January 31, 1999 and 1998, were audited by other auditors whose report dated May 6, 1999, on those statements included an explanatory paragraph that described the uncertainty of the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The MNI Group Inc. as of January 31, 2000, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the financial statements, the Company has suffered recurring losses from operations, a decline in revenue and net capital deficiencies that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments relating to the recoverability or reclassification of any asset or liability that might result from the outcome of this uncertainty.
Goldstein & Ganz, CPA's, PC
Great Neck, NY April 7, 2000
THE MNI GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2000
Note 1. ORGANIZATION AND BUSINESS:
The MNI Group Inc. (MNI), a New Jersey corporation organized in 1981, and its subsidiaries, are engaged in the development, marketing and distribution of a variety of health-related products and programs. The Company and its subsidiaries distribute nutritional support products and programs for weight control, a line of nutritionally-oriented pet products, and over-the-counter household remedies.
In May 1993, the Company organized NutraPet Labs, Inc. (NutraPet) for the purpose of developing and marketing pet products. The Company subsequently issued 313,000 shares of NutraPet for $313,000 in a private placement.
In July 1997, the company consummated a merger with K.O.S. Industries, Inc. (KOS) whereby all of KOS outstanding common stock was exchanged for 600,000 shares of the company's common stock. The transaction was treated as a purchase. KOS distributes and markets a line of pet-related products. In addition, one of KOS key employees was granted stock options to acquire 750,000 additional shares of the Company, and a KOS consultant was granted options to acquire 150,000 shares of the Company's common stock. (See Note 6)
In December 1998, the Company reversed the KOS transaction above, as a result of KOS's inability to meet marketing expectations.
Note 2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries after elimination of intercompany accounts and transactions for ongoing activities and does not include any of the activities of KOS. Certain amounts in the January 31, 1999 and 1998 financial statements were reclassified to conform to the January 31, 2000 presentation.
The consolidated statements of operations for the years ended January 31, 1999 and 1998, include in "Discontinued Operations" the results of operations for K.O.S. Industries, Inc. and the resulting gain on the reversal of the KOS transaction. The amounts shown in discontinued operations are not shown net of any income tax effect (either expense or benefit) because the Company incurred a net loss in those years, and has substantial net operating loss carryforwards.
INVENTORIES - Inventories, which consist primarily of purchased finished products, are stated at the lower of cost or market using the "first-in, first-out" (FIFO) cost method.
FIXED ASSETS - Furniture, fixtures and equipment, and leasehold improvements are stated at cost and depreciated and amortized over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Expenditures for repairs and maintenance which do not extend the useful life of the property are expensed as incurred. The estimated useful lives of the assets are as follows:
Furniture, fixtures and equipment 5-10 years Leasehold improvement 3-7 years
Note 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RESEARCH AND DEVELOPMENT - The Company and its subsidiaries utilize independent third parties to design and test certain products. These expenditures are accounted for as research and development costs and are expensed as incurred.
WEB SITE DEVELOPMENT COSTS - Costs to develop the Company's web site, including the cost of developing services offered to visitors of the web site, are accounted for under Statement of Position No. 98-1 "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". Through January 31, 2000, such costs have been incurred during the preliminary project stage and, accordingly, have been expensed.
REVENUE RECOGNITION - The Company recognizes revenue when its products are shipped.
EARNINGS PER SHARE - The consolidated financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options and warrants. In accordance with SFAS No. 128, diluted earnings per share is not presented in years during which the Company incurred a loss from operations.
USE OF ESTIMATES - In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 - The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees", and related Interpretations in accounting for its stock based compensation. Accordingly, no expense has been recorded for stock options issued.
