Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS / INTRODUCTION
Gender Sciences, Inc. ("The Company"), (F/K/A as The MNI Group, Inc.), has primarily been engaged in the development and distribution of nutritional and health products. The Company has developed a line of proprietary nutritional supplements for women to be sold under the FemChoice(TM)label or alternatively to be made under private label for various distribution channels. (See " Network Marketing"). The Company has also completed the development of an internet site, His and Her Medicine.com, which is intended to provide comprehensive health care information for women and men on a broad range of conditions. (See: "Business - Internet marketing Opportunity").
INDUSTRY TRENDS AND STRATEGY
The Company believes that the markets for nutritional products is expanding and wants to be a leader in proving gender-specific products, services and information. By responding to these trends, the Company believes that it can become a premier marketer of health and nutritional products and can have the opportunity to penetrate niche markets of minority populations whose healthcare needs have been largely overlooked.
o Rapid growth of the healthcare industry fueled by the link between diet, nutrition and disease.
o A growing disenchantment with traditional treatment creates enhanced use of preventive and alternative treatments, including natural and nutrition based remedies.
o Burgeoning niche markets of African-American and Hispanic populations whose health-care needs are underserved. The Company believes that there are few if any companies focusing on these groups through network marketing.
o Consumer demand for comprehensive health information is rising. The Company believes that there is a significant and growing population who are dissatisfied with their healthcare. The establishment of the Company's web site with detailed gender-specific health information developed in conjunction with its Health Advisory board, is intended to redefine the way health and wellness information is provided and used.
The Company has had a very limited operating history in the gender-specific 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 there from. 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 is 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 have been 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.
The Company, in developing its products, elected to focus on the women's market because women are the primary household shoppers and are predominately the KEY 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 alternative remedies, the Company has developed a strategy focusing primarily on reaching the large minority populations in the U.S. through alliances with certain network marketing companies as described below. 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; the ability of its management and the people associated with the Company to implement and execute its strategy and the ability of the management of the network marketing companies to successfully attract independent distributors. 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.
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, consistent with its strategy to focus on niche markets, has entered into an agreement with E2K Inc., ("E2K"), a network marketing company focused on the African-American market. E2K recently began its network-marketing program, pursuant to which it is selling the Company's nutritional supplements under the label, "Carver-Curtis", (the exclusive rights to the name and certain products formerly marketed under the Carver-Curtis label were acquired by the Company in 2001). The Company has signed a distribution agreement with E2K under the terms of which E2K is the exclusive distributor of the Carver-Curtis products in the network marketing arena.
The Company believes that within the African-American community, the name "Carver-Curtis" has strong name recognition and will substantially enhance E2K's ability to sell its nutritional supplements. Initially E2K will offer 20 products. E2K intends to seek independent representatives by promoting through
churches and other community based organizations. Initially, E2K intends to focus its recruiting efforts in the New York metropolitan region and thereafter expand to other urban locations where there is a significant African-American population. On a national basis, there are approximately 40,000 churches with an estimated 18,000,000 parishioners. Overall, the African-American population now exceeds 30 million.
The Company believes that a significant opportunity exists for E2K to penetrate the African-American market in part because of the immediate brand name recognition of "Carver-Curtis" in the African-American community, and because presently there are very few multi-level network marketing companies offering nutritional supplements that are focused on the African-American community. Since the activities of E2K have only recently begun, there is no assurance that E2K's program will be successful in recruiting sufficient independent representatives to generate sufficient revenues for the Company or that even if the Company does sell its nutritional supplements to E2K that the business will be profitable.
Under the terms of the agreement, the Company will be paid directly by E2K for all the nutritional supplements and all shipping costs. The Company will be responsible for shipping the nutritional supplements to each distributor. The Company also intends to publish a Carver/Curtis Healthletter that is exclusively for the E2K members. Each issue will provide health news and nutritional tips focused principally on conditions affecting the African-American population such as hypertension, sickle cell anemia, and diabetes. There will be six issues per year at a member cost of $19.95.
The Company also is the supplier to Natural Living, a multi-level company located in Florida that focuses on the Hispanic market. The Company's management believes that next to the African-American market, the Hispanic market (with approximately 34 million population) offers very significant growth opportunities. The Company's nutritional supplements are being sold under a Spanish label. The Company sells these products in bulk quantities directly to the company's distribution warehouse. The Company is paid directly by Natural Living for all products.
In pursuing this network marketing strategy, the Company believes that these arrangements afford it the best opportunity to sell its nutritional supplements without incurring the substantial marketing and other related costs associated with either attempting to sell its products at retail or to certain other end users (i.e. doctors, nurses etc.) which would require either a dedicated sales force or establishing distributor relationships. By eliminating its selling and marketing expenses, the Company believes it will achieve gross margins in excess of 50%. The Company also believes that in the present economic environment participating in a network marketing program, which does not require a person devoting full time to the program, affords the individual an opportunity to earn additional income without requiring a significant investment. For example, under the E2K program, a distributor for an initial investment of $450, (assuming the distributor recruits the maximum number of other independent distributors known as "downliners"), could receive commissions totaling more than $100,000.
