0000891554-01-504987.txt : 20011009 0000891554-01-504987.hdr.sgml : 20011009 ACCESSION NUMBER: 0000891554-01-504987 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010925 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEM INTERNATIONAL INC CENTRAL INDEX KEY: 0001016504 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133035216 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28876 FILM NUMBER: 1744037 BUSINESS ADDRESS: STREET 1: 201 ROUTE 22 CITY: HILLSIDE STATE: NJ ZIP: 07205 BUSINESS PHONE: 2019260816 MAIL ADDRESS: STREET 1: 201 ROUTE 223 CITY: HILLSIDE STATE: NJ ZIP: 07205 10KSB 1 d26808_10ksb.txt 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ------------ FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 2001 Commission File Number 000-28876 INTEGRATED HEALTH TECHNOLOGIES, INC. (Exact name of small business registrant in its charter) Delaware 22-2407475 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 Route 22, Hillside, New Jersey 07205 (Address of principal executive offices) (Zip code) Registrant's telephone number: (973) 926-0816 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock $.002 par value per share Class A Redeemable Common Stock Purchase Warrants (Title of each class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. Yes _X_ No ___ Registrant's revenues for the fiscal year ended June 30, 2001 were $15,293,090. The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the trading price of the Registrant's Common Stock on August 31, 2001 was $ 357,600. The number of shares outstanding of each of the Registrant's classes of common equity, as of the latest practicable date: Class Outstanding at August 31, 2001 Common Stock $.002 par value 6,228,720 Shares Class A Redeemable Common Stock 1,265,000 Warrants Purchase Warrants Class C Redeemable Common Stock Purchase Warrants 150,000 Warrants DOCUMENTS INCORPORATED BY REFERENCE The information required by part III will be incorporated by reference to certain portions of a definitive Proxy Statement which is expected to be filed by the Registrant within 120 days after the close of its fiscal year. INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-KSB ANNUAL REPORT INDEX Part I Page ---- Item 1. Description of Business 1 Item 2. Description of Properties 3 Item 3. Legal Proceedings 3 Item 4. Submission of Matters to a Vote of Security Holders 4 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Management's Discussion and Analysis of Financial Condition And Results of Operations 6 Item 7. Financial Statements 8 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8 Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 9 Item 10. Executive Compensation 9 Item 11. Security Ownership of Certain Beneficial Owners and Management 9 Item 12. Certain Relationships and Related Transactions 9 Item 13. Exhibits and Reports on Form 8-K 9 Signatures PART I Disclosure Regarding Forward-Looking Statements All statements other than statements of historical fact, in this Form 10-KSB, including without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Business" are, or may be deemed to be, forward looking statements. These statements represent the Company's current judgement and are subject to risks and uncertainties that could cause actual results to differ materially. Such risks and uncertainties include, without limitation: (i) loss of a major customer, (ii) competition, and/or (iii) government regulation. Item 1. Description of Business Effective January 5, 2001 Chem International, Inc. amended its corporate charter and changed its name to Integrated Health Technologies, Inc. [the "Company"]. The Company, a Delaware corporation, is the survivor of a merger of Chem International, Inc. a Delaware Corporation, with and into Frog Industries, Ltd. a New York corporation, which was effected on December 27, 1994 with Frog Industries, Ltd. renamed Chem International Inc. after the merger. The Company was reincorporated in Delaware on February 2, 1996. The Company is engaged primarily in manufacturing, marketing and sales of vitamins, nutritional supplements and herbal products, including vitamins sold as single entity supplements, in multi-vitamin combinations and in varying potency levels and in different packaging sizes. The Company's subsidiary, Manhattan Drug Company, Inc. ["Manhattan Drug"], manufactures the vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers. The Company also manufactures such products for sale under its own private brand, "Vitamin Factory", through mail order. On July 1, 2000, the Company began offering solid dosage product development and technical services through its subsidiary, Integrated Health Ideas, Inc. On August 31, 2000, the Company began the