Note 3. FIXED ASSETS:
Fixed assets consisted of the following at January 31, 2000 and 1999, respectively:
January 31, ------------------------- 2000 1999 --------- --------- Furniture, fixtures and equipment $ 75,800 $ 73,300 Leasehold improvements 25,100 17,700 Promotional video -- 29,000 --------- --------- 100,900 120,000 Less: accumulated depreciation and amortization 91,100 120,000 --------- ---------
$ 9,800 $ -- ========= =========
Note 4. NOTES PAYABLE:
In November 1991, Family Weight Loss Centers, Inc. (FWLC), (a former subsidiary of MNI), filed a petition for bankruptcy proceedings pursuant to Chapter 7 of the federal bankruptcy statutes. This petition provided for complete liquidation of all of the corporate assets and liabilities. FWLC was an affiliate of a stockholder of the Company.
Subsequent to the bankruptcy filing, MNI agreed to satisfy an outstanding $4,000,000 obligation, which it had guaranteed as part of the FWLC acquisition. The guarantee was in the form of a term note to Fleet Bank, NA. The Company agreed to satisfy the obligation by the payment of $125,000, issuance of a three year note in the amount of $125,000, with interest at the bank's prime rate, and the issuance of warrants to purchase 750,000 shares of the Company's common stock at a price of $.01 per share, expiring in February 2002. In February 1995, the Company agreed to liquidate the three-year note in the amount of $125,000 by the payment of 42 monthly payments in the amount of $2,976 each plus interest at the prime rate commencing in August 1995. At January 31, 2000, the balance outstanding was $23,800. The note is currently in default and the Company is discussing a payoff settlement with Fleet Bank. Interest on this debt was $3,822, $2,788, and $4,939 for the years ended January 31, 2000, 1999 and 1998, respectively.
The Company borrowed $50,000 from PNC Bank on January 29, 1998. The maturity date of the loan was January 29, 1999, with interest accruing at the rate of 10.25% per annum. During the year ended January 31, 1999, the terms of this loan were changed to a demand note. Principal and interest payments are being made on a monthly basis. Interest paid during the year ending January 31, 2000 was approximately $3,800. At January 31, 2000, the outstanding balance was $37,200.
In December 1992, LN Investment Capital Limited Partnership (LNIC) advanced $75,000 to the Company. Mr. Michael Connelly, who at the time of the loan was the Chairman of the Company's Board of Directors, is President of LNIC. This loan was originally due on July 31, 1993, and, in accordance with the terms of the loan agreement, was extended and converted to a demand note, with interest at 10% per annum. In addition, under the original loan terms, LNIC received warrants to purchase 300,000 shares of the Company's common stock at an exercise price of $.25 per share. Upon LNIC's agreement to extend the note, the warrant exercise prices were reduced and the number of warrants increased.
In the year ended January 31, 1998, 275,000 warrants were exercised at $.10 per share (see Note 6). The exercise of these warrants is reflected in the capitalization of the Company as of January 31, 1998.
During the year ended January 31, 2000, Mr. Connelly tendered his resignation as Chairman of the Board. Concurrently, the Company entered into a settlement agreement with LNIC, whereby the loan and accrued interest were foregiven (see Note 10).
A summary of the Company's notes payable at January 31, 2000 and 1999 is as follows:
Subordinated Debentures
In November 1999, the Company completed a private placement for the principal amount $1,521,250 of 10% Convertible Debentures due October 1, 2000 (including $390,000 of unsecured advances received during the second quarter which were converted into 10% Convertible Subordinated Debentures).
Under the terms of the Debentures, the principal dollar amount is convertible by the holders at $.075 per share. The Debentures must be converted upon the Company amending its Certificate of Incorporation to increase its authorized capitalization to not less than 35,000,000 shares of Common Stock. The Company expects the recapitalization to be approved by the stockholders at its next annual meeting. At January 31, 2000, the Company has accrued to the debenture holders interest payable amounting to $58,200.
Loans Payable - Officer
From time to time the Company's chief operating officer made advances to the Company for working capital purposes. Interest on these advances was charged at rates varying from 11% to 18%. The balance due at February 1, 1999, was $196,300 and the highest balance due during the year was $230,800. The total of all repayments during the year, including interest, amounted to $278,200. At January 31, 2000, all advances were repaid and, accordingly, no balance remained outstanding.
Note 5. LEASE COMMITMENTS:
MNI leases an office and warehouse facility in New Jersey under a lease which expires in December 2004.