The Company has also formed an alliance with Family Health Network, Inc., ("Family Health"), a 2-1/2 year old multi-level marketing organization with approximately 5,000 distributors. Family Health network plans to open virtual stores where the Company's nutritional supplements may be purchased on-line. The virtual stores are being marketed to persons who want to own a home-based business through an advertising campaign in 26 major cities throughout the United States. Each owner is obligated to purchase a minimum of $300 worth of the Company's products from the Company's e-commerce area of its Internet site in order to launch their store. The Company has developed three new products for Family Health in addition to its existing products: MACHO MAN, a male performance enhancer with all natural herbs including Yohimbe and Maca extracts, known to help increase blood flow to erectile tissue as well as to increase libido; SEXTASY CREAM that helps increase the intensity of sexual pleasure for men and women; and COLOSTRUM-C, an energy and anti-aging product that is more fully described below.
The Company continues to explore several other multi-level opportunities to further enhance the sale of its nutritional supplements. There is no assurance any of the alliances described herein will be successful or that the Company's operations will become profitable as a result of these alliances.
NEW PRODUCT DEVELOPMENTS
The Company believes that to remain competitive, it is necessary to continually introduce new products. Recently, the Company has introduced a new product, plans to re-introduce a product that it has been marketing for many years, and is preparing prototypes for several other products.
The new product is called "Immuno-C" and is designed to boost the immune system and increase a person's energy level. The active ingredients of "Immuno-C" are Colostrum and a non-acid form of Vitamin C. These are delivered in a patented "quickmelt" wafer for instant absorption. Colostrum is the fluid secreted by the mammary glands just after childbirth that contains the highest content of immunoglobulins (antibodies) and other immune boosters and energizing elements, (proteins). Colostrum is taken during the first 2-4 hour collection called colostrogenesis when the concentration of the active components is at peak. Studies have shown that Colostrum assists the immune system in fighting disease before its onset or by slowing disease down as it progresses on its destructive path. Research further indicates that colostrum may be useful in providing protection against infectious agents and their toxins thereby providing systemic immunological enhancement and promoting general health and healing of the body.
To the best of knowledge of the Company, there are a limited number of companies offering a product with Colostrum taken during the first 2-4 hours, the peak period for the components and no other company is presently offering Colostrum in a "quickmelt" wafer form. The Company plans to market this product to doctors and clinics that specialize in anti-aging, and the treatment of viral and bacterial infections that depress the immune system such as HIV/AIDS. Colostrum may be helpful to these patients in delivering energy and fortifying the immune system, thus improving the quality of life and helping to fight infectious organisms. The Company has already received initial orders for 1,000 bottles of Immuno-C from a specialty care provider company that specializes in the treatment of patients with chronic medical conditions. Their staff includes experienced pharmacists, dieticians, client service coordinators, and reimbursement specialists. The specialty care provider is seeking approval from Medicaid to make Immuno-C reimbursable, the consequence of which would be to make this product also affordable to a larger population of sufferers, thereby increasing the potential market for the product.
The Company during the past ten years has sold in limited amounts its EMF, a collagen hydrolysate used as nutritional support for wasting disease, to nursing homes and hospitals. The Company received a series of patents for EMF covering oral administration, preventing nutritional deficiency, treating nutritional deficiency during wasting disease and certain other conditions, and as a method of treating obesity, (see "PATENTS"). Studies with EMF have demonstrated weight stabilization and weight gain in wasting disease patients. The importance of this is the improvement of the quality of life to those patients who feel more energized after using EMF. The Company believes there is a significant market for this product, in particular, nursing homes and hospitals. EMF is also attractive for the anti-aging market, the most rapidly growing field in the nutrition market, because of its energy delivering qualities. Because the amino acids in EMF have been hydrolyzed, (predigested), the body can quickly absorb and utilize the benefits without interference from the normal digestive process.
The Company also has entered discussions with the specialty care provider to create a bar for HIV/AIDS patients to deliver energy from specialized nutrients, and a high protein shake with natural killer cell booster ingredients.
The Company believes that the Immuno-C, EMF, and its new line of anti-aging, immune boosting products create a line of products designed to address conditions associated with some of the most debilitating diseases afflicting people, including cancer and HIV/AIDS. The anti-aging market presents an opportunity for the Company because there is a marketing boom that appeals to the insecurities of a baby boomer graying population. They are, in effect, a
captive audience seeking to delay aging and embracing this trend that blends alternative medicine with traditional medicine. There is no assurance that the Company will be able to successfully market these new products or that the sale of these products will be profitable for the Company.
PRODUCTS
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 (soft gel) 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. THE HEALTHY NUT (snack) SALTED, UNSALTED and HONEY ROASTED flavors. A natural snack high in protein and phytonutrients.
16. KAVA KAVA (capsule) Eases tension, relaxes muscles and helps contribute to a good night's sleep.
17. HUPERZINE A COMPLEX (tablets) contains an ingredient being tested in clinical trials in the United States for the treatment of memory loss associated with aging.
18. PHYTO-TONIC (liquid) a true health formula dietary supplement.
19. NATURAL PLANT ESTROGENS (tablets) The natural way to help women who have an estrogen imbalance.
20. SUPER EPA (soft gels) Omega 3 fatty acids consisting of Eicosapentaenoic Acid (EPA) and Docosahexaenoic Acid (DHA) provide benefits for the heart and circulatory system.