distribution and sale of fine chemicals through a new subsidiary IHT Health Products, Inc. Development and Supply Agreement On April 9, 1998, the Company signed a development and supply agreement with Herbalife International of America, Inc. ["Herbalife"] whereby the Company will develop, manufacture and supply certain nutritional products to Herbalife through December 31, 2001. Manufacturing Agreement On February 14, 1998, the Company signed a manufacturing agreement with Pilon International, PLC., a company that supplies Zepter International, a world-wide sales distributor of consumer products. The Company will manufacture and develop dietary supplements through the year 2001. Risk of Reduction of Significant Revenues from Major Customer The Company derives a significant portion of its sales from one customer, Rexall Sundown, Inc. ["Rexall"], for which it manufactures vitamins and nutritional supplements. Sales to Rexall expressed as a percentage of the Company's total sales, were approximately 28% and 51%, respectively, for the fiscal years ended June 30, 2001 and 2000. The loss of this customer would have a material affect on the Company's operations. Dependence on Key Personnel The Company is highly dependent on the experience of its management in the continuing development of its manufacturing and retail operations. The loss of the services of these certain individuals, particularly E. Gerald Kay, Chairman of the Board, and director of the Company, would have a material adverse effect on the Company's business. The Company has entered into employment agreements with each of its four executive officers, which expire on June 30, 2002. Such agreements may be terminated by the employees at any time upon 30 days prior written notice without penalty, subject to a one year non-compete clause. The Company has obtained key-man life insurance in the amount of $1,000,000 on the life of Mr. Kay, with the Company as the named beneficiary. 1 Raw Materials The principal raw materials used in the manufacturing process are natural and synthetic vitamins, minerals, herbs, and related nutritional supplements, gelatin capsules and coating materials and the necessary components for packaging the finished products. The raw materials are available from numerous sources within the United States. The gelatin capsules and coating materials and packaging materials are similarly widely available. Raw materials are generally purchased by the Company without long-term commitments, on a purchase order basis. The Company's principal suppliers are Tomen American, Inc., Roche Vitamins, Inc., and Triarco Inc. Employees As of June 30, 2001, the Company had 96 full time employees, of whom 50 belonged to a local unit of the Teamsters Union and are covered by a collective bargaining agreement, which expires August 31, 2002. Seasonality The Company's results of operations are not significantly affected by seasonal factors. Trademarks The Company owns the registration in the United States Patent and Trademark offices for "Oxitiva." Oxitiva is the Company's brand of chewable antioxidant formula. Government Regulations The manufacturing, processing, formulation, packaging, labeling and advertising of the Company's products are subject to regulation by a number of federal agencies, including the Food and Drug Administration [the "FDA"], the Federal Trade Commission [the "FTC"], the United States Postal Service, the Consumer Product Safety Commission and the Untied States Department of Agriculture. The FDA is primarily responsible for the regulation of the manufacturing, labeling and sale of the Company's products. The Company's activities are also regulated by various state and local agencies in which the Company's products are sold. The operation of the Company's vitamin manufacturing facility is subject to regulation by the FDA as a food manufacturing facility. In addition, the United States Postal Service and the FTC regulate advertising claims with respect to the Company's products sold by solicitation through the mail. The Dietary Supplement Health and Education Act of 1994 [the "Dietary Supplement Act"] was enacted on October 25,1994. The Dietary Supplement Act amends the Federal Food, Drug and Cosmetic Act by defining dietary supplements, which include vitamins, minerals, nutritional supplements and herbs, and by providing a regulatory framework to ensure safe, quality dietary supplements and the dissemination of accurate information about such products. Dietary supplements are regulated as foods under the Dietary Supplement Act and the FDA is generally prohibited from regulating the active ingredients in dietary supplements as food additives, or as drugs unless product claims trigger drug