Total gross rental expense for the year ended January 31, 2000, 1999 and 1998 was approximately $65,600, $77,300 and $83,000, respectively. MNI sub-leases (on a month to month basis) a portion of its facility to various entities at an annual rental income of approximately $34,600, $41,000 and $43,000 for the year ended January 31, 2000, 1999 and 1998, respectively. The future minimum annual rents are as follows:
Note 6. STOCKHOLDERS' EQUITY:
In January 1990, MNI adopted its Incentive and Nonqualified Stock Option Plan (the "Plan"), to which options for an aggregate of 175,000 shares of common stock may be granted to key employees and certain other persons. The Plan terminated on November 28, 1999. During 1993, MNI issued 50,000 options under this plan, exercisable at $.10 per share. These were subsequently replaced with new options in 1994. The new options were not exercised and expired in 1999.
In February 1992, in connection with the bankruptcy of FWLC (see Note 4) the Company issued warrants to purchase 750,000 shares of the Company's common stock to Fleet Bank. The warrants are exercisable at $.01 per share and expire in February 2002. At January 31, 2000, none of the options were exercised.
In March 1992, three officers and directors of MNI were granted options to immediately purchase 125,000 shares each and an additional 150,000 options each to be granted over the next 60 months at a rate of 2,500 per month per officer and director. The options are exercisable at $.10 per share. Upon the resignation of one of the officers, 150,000 of the aforementioned additional options were cancelled. Additionally, the original 125,000 options issued to this officer expired in 1999. The options issued to the remaining two officers (275,000 each), were extended in 1999 to November 2004. At January 31, 2000. none of the options were exercised.
During 1993, MNI issued warrants to purchase 125,000 shares of its common stock in exchange for the elimination of approximately $41,000 of accounts payable. These warrants are exercisable at $.10 per share and expired in February 1999. These warrants were not exercised. In addition, 156,500 warrants were issued to a financial advisor as compensation for services rendered in conjunction with the private placement offering of NutraPet. These warrants were exercisable at $.125 per share. In March 1999, the options were unexercised and expired.
During 1994, an officer of MNI was issued 35,000 fully-vested options at an exercise price of $.10 per share. In addition, 15,000 previously issued options exercisable at a price of $2.00 were cancelled, and 15,000 options subject to a three-year vesting and exercisable at a price of $.10 per share were issued. In addition, consultants to MNI were issued 40,000 options exercisable at $.10 per share. None of the options were exercised and all expired in March and September 1999.
In February 1997, as consideration for his efforts on behalf of the Company, an officer was issued options to purchase 100,000 shares of the Company's common stock at $.10 per share. The options expire in November 2004. At January 31, 2000, none of the options were exercised.
In August 1997, in conjunction with the acquisition of KOS, two shareholders were granted options to purchase 900,000 shares of MNI's stock exercisable at $.50 per share. These options were to expire on December 31, 2001. These options were recalled upon the completion of the reversal of the acquisition effective December 31, 1998.
During the fiscal year ended January 31, 1998, one option holder exercised options for 275,000 shares at $.10 per share. This has been reflected in the capital accounts and in the consolidated statement of stockholders' equity.
During 1999, the Company issued options to a consultant to purchase 250,000 shares of the Company's common stock as additional consideration on behalf of his efforts in building the Company's web site. The options are exercisable at $.10 per share and expire November 2004. At January 31, 2000, none of the options were exercised.
In July 1999, as consideration for his efforts on behalf of the Company, an officer was issued options to purchase 100,000 shares of the Company's common stock at $.10 per share. The options expire in November 2004. At January 31, 2000, none of the options were exercised.
In August, 1999, options to purchase 750,000 shares of the Company's common stock which were previously issued to Lepercq Capital Management, were transferred to Arnold and Myra Gans, President and Vice President of the Company, respectively. These options were transferred as consideration for their efforts in developing Womens Health Network on behalf of the Company. Such options expire on November 1, 2004. At January 31, 2000, none of the options were exercised.