21. 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.
22. 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.
23. BLACK CURRANT SEED OIL (soft gel) a comprehensive source of Omega 3 and Omega 6 (Essential Fatty acids). Important in the production of prostaglandins.
24. CELLU-SHRINK (capsule) is made from plant extracts and other dietary supplements. Works below the surface, where cellulite occurs.
25. ESSENTIAL OILS (soft gel) Provides Omega 3, 6 and 9 Essential Fatty Acids.
26. FEVERFEW (capsule) Feverfew is derived from the Latin term for "chase away fevers." Provides anti-inflammatory properties.
27. COLLAGEN PLUS (liquid) nutritionally supports body structure and provides energy. Enhances lean body mass.
28. 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.
29. USRDA CALCIUM 1200 (wafers) a delicious chewable wafer flavored with malted milk. Provides the calcium necessary to prevent bone loss in women.
30. *MIRACLE RUBBING OIL (liquid) For fast relief from minor aches and pains including arthritis
31. *PRESSURE MAINTENANCE (liquid) An herbal potassium mineral complex used to help lower pressure.
32. *FRUIT AND VEGETABLE DETOX WASH (liquid) Cleans produce to remove pesticides, fungicides, herbicides, chemicals and toxins.
33. *STOPPS BUMPS SHAVING LOTION (liquid) A fully tested remedy for annoying and irritating ingrown hairs.
34. *SAGE AND SULPHUR HAIR TREATMENT (cream) A true scalp tonic.
35. *HAIR ENRICHMENT FORMULA (liquid) helps control hair breakage, dry scalp, damaged hair and brittle ends.
36. *BLACK AND BEAUTIFUL CONDITIONER (liquid) Promotes easy care for all styles.
37. *POTENCY PLUS (tablets) A male performance enhancer.
38. *SEXUAL ENHANCEMENT CREAM (cream) Increases intensity of sexual pleasure for men and women naturally.
*These products are sold under the "Carter-Curtis" label.
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 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. The Company believes at the present time it will be able to obtain the quantity of products it will need to meet orders.
COMPETITION
The market for nutritional supplements 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 for many of the foregoing reasons has decided to focus on becoming the supplier for multi-level marketing organizations under exclusive supply arrangements where its financial resources can be focused on product procurement and product development instead of marketing against larger companies. The Company believes that there are a limited number of companies presently engaged in multi-level marketing to niche markets, however, there can be no assurance that the Company can successfully implement its new strategy.
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 patents do not protect most of the Company's products.
COPYRIGHTS
The Company has applied for copyright registration for the FemChoice brand. Proof of use has been filed and the Company awaits final approval.
LICENSES
The Company has a five year exclusive license to the name "Carver-Curtis" for which it pays to the license holder a royalty of 10% on sales of six particular items out of the current 20 "Carver-Curtis" products. These six products had been manufactured at the Carver facility in Detroit and the formulas were turned over to the Company.
TRADEMARKS AND DOMAIN NAMES
The Company owns the following domain names: womenshealthnetwork.com, hisandhermed.com, hisandhermed.net, hisandhermedicine.com, hisandhermedicine.net, menwomenandmedicine.com, menwomenandmedicine.net, menshealthnetwork.com, womenandgendermed.com, womenandgendermed.net, hischoice.net, kidshealthnetwork.com, genderhealth.net, gendermed.com, gendermed.net, gendermedicine.com, gendermedicine.net, genderspecificmed.com, genderspecificmed.net, genderspecificmedicine.com, genderspecificmedicine.net, hisandherhealthnews.com, hisandherhealhtnews.net, blackfamilyhealth.net, blackfamilymedicine.com, blackfamilymedicine.net, blackwomenshealth.net, femchoice.cc, menshealthnetwork.cc, whnnetwork.cc, womanshealthnetwork.cc ,womenshealthnetwork.cc, womenshealthnetwork.co.uk, saluddefamilia.com, saluddefamilia.net, and saluddemujer.com. domain 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.
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 the Company 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.
INTERNET MARKET OPPORTUNITY
The Company during the past eighteen months has completed the development of an Internet site called His and Her Medicine.com intended to provide both men and women with proprietary, comprehensive, relevant and timely content regarding various health conditions. The Company's strategy was to establish its network as a recognized and comprehensive source of healthcare information and services on the Internet for women and men. The business model was 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 site, and (iii) fees from licensing of proprietary healthcare information to other health sites. Unfortunately, since the Company commenced its Internet development activities, the market for Internet services and products has
materially deteriorated and as a result thereof, the Company has elected to de-emphasize the site pending a change in the environment for Internet sites and the establishment of a definitive plan to achieve profitability on the site.
Although the Company presently has de-emphasized its site, it will continue to maintain the site at an estimated cost of approximately $2,000 per month. In connection with its relationship with Family Health Network and E2K, the Company will be using its Internet site to fill orders for nutritional supplements. The Company believes that its site provides very important information on gender-specific medicine, which has recently received significant interest in the medical community. Moreover, the Company has assembled a prestigious group of medical advisors and should the Company elect to discontinue its site, it might have resulted in the medical advisors discontinuing their relationship with the site.