status. The Dietary Supplement Act provides for specific nutritional labeling requirements for dietary supplements effective January 1, 1997. The Dietary Supplement Act permits substantiated, truthful and non-misleading statements of nutritional support to be made in labeling, such as statements describing general well being from consumption of a dietary ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining structure or function of the body. In addition, the Dietary Supplement Act also authorizes the FDA to promulgate Current Good Manufacturing Practices ["cGMP"] specific to the manufacture of dietary supplements, to be modeled after food cGMP. The Company currently manufactures its dietary supplement products pursuant to food cGMP. The Company believes that it is currently in compliance with all applicable government regulations. The FDA will be proposing and promulgating regulations to implement the Dietary Supplement Act. The Company cannot determine what effect such regulations, when promulgated, will have on its business in the future or what cost it will add to manufacturing the product. Such regulations could, among other things, require expanded or different labeling, the recall, reformulation or discontinuance of certain products, additional record keeping and expanded documentation of the properties of certain products and scientific substantiation regarding ingredients, product claims and safety of efficacy. 2 Competition The business of manufacturing, distributing and marketing vitamins and nutritional supplements is highly competitive. Many of the Company's competitors are substantially larger and have greater financial resources with which to manufacture and market their products. In particular, competition is fierce in the retail segment. Many direct marketers not only focus on selling their own branded products, but offer national brands at discounts as well. Many competitors have established brand names recognizable to consumers. In addition, major pharmaceutical companies offer nationally advertised multivitamin products. The Company also competes with certain of its customers who have their own manufacturing capabilities. Many of the Company's competitors in the retailing segment have the financial resources to advertise freely to promote sales and to produce sophisticated catalogs. In many cases, such competitors are able to offer price incentives for retail purchasers and offer participation in frequent buyers programs. Some retail competitors also manufacture their own products whereby they have the ability and financial incentive to sell their own product. Product Liability Insurance The Company intends to compete by stressing the quality of its manufacturing product, providing prompt service, competitive pricing of products in its marketing segment and by focusing on niche products in the international retail markets. The Company, like other manufacturers, wholesalers and distributors of vitamin and nutritional supplement products, faces an inherent risk of exposure to product liability claims if, among other things, the use of its products result in injury. Accordingly, the Company currently maintains product liability insurance policies, which provides a total of $10 million of coverage per occurrence and $10 million of coverage in the aggregate. Although the Company's product liability insurance policies do not currently provide coverage for claims with respect to products containing L-tryptophan manufactured after September 1992, the Company discontinued manufacturing such products in 1989. Based upon indemnification arrangements with its supplier of L-tryptophan, the Company's product liability insurance and the product liability insurance of its suppliers, the Company believes that its product liability insurance is adequate to cover any product liability claims. There can be no assurance that the Company's current level of product liability insurance will continue to be available or, if available, will be adequate to cover potential liabilities. Item 2. Description of Properties On January 10, 1997, the Company entered into a lease agreement for approximately 84,000 square feet of factory, warehouse and office facilities in Hillside, New Jersey. The facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is owned by the Company's Chairman of the Board, and principal stockholder and certain family members and 10% owned by the Company's chief financial officer. The lease has a term of five years and expires on January 10, 2002. The lease provides for a base annual rental of $346,000 plus increases in real estate taxes and building expenses. At its option, the Company has the right to renew the lease for an additional five year period. The