In October 1999, five individuals, including several proposed nominees for directorships and the Chairman of the Company, were each contingently awarded options to purchase a total of 300,000 shares of the Company's common stock at a price of $0.10 per share. The grant of these options was contingent upon the adoption of a stock option plan by the stockholders of the Company at the upcoming annual meeting of stockholders. None of these options will vest unless and until a stock option plan is adopted by the stockholders. The options will expire on November 1, 2004.
In November 1999, options to purchase 335,000 shares of the Company's common stock were issued to various medical consultants. Such options expire on November 1, 2009. At January 31, 2000, none of the options were exercised.
In December 1999, the Company issued options to purchase 5,250 shares and 500 shares of the Company's common stock as bonuses to employees and consultants, respectively. The options are exercisable at $.10 per share and expire November 2004. At January 31, 2000, none of the options were exercised.
Note 7. INCOME TAXES:
The Company has adopted the liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes". No recognition has been made of the possible benefits of available net operating loss carryforwards due to the uncertainties that such benefits will be available to be used to offset future years' income. MNI and its subsidiaries have net operating loss carryforwards in excess of $8,000,000 which could be available to reduce income otherwise subject to income tax. The possible deferred income tax benefits of such available net operating losses are estimated to be approximately $2,911,000 as of January 31, 2000, with a valuation allowance of an equal amount as follows:
Net operating losses expire during various years as follows:
Years ending prior to January 31, 2006 $4,047,800 Year ending January 31, 2007 2,932,000 Year ending January 31, 2008 486,300 Year ending January 31, 2009 31,600 Year ending January 31, 2010 310,500 Year ending January 31, 2011 16,200 Year ending January 31, 2012 16,200 Year ending January 31, 2017 232,000 Year ending January 31, 2018 244,200 ---------- $8,316,800 ==========
Note 8. COMMITMENTS AND CONTINGENCIES:
The Company's food and pet products are produced by third parties in various plants under applicable government regulations. The Company depends upon its vendors to comply with such regulations. Failure by such vendors to comply with the applicable regulations could result in fines and/or seizure of the food products. Presently, the Company is not a party to any lawsuits. In addition, it has no commitments to its vendors for the purchase of either raw materials or finished product.
Going Concern
As shown in the accompanying financial statements, the Company's revenues have decreased from $939,700 to $443,200, and losses from operations have increased from ($66,700) to ($729,300). The fact that the Company has continued to sustain losses and requires additional sources of cash to fund its operations, continues to create uncertainty about the Company's ability to continue as a going concern.
Management of the Company has developed a plan to improve cash flow through expanding operations and raising additional funds either through the issuance of debt or equity. Managements' plan includes the sale of an additional $750,000 of subordinated convertible debentures, which is expected to be completed by June 30, 2000 (during the year ended January 31, 2000 the Company sold approximately $1.5 million of its subordinated convertible debentures).
Managements' efforts and the Company's resources have been directed toward the development of its non-biased gender based womens' healthcare Internet web site. This site is expected to be launched in June 2000 and will provide a medium to reach 1) a women specific targeted market for the Company's products, and 2) a healthcare professional market (e.g.-physicians, dieticians, etc.) for video-streaming based continuing medical education courses. Additionally, the Company has affiliated itself with several of the most prestigious womens' healthcare professionals in the country as both consultants and board of director members. Finally, the Company has begun discussions with prominent healthcare professionals interested in bringing the Company's products to the public in conjunction with their own direct sales and marketing efforts.
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional funds and the success of managements
plan to expand operations. The Company anticipates that the proceeds from the forthcoming sale of debentures as discussed above will provide the necessary funds it requires for the balance of the year ending January 31, 2001. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 9. MAJOR CUSTOMERS:
One customer was responsible for approximately $75,800 in sales for the year ended January 31, 2000, representing approximately 17% of total sales. For the years ended January 31, 1999, and 1998, two customers were responsible for approximately $523,000 and $540,300 in sales, respectively, representing approximately 56% and 43% of total sales, respectively.