HEALTH 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 Health Advisory Board consisting of:
MYRON WEISFELDT, M.D. The Samuel Bard Professor of Medicine
Chair, Department of Medicine at Columbia University College of Physicians & Surgeons (1991-present). National President of the American Heart Association (1989-1990). Current member of the National Advisory Council, National Institute of Aging. In 1998, he won the Gold Heart Award from the American Heart Association. Author of more than 250 papers for many publications including the Journal of Clinical Investigation, Circulation (Consulting Editor), and the New England Journal of Medicine
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
BENJAMIN H. LEWIS, M.D., F.A.C.C. Assistant Professor of Medicine at Columbia University School of Physicians & Surgeons,(since 1982) Established the first Adult Cardiac Doppler Unit and the Exercise Echocardiography Laboratory at Columbia Presbyterian Medical Center/Eastside. Research Fellow in Cardiology at Harvard Medical School. (1980-82). Author of many published articles including those in the Journal of American College of Cardiology, the New England Journal of Medicine, and The Journal of Gender-Specific Medicine. First cardiologist in New York State to be accredited for both transthoracic and stress echocardiography.
LAURI ROMANZI, M.D., FACOG, Clinical Assistant Professor at New York Hospital. Former Director of the Division of Urogynecology at the Hospital. Fellow of the American College of Obstetrics and Gynecology and is a member of numerous national and international professional committees including the International Continence Society, the American Urogynecologic Society. Member of the Editorial Advisory Board for The Journal of Gender-Specific Medicine. Concentrates on the effective behavioral, pharmacologic and surgical assessment and treatment of incontinence in women.
PETER D. VASH, MD, M.P.H. Assistant Clinical Professor of Medicine, UCLA Medical Center, CA Board Certified Internist Specialist in eating Disorders and Endocrinology
ROBERT STENSON, M.D., F.A.C.O.G. One of 750 Gynecological Oncologists worldwide American College of Obstetricians and Gynecologists, Diplomate 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
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.
JEFFREY SCHNEIDER Nutraceutical Consultant and hands-on leader in the nutrition industry since 1980.
HOWARD NADEL Director of Research the North Bronx Health Care Network in New York City. Consultant and lecturer for major pharmaceutical companies.
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 has 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, they have received option grants totaling between 10,000 and 25,000 options with the exception of Dr. Wendy Klein who received 150,000 as compensation for her one year term as Chairman of the Health Advisory Board and her work for the Company.
EMPLOYEES
The Company presently has 6 employees.
RECENT DEVELOPMENTS
In 1999 and 2000, the Company sold approximately $2,021,000 of its 10% Convertible Debentures ("Debentures"). In October and November 2000, these debentures and the accrued interest thereon became convertible into shares of the Company's common stock at exchange rates varying between $0.075 and $0.25 per share. In addition, the Company received a loan from Unity Capital of $130,000 through January 31, 2001. The Company intends to seek additional capital which is essential to permitting the Company to execute its new strategy. There can be no assurance the Company will be successful in raising new funds or that the terms under which the funds are raised are favorable to the Company.
PREVIOUS BUSINESS OPERATIONS
During the fiscal year ending January 31, 2001, the revenues generated by the Company resulted from the sale of existing products, including nutritional supplements, pet products, and home remedy products.
Commencing in the first quarter of 2001, the Company intends to focus on the sale of its branded products (Carver- Curtis) to E2K and its other products to network marketers.
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. (See Note 6 and Note 8 to the Financial Statements)
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting ("Meeting") of Shareholders of the Company was held on October 19, 2000. The 3,735,767 shares of common stock ("Common Stock") present at the Meeting out of a then total 4,633,683 shares outstanding and entitled to vote, acted as follows with respect to the following proposals:
Approved, by a vote of: 3,734,767 shares of Common Stock for and 1,000 shares against the election of Arnold M. Gans as a director of the Company; 3,734,767 shares of Common Stock for and 1,000 shares against the election of Myra D. Gans as a director of the Company; 3,735,267 shares of Common Stock for and 500 shares against the election of Lawrence S. Burstein as a director of the Company; and 3,735,267 shares of Common Stock for and 500 shares against the election of Alan Gaines as a director of the Company. In addition, no shares of Common Stock were voted against the election of all of the nominees.
Approved, by a vote of 3,731,617 shares of Common Stock for and 1,100 shares against an amendment to the Company's Certificate of Incorporation to change the name of the Company to Gender Sciences, Inc.
Approved, by a vote of 3,692,260 shares of Common Stock for and 16,041 shares against an amendment to the Company's Certificate of Incorporation to increase the Company's authorized Common Stock from 10,000,000 shares to 70,000,000 shares.