space is utilized for the retail mail order business, warehousing and packaging operations and also houses the Company's corporate offices. On April 28, 2000 the lease was amended reducing the square footage to approximately 75,000 square feet and extending the lease to May 31, 2015. The Company leased 40,000 square feet of manufacturing facilities in Hillside, New Jersey from Morristown Holding Company, Inc. (formerly Gerob Realty Partnership), of which E. Gerald Kay, Chairman of the Board of the Company, is a majority shareholder. The lease which expired on December 31,2000 provided for a minimum annual rental of $60,000 plus payment of all real estate taxes. On August 30, 2000 the Company acquired the manufacturing facility by issuing 1,05,420 shares of its common stock in exchange for the property. The space is utilized for Manhattan Drug's tablet manufacturing operations. Item 3. Legal Proceedings Numerous unrelated manufacturers, distributors, suppliers, importers and retailers of manufactured L-tryptophan are or were defendants in an estimated 2,000 lawsuits brought in federal and state courts seeking compensation and punitive damages for alleged personal injury from ingestion of products containing manufactured L-tryptophan. A number of these lawsuits have been settled or discontinued. Additional suits may be filed. Prior to a request from the FDA in November 1989 for a national, industry-wide recall, Manhattan Drug halted sales and distribution and also ordered a recall of L-tryptophan products. Subsequently, the FDA indicated that there is a strong epidemiological between the ingestion of the allegedly contaminated L-tryptophan and a blood disorder known as eosinophilia myalgia syndrome ["EMS"]. 3 Investigators at the United States Centers for Disease Control suspect that a contaminant was introduced during the manufacture of the product in Japan. While intensive independent investigations are continuing, there has been no indication that EMS was caused by any formulation or manufacturing fault of Manhattan Drug or any of the other firms that manufactured tablets and/or capsules containing L-tryptophan. Manhattan Drug and certain companies in the vitamin industry, including distributors, wholesalers and retailers, have entered into an agreement [the "Indemnification Agreement"] with Showa Denko America, Inc. ["SDA"]. Under which SDA, a U.S. subsidiary of a Japanese corporation, Showa Denko K.K. ["SDK"], which appears to have been the supplier of all of the alleged contaminated L-tryptophan products, has assumed the defense of all claims against Manhattan Drug arising out of the ingestion of L-tryptophan products and has agreed to pay the legal fees and expenses in that defense, and SDK has agreed to guarantee SDA's obligation therein. SDA has posted a revolving irrevocable letter of credit, in the amount of $20,000,000, to be used for the benefit of the Company and other indemnified parties if SDA is unable or unwilling to satisfy any claims or judgements. SDA has agreed to indemnify Manhattan Drug against any judgements and to fund settlements arising out of those actions and claims if it is determined that a cause of the injuries sustained by the plaintiffs was a constituent in the bulk material sold by SDA to Manhattan Drug or its suppliers, except to the extent that Manhattan Drug is found to have any part of the responsibility for those injuries and except for certain claims relating to punitive damages. There is no assurance that SDA will have the financial ability to perform under the Indemnification Agreement. Manhattan Drug has product liability insurance, which the Company believes provides coverage for all of its L-tryptophan products subject to these claims, including legal defense costs. Due to the multitude of defendants, the probability that some or all of the total liability will be assessed against other defendants and the fact that discovery in these actions is not complete, it is impossible to predict the outcome of these actions or to assess the ultimate financial exposure of the Company. Based upon the aforementioned indemnification arrangements, the Company's product liability insurance and the product liability insurance of its suppliers, the Company does not believe these actions will have a material adverse effect on Manhattan Drug, and, accordingly, no provision has been made in the Company's Consolidated Financial Statements for any loss that may be incurred by the Company as a result of these actions. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter ended June 30, 2001. 