Note 10. EXTRAORDINARY ITEMS:
Forgiveness of Debt
In August 1999, the Company entered into a settlement agreement with the former Chairman of the Company's board of directors and his affiliates, LePercq Capital Management Inc. (LePercq) and LN Investment Capital Ltd. Partnership (LNIC). The settlement provided that the Company repurchase from the former Chairman 1,536,030 shares of its common stock for $100,000 (the current market value). Further, the Company's indebtedness of $165,000 for consulting fees to LePercq and notes of $75,000 with additional accrued interest of $22,100 payable to LNIC were forgiven and options for 150,000 shares of the Company's common stock were returned. Additionally, as part of the terms of the agreement, two of the Company's officers and directors agreed to forgive accrued salaries due them aggregating $75,000.
Extinguishment of minority interest
In 1993, the Company sold a minority interest in one of its subsidiaries to third parties through a private offering. As a result, the Company recorded an obligation to minority shareholders representing their proportionate share of the subsidiary's equity. This liability changed from year to year as the equity of the subsidiary changed. Although the equity of the subsidiary was negative in recent years, the Company continued to reflect a liability to the minority shareholders. Due to the negative equity of the subsidiary as of January 31, 2000, and the absence of the Company's obligation to the minority shareholders, the liability was written off. When the subsidiary reestablishes a positive equity the Company will record a liability to reflect the minority interests' proportionate share.
Note 11. SUBSEQUENT EVENTS:
In March 2000, the Company granted options to a member of its medical review board to purchase 100,000 shares of its common stock. Additionally, in March 2000, the Company granted options to a consultant to purchase 1,000 shares of its common stock. Both options are exercisable at $.875 per share and expire on November 1, 2009 and November 1, 2004, respectively.
In March 2000, the Company entered into an agreement with a consultant which provided, in addition to cash consideration, options to purchase 3,985,000 shares of common stock of the Company at an exercise price of $.875 per share. The options have a five year term and vest 20% upon grant and 20% on each six month anniversary of the date of grant. Further, the agreement provided options to purchase 515,000 shares of the Company's common stock on substantially the same terms to the Department of Medicine at Columbia University College of Physicians and Surgeons.
Note 12. SEGMENTAL REPORTING:
The Company organizes its business units into three reportable segments: nutritional support products, holistic products, and animal products.
The accounting policies for the Company's segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on profit or loss from operations before interest and income taxes, and excluding nonrecurring gains and losses.
The Company's reportable business segments are strategic business units that offer different products and services. Each segment is managed as a separate unit and markets its products to a distinct class of customers.
Note 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Below is a summary of the results of operations for each of the quarters of the years ended January 31, 2000 and 1999:
January 31, 2000: First Second Third Fourth ---------- ---------- ------------ ---------
Revenue $ 90,500 $ 127,200 $ 158,800 $ 66,700 ========== ========== ============ ========= Gross profit $ 17,900 $ 69,300 $ 75,000 $ 13,400 ========== ========== ============ ========= Net Income (Loss) ($ 103,000) ($95,200) $ 258,600 ($304,600) ========== ========== ============ ========= Net Income(Loss) per common share ($ .03) ($ .02) $ .07 ($.08) ========== ========== ============ =========
January 31, 1999:
Revenue $ 368,500 $ 299,200 $ 271,000 $ 1,000 ========== ========== ============ ========= Gross profit $ 128,400 $ 106,700 $ 84,500 $ 92,400 ========== ========== ============ ========= Net Income (Loss) ($55,200) ($80,500) ($51,100) $ 120,100 ========== ========== ============ ========= Net Income(Loss) per common share ($.01) ($.02) ($.01) $ .03 ========== ========== ============ =========
Item 9:
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has replaced its prior auditor. Reference is made to form 8-K filed March 24, 2000.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Set forth below are the names, ages, and the position and offices held by each of the directors and executive officers of the Company.
Name Age Position and Office - ----------------- ----- --------------------------------- Lawrence Burstein 57 Chairman (1) and Director Arnold Gans 65 President Myra Gans 62 Executive Vice President/Director
- -------------- (1) Michael J. Connelly resigned as the Company's Chairman in November 1999.