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, 1999 .062 .062 April 30, 1999 .03 .03 July 31, 1999 .07 .07 October 31, 1999 .25 .25 January 31, 2001 .0621 .062 April 30, 2000 .75 .625 July 31, 2000 .50 .375 October 31, 2000 .50 .50 January 31, 2001 .312 .187
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 April 17,2001, there were approximately 112 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.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
2001 - 2000
Sales for the year ended January 31, 2001 were $627,500 as compared with sales of $443,200 for the year ended January 31, 2000, an increase of 41.6%. The increase in sales was primarily due to collagen-based products and The Healthy Nut (soybean) program. Cost of sales increased from $267,600 for the year ended January 31, 2000, or 60.4% of sales, to $311,800, or 49.7% of sales, for the year ended January 31, 2001. Selling, general and administrative expenses increased 51.8% to $980,100 from $645,600. This represents an increase of approximately $334,500, which consists of increased professional fees of $69,000; the hiring of additional personnel and salary increases of approximately $150,000; the cost of obtaining additional insurance of $27,000 and consulting fees of $80,000. The Company also expended $379,600 towards the development of its website as compared to an expenditure of $167,200 in the prior year. The preponderance of these expenses was incurred during the first nine months of the fiscal year. The Company increased advertising expense by $5,700 in the current year. For the year ended January 31, 2001, the Company incurred an operating loss of $1,056,100 as compared to an operating loss of $643,600 for the comparable period in 2000. The Company had a loss from continuing operations of $1,184,300 or ($.12) per share, as compared to a loss of $729,300 or ($.18) per share for the comparable period in 2000. The net loss for the year ended January 31, 2001 was $1,170,500, which includes forgiveness of debt in the aggregate amount of $13,800. 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) Because of the decline in the interest in the Internet and, in particular the determination by the Company that its Women's Health website and its e-commerce initiative would not be successful in the foreseeable future the Company elected to significantly reduce its Internet initiative and has focused its efforts on its off-line businesses. See "Liquidity and Capital Resources".
Interest expense was $140,300 and interest income was $12,100 for the year ended January 31, 2001, as compared to interest expense of $94,700 and interest income of $9,000 during the comparable period of 2000. The increase in both interest expense and interest income was primarily due to the $2,021,250 principal amount of 10% Convertible Subordinated Debentures.
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; costs 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 comparable period in 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 comparable period in 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 the $1,521,250 principal amount of 10% Convertible Subordinated Debentures outstanding.
Liquidity and Capital Resources
At January 31, 2001, the Company had cash of $32,700 as compared to cash of $649,700 on January 31, 2000.
In 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. Thereafter the Company completed the private placement of $2,021,250 principal amount of 10% Convertible Subordinated Debentures. The Convertible Subordinated Debentures became convertible into shares of common stock at rates ranging between $.075 and $.25 per share. In addition, accrued interest on these debentures was also converted into common stock thus resulting in the issuance of 24,725,997 shares. See Note 6 - to notes to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. However as noted above due to the significant decline in the commercial potential of its internet site, the Company has now focused its efforts on off-line activities. As part of its decision to refocus on its off-line strategy and reduce its cash expenditures the Company reduced its number of employees and discontinued its use of consultants during fiscal 2001. The Company has recently entered into marketing affiliations with two network-marketing groups in the past three months, and has begun to make sales to one of these groups and has received deposits from the other. All sales are made against prepayments from the network marketing companies rather than selling directly to independent distributors thereby limiting credit risks. The Company will require additional working capital until such time as profitability from these ventures and sales of existing products are achieved and the Company reaches breakeven levels. There can be no assurance that the Company will be successful in raising such funds and that if additional funds are raised, that the Company's decision to focus on off-line activities will result in the Company achieving profitability. 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."
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 faces 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 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 will require significant amounts of additional capital to achieve its stated goals. The Company believes that the net proceeds from the Company's recent private offering of convertible debentures will be insufficient to implement its strategy in calendar year 2001. 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 its markets,
- 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 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.
IF THE NETWORK MARKETERS DO NOT SUCCESSFULLY SELL 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 the marketing programs instituted by the network marketing companies with which it has alliances will result in increased demand for the products it offers. If the 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 network marketers, and its marketing efforts are concentrated on this group. If these distribution networks do not successfully sell the products the Company offers or if their customers do not regularly use these products, the Company may experience significant losses and its business will be adversely affected.
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 similar outlets 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 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.
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 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.
Item 8:
Item 8: Financial Statements and Supplemental Data
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Gender Sciences, Inc., F/K/A The MNI Group Inc.
We have audited the accompanying consolidated balance sheets of Gender Sciences, Inc. F/K/A The MNI Group, Inc. as of January 31, 2001 and January 31, 2000 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years 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 Gender Sciences, Inc. F/K/A The MNI Group, Inc. as of January 31, 1999, 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 Gender Sciences, Inc. F/K/A The MNI Group, Inc. as of January 31, 2001 and January 31, 2000, and the results of its operations and cash flows for the years 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 11, 2001
See notes to consolidated financial statements.
GENDER SCIENCES, INC. F/K/A THE MNI GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
GENDER SCIENCES, INC. F/K/A THE MNI GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
See notes to consolidated financial statements.
GENDER SCIENCES, INC. F/K/A THE MNI GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
GENDER SCIENCES, INC. F/K/A THE MNI GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 2001
Note 1. ORGANIZATION AND BUSINESS:
Gender Sciences, Inc. F/K/A The MNI Group, Inc. (Gender Sciences), 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 healthy living, 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.
On October 19, 2000, at the Company's annual meeting, the stockholders voted to change the Company's name to Gender Sciences, Inc.
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. They do not include any of the activities of KOS.
The consolidated statements of operations for the year ended January 31, 1999, 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) due to the net loss in that year, as well as substantial net operating loss carryforwards.