4 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Effective January 5, 2001 the Company changed its name to "Integrated Health Technologies, Inc." and began trading using the NASDAQ symbol IHTC for its common stock and the symbol IHTCW for its redeemable warrants. Set forth below are the high and low closing prices of the Common Stock and the Class A Redeemable Warrant as reported on the Nasdaq National Market for the period July 1, 1999 through April 25, 2001 and on the Electronic Bulletin Board for the period April 25, 2001 through June 30, 2001: HIGH LOW COMMON STOCK [CXIL/IHTC] FISCAL YEAR ENDED JUNE 30, 2000 First Quarter $1.7500 $0.5000 Second Quarter $1.4375 $0.4375 Third Quarter $2.9375 $0.5625 Fourth Quarter $1.7188 $0.7813 FISCAL YEAR ENDED JUNE 30, 2001 First Quarter $2.4063 $0.8750 Second Quarter $1.9375 $0.4375 Third Quarter $1.0625 $0.5000 Fourth Quarter $0.8125 $0.2188 CLASS A REDEEMABLE WARRANTS [CXILW/IHTCW] FISCAL YEAR ENDED JUNE 30, 2000 First Quarter $2.4062 $0.8750 Second Quarter $1.9375 $0.4375 Third Quarter $1.0625 $0.5000 Fourth Quarter $0.8125 $0.2100 FISCAL YEAR ENDED JUNE 30, 2001 First Quarter $0.6562 $0.1875 Second Quarter $0.3438 $0.0312 Third Quarter $0.1875 $0.0625 Fourth Quarter $0.0938 $0.0100 As of June 30, there were approximately 580 holders of record of the Company's Common Stock. The Company has not declared or paid a dividend with respect to its Common Stock nor does the Company anticipate paying dividends in the foreseeable future. 5 Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the historical financial statements of the Company and notes thereto. Results of Operations Year ended June 30, 2001 Compared to the Year ended June 30, 2000 The Company's net loss for the year ended June 30, 2001 was $(1,449,903) as compared to the net income of $3,143,695 for the year ended June 30, 2000. This decrease in net income of approximately $4,600,000 is primarily the result of a $300,000 decrease in operating income resulting from an increase in gross profit of approximately $185,000 and an increase in selling and administrative expenses of approximately $485,000, a decrease in other income of approximately $6,100,000 due to the settlement of a Class Action Lawsuit and a decrease in Federal and State income taxes of approximately $1,500,000. Sales for the years ended June 30, 2001 and 2000 were $15,293,090 and $17,974,885, respectively, a decrease of $2,681,795 or 15%. For the year ending June 30, 2001 the Company had sales to one customer who accounted for 28% of net sales in 2001 and 51% of net sales in 2000. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the year ended June 30, 2001 totaled $447,701 as compared to $679,612 for the year ended June 30, 2000, a decrease of 34%. The Company has been experiencing a decline in retail mail order sales due to increased competition. The Company closed its retail store on March 2, 2001. Sales under the Roche Vitamins, Inc. distribution agreement were $2,264,256 as compared to $2,689,575 for the year ended June 30, 2000, a decrease of 16%. On July 1, 2000 the Company began offering solid dosage product development and technical services through its subsidiary, Integrated Health Ideas, Inc. Consulting revenues for the year ended June 30, 2001 totaled $458,757. On August 31, 2000 the Company began the distribution and sale of fine chemicals through a new subsidiary, IHT Health Products, Inc. Sales for the ten months ended June 30, 2001 totaled $3,765,490. Cost of Sales decreased to $13,820,829 in 2001 as compared to $16,687,844 for 2000. Cost of sales decreased as a percentage of sales to 90% as compared to 93% for 2000. The decrease in cost of sales is due to greater manufacturing efficiencies. Selling and administrative expenses for the year ending June 30, 2001 were $3,758,957 versus $3,276,435 for the same period a year ago. The increase of $482,522 was primarily attributable to a decrease in advertising of approximately $120,000, an increase in freight out of approximately $42,000 a decrease in bad debt expenses of approximately $130,000, a decrease in officers salaries of approximately $70,000, an increase in office salaries of approximately $350,000 due to the commencement of the IHT Health Products, Inc. distribution business, a decrease in consulting fees of approximately $175,000, an increase in insurance expense of approximately $45,000, an increase in depreciation expense of approximately $43,000, an increase in professional fees of approximately $70,000, an increase in public relations fees of approximately $70,000 and an increase in auto, entertainment and lodging of approximately $198,000. Other income (expense) was $189,328 for the year ended June 30, 2001 as compared to $6,047,145 for the same period a year ago. This decrease in other income of approximately $6,000,000 is primarily the result of the proceeds received of $6,143,849 from the settlement of a Class Action Lawsuit against three bulk vitamin suppliers for the year ended June 30, 2000. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Year ended June 30, 2000 Compared to the Year ended June 30, 1999 The Company's net income for the year ended June 30, 2000 was $3,143,695 as compared to the net loss of $(2,628,433) for the year ended June 30, 1999. This increase in net income of approximately $5,800,000 is primarily the result of a $670,000 increase in operating income resulting from a corresponding increase in gross profit of $670,000, an increase in other income of approximately $6,200,000 due to the settlement of a Class Action Lawsuit and an increase in Federal and State income taxes of approximately $1,100,000. Sales for the years ended June 30, 2000 and 1999 were $17,974,885 and $12,274,448, respectively, an increase of $5,700,437 or 46%. For the year ending June 30, 2000 the Company had sales to one customer who accounted for 51% of net sales in 2000 and 55% of net sales in 1999. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the year ended June 30, 2000 totaled $679,612 as compared to $713,962 for the year ended June 30, 1999, a decrease of 5%. The Company has been experiencing a decline in mail order sales due to increased competition and a decrease in advertising expenses. Sales under the Roche Vitamins, Inc. distribution agreement were $2,689,575 as compared to $1,607,092 for the year ended June 30, 1999, an increase of $1,082,483 or 67%. Cost of sales increased to $16,687,844 in 2000 as compared to $11,655,173 for 1999. Cost of sales decreased as a percentage of sales to 93% as compared to 95% for 1999. The decrease in cost of sales is due to the greater manufacturing efficiencies. Selling and administrative expenses for the year ending June 30, 2000 were $3,276,435 versus $3,275,723 for the same period a year ago. The increase of $712 was primarily attributable to a decrease in advertising of approximately $50,000, an increase in freight out of approximately $46,000 a decrease in bad debt expenses of approximately $166,000, a decrease in officers salaries of approximately $80,000, an increase in office salaries of approximately $47,000, a decrease in the writeoff of the balance of goodwill of approximately $276,000, an increase in consulting fees of approximately $295,000, an increase in professional fees of approximately $63,000 and an increase in entertainment and lodging of approximately $57,000. Other income (expense) was $6,047,145 for the year ended June 30, 2000 as compared to $(136,159) for the same period a year ago. This increase in net income of approximately $6,200,000 is primarily the result of the proceeds received of $6,143,849 from the settlement of a Class Action Lawsuit against three bulk vitamin suppliers. Liquidity and Capital Resources At June 30, 2001 the Company's working capital was $3,687,816 a decrease of $1,771,967 over working capital at June 30, 2000. Cash and cash equivalents were $375,584 at June 30, 2001 a decrease of $1,447,425 from June 30, 2000. The Company utilized $1,517,415 and generated $4,098,629 for operations for the years ended June 30, 2001 and 2000, respectively. The primary reasons for the increase in cash utilized for operations are a net loss of approximately $1,400,000, an increase in accounts receivable of approximately $830,000, an increase in inventory of approximately $360,000, an increase in refundable Federal Income Taxes of approximately $410,000, an increase in accounts payable of approximately $820,000 and an increase in accrued expenses of approximately $422,000. The Company believes that the anticipated sales for next year will meet cash needs for operations. The Company utilized $24,066 and $167,460 in investing activities for the years ended June 30, 2001 and 2000, respectively. The Company generated $94,056 and utilized $2,407,190 from debt financing activities for the years ended June 30, 2001 and 2000, respectively. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources [Continued] The Company's total annual commitments at June 30, 2001 for long term non-cancelable leases of $4,710,078 consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment, office equipment and automobiles. The Company has two revolving lines of credit. One of the lines provides for a $1,000,000 revolving line of credit agreement, which bears interest at 3.0% above the prime interest rate and expires on November 5, 2001. At June 30, 2001 the balance due under the revolving line of credit was $636,966. The second line of credit also provides for a $1,000,000 revolving line of credit agreement, which bears interest at 4% above the prime interest rate and expires on December 21, 2002. At June 30, 2001 the balance due under the second line was $1,566. New Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities and measure them at fair value. Under certain circumstances, the gains or losses from derivatives may be offset against those from the items the derivatives hedge against. The Company has adopted SFAS No. 133 in the fiscal year ending June 30, 2001. SFAS No. 133 did not have a material impact on the financial statements. In July 2001, FAS No. 141, "Business Combinations" ("FAS 141") and FAS No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") were issued. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. FAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment, at least annually, in accordance with the provisions of FAS 142. FAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with FAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of". The provisions of FAS 141 are effective immediately, except with regard to business combinations prior to July 1, 2001. FAS 142 will be effective as of January 1, 2002. Goodwill and other intangible assets acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of FAS 142. The Company is currently evaluating the effect that the adoption of FAS 141 and FAS 142 will have on its results of operations and its financial position. Impact of Inflation The Company does not believe that inflation has significantly affected its results of operations. Item 7. Financial Statements For a list of financial statements filed as part of this report, see index to financial statement at F-1. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NONE 8 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended June 30, 2001. Item 10. Executive Compensation Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended June 30, 2001. Item 11. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended June 30, 2001. Item 12. Certain Relationships and Related Transactions Incorporated by reference to the Company's Proxy Statement for Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended June 30, 2001. Item 13. Exhibits and Reports on Form 8-K (a) The following documents are filed as part of this report: (1) A list of the financial statements filed as part of this report is set forth in the index to financial statements at Page F-1 and is incorporated herein by reference. (2) Exhibits Number Description ------ ----------- 3.1 Restated Certificate of Incorporation of Registrant (1) 3.2 By-Laws of Registrant (1) 4.1 Form of Amended Warrant Agreement among the Registrant and Continental Stock Transfer & Trust Company, as Warrant Agent (1) 4.2 Specimen Common Stock Certificate of Registrant (2) 4.3 Specimen Class A Warrant Certificate of Registrant (2) 10.1 Employment Agreement, effective January 1, 1996, between the Registrant and Ronald G. Smalley (1) 10.2 Employment Agreement, effective July 1, 1996, between the Registrant and E. Gerald Kay (1) 10.3 Employment Agreement, effective July 1, 1996, between the Registrant and Eric Friedman (1) 10.4 Employment Agreement, effective July 1, 1996, between the Registrant and Riva L. Kay (1) 10.5 Employment Agreement, effective July 1, 1996, between the Registrant and Christina M. Kay (1) 10.6 Lease Agreement, dated January 1, 1996, between the Registrant and Gerob Realty Partnership (1) 10.7 Stock Option Plan (2) 10.8 Amended Employment Agreement, effective September 20, 1996, between the Registrant and E. Gerald Kay (3) 10.9 Lease Agreement, dated August 3,1994, between the Registrant and Hillside 22 Realty Associates, L.L.C. (2) 10.10 Exclusive License Agreement between the Registrant and International Nutrition Research Center, Inc. and amendments, dated April 29, 1997 and November 27, 1996 (4) 9 10.11 Lease Agreement between the Registrant and Vitamin Realty Associates, dated January 10, 1997 (4) 10.12 Manufacturing Agreement between Chem International, Inc. and Herbalife International of America, Inc. dated April 9, 1998 (5) 10.13 Manufacturing Agreement between Chem International, Inc. and Pilon International, PLC. dated February 14, 1998 (5) 10.14 Stock Sale Agreement between the Company and Gerob Realty Partnership (5) 10.15 Promissory note between the Company and E. Gerald Kay dated March 12, 1998 (5) 10.16 Class C Warrant to purchase common stock dated March 12, 1998 (5) 10.17 Consulting Agreement with Buttonwood Advisory Group dated March 20, 1998 (5) 10.18 Employment Agreement, effective July 1, 1999, between the Registrant and Eric Friedman (6) 10.18 Employment Agreement, effective July 1, 1999, between the Registrant and Riva Sheppard (6) 10.18 Employment Agreement, effective July 1, 1999, between the Registrant and Christina Kay (6) 