LAWRENCE BURSTEIN is and since March 1996 has been President, a director and the principal shareholder of Unity Venture Capital Associates, a private investment banking firm. He is also a director of CAS Medical Systems, Inc. engaged in the manufacture and marketing of disposable medical devices, T.H.Q., Inc., a developer of electronic game cartridges, Quintel Communications, Inc., a direct marketing company and ID Systems, Inc., a manufacturer of wireless tracking devices. Mr. Burstein became Chairman of MNIG in July 1999 upon the resignation of the former Chairman.
ARNOLD GANS has been President and a director of the Company since its formation in 1981. Prior thereto, Mr. Gans had been involved in the weight control market for over 25 years during which time he, among other things, developed certain appetite suppressants and anti-obesity programs. Prior to founding the Company in 1981, Mr. Gans was President of Control Drug, Inc. a private company engaged in the manufacture of nutritional protein supplements. Mr. Gans was granted patents in 1977 for method-use manufacturing for certain nutritional formula processes relating to the use of certain foods (EMF) to treat nutritional deficiency, which he has assigned to the Company.
MYRA GANS, wife of Arnold Gans, the Company's president, has been Executive Vice President of and a director of the Company since 1982. Prior to thereto, Mrs. Gans served as Vice President/Sales for Control Drug, Inc.
Directors of the Company hold office until the next annual meeting of the Company's shareholders and until their successors have been duly elected and qualified. None of the Company's Directors receives compensation for his services as such.
Officers of the Company serve at the pleasure of the Board of Directors and until the first meeting of the Board of Directors following the next annual meeting of the Company's shareholders and until their successors have been elected and qualified.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and the rules issued thereunder, the Company's executive officers and directors are required to file with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc. reports of ownership and changes in ownership of Common Stock. Copies of such reports are required to be furnished to the Company. Arnold Gans did not timely file a Form 4 with respect to the grant to him of 750,000 options in August, 1999 and the purchase of 133,340 shares of Common Stock and Myra Gans did not timely file a Form 4 with respect to the same 750,000 options granted to her in August 1999 and the same purchase of 133,340 shares of Common Stock. A Form 5 was filed by both on February 16, 2000. Based solely on review of the copies of such reports furnished to the Company, or written representations that no other reports were required, the Company believes that during Fiscal Year 1999, all of its other executive officers and directors complied with the requirements of Section 16(a).
Item 11.
Item 11. EXECUTIVE COMPENSATION
(a) CASH COMPENSATION
The following table summarizes the compensation paid in the fiscal years ended January 31, 2000, 1999, & 1998 respectively, to the Company's Chief Executive Officer and Executive Vice President.
SUMMARY COMPENSATION TABLE
(a) These stock options are owned jointly by Mr. And Mrs. Gans. (b) The Company does not offer any restricted stock awards, stock appreciation rights, or other long term incentive programs.
In October 1999, Lawrence Burstein, Chairman of the Company was contingently awarded options to purchase 300,000 shares of the Company's common stock at a price of $0.10 per share. The grant of these options was contingent upon the adoption of a stock option plan by the stockholders of the Company at the upcoming annual meeting of stockholders. None of these options will vest unless and until a stock option plan is adopted by the stockholders. The options will expire on November 1, 2004.
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT YEAR END (#) AT FISCAL YEAR END ($)(a) ---------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Arnold Gans(a) 1,400,000 $1,346,800 $ Myra Gans (a) 1,400,000 $1,346,800 $
- --------- (a) includes 750,000 options owned jointly by Mr.and Mrs. Gans
1. In accordance with Securities and Exchange Commission rules, these columns show gains that might exist for the respective options, assuming that the market price of MNI common stock appreciates from the date of grant over a period of 10 years at the annualized rates of 5% and 10%, respectively. If the stock price does not increase above the exercise price at the time of exercise, realized value to the named executives from these options will be zero.
2. Only reflects a five year period in accordance with the expiration date of the options.
EMPLOYMENT AGREEMENTS
None of the Company's executive officers is presently a party to an employment agreement with the Company.
(b) COMPENSATION PURSUANT TO PLANS None.