INVENTORIES - Inventories, which consist primarily of purchased finished foods, 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
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 the third quarter of the year ended January 31, 2001, such costs were incurred during the preliminary project stage and, accordingly, were expensed. Since that time, such costs have been capitalized and amortized over a five year period.
INCOME TAXES - The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109)"Accounting for Income Taxes". SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.
REVENUE RECOGNITION - Revenue is recognized upon shipment of products to customers.
EARNINGS PER SHARE - The consolidated financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128 (SFAS 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 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.
Note 3. FIXED ASSETS:
Fixed assets consisted of the following at January 31, 2001 and 2000, respectively:
January 31, ----------------------- 2001 2000 -------- -------- Furniture, fixtures and equipment $103,000 $ 3,200 Leasehold improvements 25,200 97,700 Web site development costs 107,400 -- -------- -------- 235,600 100,900 Less: accumulated depreciation and amortization 102,400 91,100 -------- --------
$133,200 $ 9,800 ======== ========
Note 4. NOTES PAYABLE:
In November 1991, Family Weight Loss Centers, Inc. (FWLC), (a former subsidiary of Gender Sciences), 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, the Company 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. During the year ended January 31, 2001 the Company negotiated a payoff settlement with Fleet Bank which resulted in forgiveness of debt of $13,800. Interest charged to expense on this debt was $600, $3,800, and $2,800 for the years ended January 31, 2001, 2000 and 1999, 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, this loan was converted to a demand note. Principal and interest payments are being made on a monthly basis. Interest paid during the year ending January 31, 2001 was approximately $3,000. At January 31, 2001, the outstanding balance was $30,000.
All of the Company's notes payable are due within one year. A summary of notes payable at January 31, 2001 and 2000 is as follows:
January 31, --------------------------- 2001 2000 -------- -------- PNC Bank demand note $ 30,000 $ 37,200 Fleet Bank, NA -- 23,800 -------- -------- $ 30,000 $ 61,000 ======== ========
Loans Payable - Officers
From time to time the Company's chief operating officer has 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 January 31, 1999, was $196,300 and the highest balance due during the 2000 fiscal 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. No advances were made during fiscal 2001.
During the fourth quarter of fiscal 2001, the Company received an advance of $130,000 from an affiliate of the Chairman of the Board. Although no documentation was prepared for this loan, management expects the terms of the debt to be favorable to the Company.
Note 5. LEASE COMMITMENTS:
Gender Sciences 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, 2001, 2000 and 1999 was approximately $85,000, $65,600, and $77,300 respectively. Gender Sciences sub-leases (on a month to month basis) a portion of its facility to various entities at an annual rental income of approximately $33,800, $34,600, and $41,000 for the year ended January 31, 2001, 2000 and 1999, respectively. The future minimum annual rents are as follows:
Year ended January 31, 2002 $ 65,600 2003 65,800 2004 67,500 2005 61,900 --------
Total future minimum annual rent payments $260,800 ========
The Company leases equipment under various operating leases. During the year ended January 31, 2001, the total payments under such leases were $12,000. The future minimum annual lease payments are as follows:
Year ended January 31, 2002 $ 15,900 2003 5,900 2004 1,100 --------
Total future minimum annual lease payments $ 22,900 ========
Note 6. STOCKHOLDERS' EQUITY:
In February 1992, in connection with the bankruptcy of FWLC (see Note 4) the Company issued to Fleet Bank warrants to purchase 750,000 shares of the Company's common stock. The warrants are exercisable at $.01 per share and expire in February 2002. At January 31, 2001, none of the options were exercised.
In March 1992, three officers and directors of Gender Sciences were each granted options to purchase 125,000 shares of the Company's common stock plus 150,000 additional options which vested over 60 months. The options are exercisable at $.10 per share. Upon the resignation of one of the officers, 150,000 options were cancelled. The original 125,000 options issued to this officer expired in 1999. In 1999, the options issued to the remaining two officers (275,000 each), were extended to November 2004. At January 31, 2001, none of the options were exercised.
In January 1996, as consideration to forego payment of past due salary, two officers of the Company were issued 375,000 options each exercisable at $.10 per share. The options expire in November 2004. At January 31, 2001, none of the options were exercised.
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, 2001, none of the options were exercised.
During 1999, the Company issued options to a consultant to purchase 175,000 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 100,000 at $.10 per share and 75,000 at $.25 per share. All of these options expire November 2004. At January 31, 2001, 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, 2001, 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, 2001, none of the options were exercised.
In October 1999, the Chairman and one director 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. On October 19, 2000, at the Company's annual meeting, the stockholders adopted the 2000 Long-Term Incentive Stock Option Plan and the options vested. At January 31, 2001, none of the options were exercised. 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 and options to purchase 20,000 shares were issued to various other consultants. Such options expire on November 1, 2009. At January 31, 2001, 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, 2001, none of the options were exercised.
In February 2000, as consideration for accepting the terms of her employment agreement, an employee was issued 25,000 options each exercisable at $.875 per share. The options expire in November 2004. At January 31, 2001, none of the options were exercised.
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. At January 31, 2001, none of the options were exercised.