(c) OTHER COMPENSATION None.
(d) COMPENSATION OF DIRECTORS
Directors receive no compensation for their services as such.
(e) TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
None.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the Company's outstanding common stock beneficially owned on January 31, 2000 by (i) each person who is known by the Company to beneficially own or exercise voting or dispositive control over at least 5% of the Company's common stock, (ii) each of the Company's directors and (iii) all of the Company's executive officers and directors as a group:
NAMES AND ADDRESSES NUMBER OF SHARES OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENTAGE OF CLASS(1) - ------------------- --------------------- ----------------------
Arnold Gans 2,399,830(2) 39.0% 10-West Forest Avenue, Englewood, NJ 07631
Myra Gans 2,399,830(2) 39.0% 10 West Forest Avenue, Englewood, New Jersey 07631
Lawrence Burstein 2,750 (3) 0.04% 245 Fifth Avenue, New York, New York 10016
All directors and executive officers as a group (3 persons)(2) - (3) 2,402,580 (2) - (3) 39.0%
(1) Includes all shares issuable pursuant to presently exercisable options as well as all such options which will become exercisable within 60 days of the date hereof. Except as otherwise indicated, all shares are beneficially owned, and their sole investment and voting power is held by the persons named herein.
(2) Includes 349,830 shares which are owned by Arnold and Myra Gans; also includes options to acquire an aggregate of 2,050,000 shares for Arnold and Myra Gans exercisable at $.10 per share through November 1, 2004.
(3) Excludes 8,863 shares owned by Trinity Pension Trust, of which Mr. Burstein is a trustee and beneficiary.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time Arnold Gans, the Company's Chief Operating Officer, made advances to the Company for working capital purposes. Interest on these advances was charged at rates varying from 11% to 18%. The balance due at February 1, 1999, was $196,300 and the highest balance due during the year was $230,800. The total of all repayments during the year, including interest, amounted to $278,200. At January 31, 2000, all advances were repaid out of the proceeds raised from the private placement of 10% Convertible Subordinated Debentures and, accordingly, no balance remained outstanding.
During the quarter ended October 31, 1999, the Company raised a total of $1,148,700 in connection with a private placement of 10% Convertible Subordinated Debentures convertible at $.075 per share (including $390,000 of unsecured advances received during the second quarter which were converted into 10% Convertible Subordinated Debentures). Mr. Lawrence Burstein, a Director and Chairman of the Company, and an entity of which Mr. Burstein is a shareholder, officer and director, acquired $137,500 principle amount of the 10% Convertible Subordinated Debentures.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (i) FINANCIAL STATEMENTS (included in Part 11)
Report of Independent Public Accountants
Consolidated Balance Sheets - January 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended January 31, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements for the years ended January 31, 2000, 1999 and 1998.
(ii) FINANCIAL STATEMENTS SCHEDULES
Not applicable
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-18, File No. 33-32438-NY (the "Registration Statement")) 3.2 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.2 to the Registration Statement) 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.3 to the Registration Statement) 3.4 Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to the Registration Statement) 4 Form of Senior Subordinated Convertible Debenture, dated as of October 1999 (filed herewith) 10.1(a) Lease for premises located at 10 West Forest Avenue, Englewood, New Jersey 07631 dated October 4, 1984 between Registrant and Van Brunt Associates (incorporated by reference to Exhibit 10.3 to the Registration Statement) 10.1(b) Amendment to Lease (filed herewith) 10.2 Web Design and Consulting Agreement, dated as of March 29, 2000, between the Registrant and Keepsmart.com (filed herewith) 10.3 Web Hosting Services Agreement, dated as of March 29, 2000, between the Registrant and Keepsmart.com (filed herewith) 10.4 Consulting Services Agreement, dated March 24, 2000, by and between the MNI Group Inc. and Marianne J. Legato, M.D. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated as of March 24, 2000 (the "March 8-K")) 10.5 Non-Qualified Stock Option Agreement, dated March 24, 2000, between The MNI Group Inc. and Marianne J. Legato (incorporated by reference to Exhibit 10.2 to the March 8-K) 21 Subsidiaries of the Registrant (filed herewith) 23 Consent of Lipner Gordon & Co.(filed herewith) 27 Financial Data Schedule (filed herewith)
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: April 28, 2000 THE MNI GROUP INC.