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, on substantially the same terms, options to purchase 1) - 500,000 shares for the Department of Medicine at Columbia University College of Physicians and Surgeons and, 2) - 413,500 shares for two individuals associated with the consultant. At January 31, 2001, none of the options were exercised. The Company and the consultant are engaged in discussion pursuant to which the vesting period for the options will be accelerated and the exercise price of a portion of the options will be reduced. These discussions are based in part upon the proposed financing by the Company described elsewhere herein. See Note 8 hereunder for discussion of the potential consequences if the proposed offering is not consummated.
Throughout the year ended January 31, 2001, as consideration for accepting positions on the Company's Advisory Board, four individuals were issued a total of 85,000 options each exercisable at prices ranging from $.10 to $.875 per share. The options expire in November 2004. At January 31, 2001, none of the options were exercised.
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. This private placement included the conversion of $390,000 of unsecured advances received earlier in that year. Under the terms of the Debentures, the principal dollar amount was convertible by the holders into the Company's common stock at $.075 per share. The Debentures were to be converted automatically upon the Company amending its Certificate of Incorporation to increase its authorized capitalization to not less than 35,000,000 shares of common stock.
During the year ended January 31, 2001, the Company sold $500,000 of additional debentures with terms similar to those sold in the prior fiscal year. However, these debentures were convertible at $0.25 per share.
On October 19, 2000, at the Company's annual meeting, the stockholders voted to increase the authorized number of shares of the Company's common stock to 70,000,000. This resulted in the automatic conversion of the debenture sold during the current fiscal year plus the related accrued interest to 2,388,826 shares. The original debentures matured on October 1, 2000, and thereafter became convertible into shares of common stock. As of January 31, 2001 (including shares issuable for accrued interest) there were 22,622,161 shares issued.
2000 Long-Term Incentive Stock Plan
On October 19, 2000, the stockholders approved the 2000 Long-Term Incentive Stock Plan (the Plan). Under the Plan, the Company may grant stock options, stock appreciation rights (SAR's) or stock awards. All employees of the Company are eligible to participate in the Plan. The Plan authorizes the issuance, in the aggregate, of up to 6,000,000 share of common stock. No stock option, SAR or other award, may be granted under the Plan after October 27, 2009. The maximum number of share for which awards may be granted to any person in any fiscal year is 300,000. The purchase price per share for each stock option may not be less than 100% of the fair market value on the date of grant and may not be for more than ten years. In the case of incentive stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price per share may not be less than 110% of the fair market value on the date of grant and the option may not be exercisable for more than five years. At January 31, 2001, no options were granted from the Plan.
Note 7. INCOME TAXES:
The Company has adopted the liability method of accounting for income taxes pursuant to SFAS 109. No recognition has been made of the possible benefits of available net operating loss carryforwards due to the uncertainty that future years' will provide income to be offset by such available benefits. Gender Sciences and its subsidiaries have net operating loss carryforwards in excess of $9,000,000, 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 $3,320,000 as of January 31, 2001, with a valuation allowance of an equal amount as follows:
Net operating losses carryovers of approximately $9,485,800, will expire over the next 18 years, the majority of which (approximately $6,979,800) will expire between fiscal 2002 and 2007.
Note 8. COMMITMENTS AND CONTINGENCIES:
Government Regulations
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 such lawsuits. In addition, it has no commitments to its vendors for the purchase of either raw materials or finished product.
Consulting Agreements
In March 2000, the Company entered into an agreement with a consultant, which provided cash consideration and options to purchase shares of common stock of the Company (see Note 6). The options have a five-year term and vest over two years. Upon execution of the agreement, the Company paid the consultant $100,000 and became obligated to make an additional payment of $150,000 on the first anniversary of the agreement (March 27, 2001). The Company and the consultant have since been engaged in discussions to extend the period for payment of the outstanding sums as well as revising the pricing and vesting of the options granted to consultant. These discussions are based in part upon the success of the Company's proposed financing. If unsuccessful, there is no assurance that the consultant might not elect to assert certain claims. The Company believes that if that should occur it would have meritorious defenses against such claims.
Going Concern
As shown in the accompanying financial statements, although the Company's sales have increased from $443,200 to $627,500, losses from operations have increased from ($729,300) to ($1,182,800). Additionally, the Company has negative working capital at January 31, 2001, of ($87,000). 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 $500,000 of additional subordinated convertible debentures or equity, which is expected to be completed by May 31, 2001 (during the years ended January 31, 2000 and 1999, the Company sold approximately $0.5 million and $1.5 million of its subordinated convertible debentures, respectively). There is no assurance that the Company will successfully consummate this financing. As noted below, failure to consummate this financing could materially impact the Company's ability to operate its business. During fiscal years 2000 and 2001, management had directed its efforts toward the development of its non-biased gender based womens' healthcare Internet web site. Presently, managements' efforts and the Company's resources are being directed toward new product development and direct sales and marketing to existing and new customers.
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 or equity as discussed above will provide the necessary funds it requires for the balance of the year ending January 31, 2002. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern as a result of its inability to complete its financing.
Note 9. MAJOR CUSTOMERS:
For the year ended January 31, 2001, three customers were responsible for approximately $244,400 in sales; representing approximately 39% of sales. For the year ended January 31, 2000, one customer was responsible for approximately $75,800 in sales representing approximately 17% of total sales. For the year ended January 31, 1999, two customers were responsible for approximately $523,000 in sales representing approximately 56% of total sales.