By: /s/ ARNOLD GANS -------------------------- Arnold Gans, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ LAWRENCE BURSTEIN Chairman and Director - ------------------------------- (Principal Executive Officer) April 28, 2000 Lawrence Burstein
/s/ ARNOLD GANS President (Principal - ------------------------------- Operating Officer and Arnold Gans Principal Accounting and Financial Officer) April 28, 2000
/s/ MYRA GANS Vice President, - ------------------------------- Secretary, and Director April 28, 2000 Myra Gans
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time Arnold Gans, the Company's Chief Operating Officer, made advances to the Company for working capital purposes. Interest on these advances was charged at rates varying from 11% to 18%. The balance due at February 1, 1999, was $196,300 and the highest balance due during the year was $230,800. The total of all repayments during the year, including interest, amounted to $278,200. At January 31, 2000, all advances were repaid out of the proceeds raised from the private placement of 10% Convertible Subordinated Debentures and, accordingly, no balance remained outstanding.
During the quarter ended October 31, 1999, the Company raised a total of $1,148,700 in connection with a private placement of 10% Convertible Subordinated Debentures convertible at $.075 per share (including $390,000 of unsecured advances received during the second quarter which were converted into 10% Convertible Subordinated Debentures). Mr. Lawrence Burstein, a Director and Chairman of the Company, and an entity of which Mr. Burstein is a shareholder, officer and director, acquired $137,500 principle amount of the 10% Convertible Subordinated Debentures.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (i) FINANCIAL STATEMENTS (included in Part 11)
Report of Independent Public Accountants
Consolidated Balance Sheets - January 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended January 31, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements for the years ended January 31, 2000, 1999 and 1998.
(ii) FINANCIAL STATEMENTS SCHEDULES
Not applicable
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-18, File No. 33-32438-NY (the "Registration Statement")) 3.2 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.2 to the Registration Statement) 3.3 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.3 to the Registration Statement) 3.4 Bylaws of the Registrant (incorporated by reference to Exhibit 3.4 to the Registration Statement) 4 Form of Senior Subordinated Convertible Debenture, dated as of October 1999 (filed herewith) 10.1(a) Lease for premises located at 10 West Forest Avenue, Englewood, New Jersey 07631 dated October 4, 1984 between Registrant and Van Brunt Associates (incorporated by reference to Exhibit 10.3 to the Registration Statement) 10.1(b) Amendment to Lease (filed herewith) 10.2 Web Design and Consulting Agreement, dated as of March 29, 2000, between the Registrant and Keepsmart.com (filed herewith) 10.3 Web Hosting Services Agreement, dated as of March 29, 2000, between the Registrant and Keepsmart.com (filed herewith) 10.4 Consulting Services Agreement, dated March 24, 2000, by and between the MNI Group Inc. and Marianne J. Legato, M.D. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated as of March 24, 2000 (the "March 8-K")) 10.5 Non-Qualified Stock Option Agreement, dated March 24, 2000, between The MNI Group Inc. and Marianne J. Legato (incorporated by reference to Exhibit 10.2 to the March 8-K) 21 Subsidiaries of the Registrant (filed herewith) 23 Consent of Lipner Gordon & Co.(filed herewith) 27 Financial Data Schedule (filed herewith)
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: April 28, 2000 THE MNI GROUP INC.
By: /s/ ARNOLD GANS -------------------------- Arnold Gans, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/ LAWRENCE BURSTEIN Chairman and Director - ------------------------------- (Principal Executive Officer) April 28, 2000 Lawrence Burstein
/s/ ARNOLD GANS President (Principal - ------------------------------- Operating Officer and Arnold Gans Principal Accounting and Financial Officer) April 28, 2000
/s/ MYRA GANS Vice President, - ------------------------------- Secretary, and Director April 28, 2000 Myra Gans