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.
In February 1995, the Company agreed to liquidate a three-year note payable to Fleet Bank in the amount of $125,000 by the payment of 42 equal monthly principal payments plus interest at the prime rate. At January 31, 2000, the balance outstanding was $23,800. During the year ended January 31, 2001, the Company negotiated a payoff settlement with Fleet Bank, which resulted in forgiveness of debt of $13,800.
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. DISTRIBUTION AGREEMENT:
On January 30, 2001, the Company entered into a distribution agreement, which gave the Company the right to provide certain products to an entity, which has exclusive marketing and sales rights to such products. As part of the agreement, the Company was required to advance approximately $49,000 for marketing and promotional expenses. Such advances are to be repaid out of profits during the first six months of the agreement. These advances are reflected in Other Current Assets on the Company's balance sheet at January 31, 2001.
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 quarterly results of operations for each quarter of fiscal 2001 and 2000:
Note 14. SUPPLEMENTAL CASH FLOW INFORMATION:
During the year ended January 31, 2001 and 2000, the Company issued 122,674 and 300,000 shares of its common stock valued at $5,000 and $37,500, respectively, as payment in lieu of services performed. Additionally, during the year ended January 31, 2001, the Company issued 400,000 shares of common stock as payment of $30,000 of corporate obligations.
Item 9:
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 58 Chairman (1) and Director Arnold Gans 66 President Myra Gans 63 Executive Vice President/Director Alan Gaines 42 Director
- ---------- (1) Michael J. Connelly resigned as the Company's Chairman in November 1999.
LAWRENCE BURSTEIN, Chairman, is and since March 1996 has been President, a Director and principal shareholder of Unity Venture Capital Associates, a private investment banking firm. Mr. Burstein is a director of four other public companies, being respectively, CAS Medical Systems, Inc. engaged in the manufacture and marketing of specially formulated medical foods, and T-HQ, Inc., a developer of electronic game cartridges, Traffix, Inc., an Internet marketing company, and ID Systems, Inc., a manufacturer and marketer of systems to monitor physical assets.
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. Mrs Gans, who is Mr. Gans' spouse, has been an executive at MNI since 1981 and was employed at Control Drug, Inc. as Vice President-Sales for five years prior thereto. She has worked extensively with medical professionals and hospitals to integrate company products and programs. She directed and manages all the Internet project components for the His and Her Medicine.com site.
ALAN GAINES, Director, co-founded Gaines, Berland Inc. (GBI) in 1983. GBI, a full service brokerage concern (member NASD, SIPC), specializes in global energy markets. GBI commenced operations as a research boutique that provides consultative, brokerage, and capital formation services to institutions. Mr. Gaines left GBI in 1998 in order to pursue several entrepreneurial pursuits including expanding the market presence of HitTheBeach. Upon Mr. Gaines' departure in 1998, GBI maintained a sales and operations staff in excess of 600 employees and a retail system consisting of 400 registered sales representatives. In 1998, Mr. Gaines provided critical angel capital to GlobalNetFinancial.com, Inc. GlobalNetFinancial is a rapidly expanding international financial portal providing online financial news and content, investment tools and transaction services.
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. The Company believes that during the year ended 2001, 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, 2001, 2000, & 1999 respectively, to the Company's Chief Executive Officer and Executive Vice President.
(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 $ 350,000 $ Myra Gans (a) 1,400,000 $ 350,000 $ - --------- (a) includes 750,000 options owned jointly by Mr. and Mrs. Gans
OPTIONS GRANT IN LAST FISCAL YEAR
None
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.
Item 12.
Item 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, 2001 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) 6.02% 10-West Forest Avenue, Englewood, NJ 07631
Myra Gans 2,399,830(2) 6.02% 10 West Forest Avenue, Englewood, New Jersey 07631
Lawrence Burstein 892,750(4) (5) 2.3% 245 Fifth Avenue, New York, New York 10016
Alan Gaines 2,266,666(4) 5.8% 7 Wakeman Road Westport, CT 06880
All directors and executive officers as a group (4 persons) (3) (4) (5) 5,695,160 14.75%
(1) Includes all shares issuable pursuant to presently exercisable options as well as all such options that will become exercisable within 60 days of the date hereof. Except as otherwise indicated, all shares are beneficially owned, and the persons named herein hold their sole investment and voting power.
(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.
(4) Excludes accrual of interest on 10% debentures.
(5) Excludes 1,333,333 shares owned by Unity Capital, of which Mr. Burstein is a Director, President and principal shareholder. Unity Capital also has loaned to the Company $130,000.
Item 13.
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 ------ -----------
1.1 Carver-Curtis License Agreement
1.2 E2K Distribution Agreement
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 30, 2001 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 30, 2001 Lawrence Burstein
/s/ ARNOLD GANS President (Principal - --------------------------- Operating Officer and Arnold Gans Principal Accounting and Financial Officer) April 30, 2001
/s/ MYRA GANS Vice President, - --------------------------- Secretary, and Director April 30, 2001 Myra Gans
- --------------------------- Director Alan Gaines