10.18 Employment Agreement, effective February 16, 1999, between the Registrant and Abdulhameed Mirza (6) 16.1 Letter on changes in certifying accountants (6) 21 Subsidiaries of the Registrant 27 Financial Data Schedule ----------------------- (1) Incorporated herein by reference to the corresponding exhibit number to the Registrants Registration Statement of Form SB-2, Registration No. 333-5240-NY. (2) Incorporated herein by reference to the corresponding exhibit number to the Registrants Registration Statement Amendment No. 1 on Form SB-2, Registration No. 333-5240-NY. (3) Incorporated herein by reference to the corresponding exhibit number to the Registrants Registration Statement Amendment No. 2 on Form SB-2, Registration No. 333-5240-NY. (4) Incorporated herein by reference to the corresponding exhibit number to the Registrants Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997, filed on September 29, 1997, Commission File No. 000-28876. (5) Incorporated herein by reference to the corresponding exhibit number to the Registrants Annual Report on Form 10-KSB for the fiscal year ended June 30, 1998, filed on September 23, 1998, Commission File No. 000-28876. (6) Incorporated herein by reference to the corresponding exhibit number to the Registrants Annual Report of From 10-KSB for the fiscal year ended June 30, 1999, filed on September 30, 1999, Commission File No. 000-28876. (b) No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. 10 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX Item 7: Consolidated Financial Statements Independent Auditors' Report.................................... F-2 Consolidated Balance Sheet as of June 30, 2001.................. F-3....F-4 Consolidated Statements of Operations for the years ended June 30, 2001 and 2000.................................... F-5 Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001 and 2000.................................... F-6 Consolidated Statements of Cash Flows for the years ended June 30, 2001 and 2000.......................................... F-7....F-8 Notes to Consolidated Financial Statements...................... F-9....F-18 . . . . . F-1 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors of Integrated Health Technologies, Inc. We have audited the accompanying consolidated balance sheet of Integrated Health Technologies, Inc. and Subsidiaries (formerly Chem International, Inc.) as of June 30, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended June 30, 2001 and 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrated Health Technologies, Inc. and its subsidiaries as of June 30, 2001, and the consolidated results of their operations and their cash flows for the years ended June 30, 2001 and 2000 in conformity with accounting principles generally accepted in the United States. /s/ Amper, Politziner & Mattia, P.A. Edison, New Jersey August 21, 2001 F-2 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001 Assets: Current Assets: Cash and Cash Equivalents $ 375,584 Accounts Receivable-Net 2,214,274 Note Receivable 35,000 Inventories 3,598,845 Prepaid Expenses and Other Current Assets 172,444 Deferred Income Taxes 220,000 Refundable Federal Income Taxes 625,000 ---------- Total Current Assets 7,241,147 ---------- Property and Equipment-Net 2,350,312 ---------- Other Assets: Deferred Tax Asset 94,000 Security Deposits and Other Assets 152,643 ---------- Total Other Assets 246,643 ---------- Total Assets $9,838,102 ========== See accompanying notes to consolidated financial statements. F-3 INTEGRATED HEALTH TECHNOLGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2001 Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 2,176,152 Notes Payable 721,142 Accrued Expenses and Other Current Liabilities 521,910 Accrued Expenses-Related Party 122,400 Capital Lease Obligation 11,727 ----------- Total Current Liabilities 3,553,331 ----------- Non-Current Liabilities: Due to Stockholder 68,746 Capital Lease Obligation 24,295 ----------- Total Non-Current Liabilities 93,041 ----------- Commitments and Contingencies [13] Stockholders' Equity: Preferred Stock-Authorized 1,000,000 Shares, $.002 Par Value, No Shares Issued Common Stock-Authorized 25,000,000 Shares, $.002 Par Value, 6,228,720 Shares Issued and Outstanding 12,457 Additional Paid-in Capital 6,113,582 Retained Earnings 94,522 ----------- 6,220,561 Less Treasury Stock at cost, 25,800 common shares (28,831) ----------- Total Stockholders' Equity 6,191,730 ----------- Total Liabilities and Stockholders' Equity $ 9,838,102 =========== See accompanying notes to consolidated financial statements. F-4 INTEGRATED HEALTH TECHNOLGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended June 30, ---------------------------- 2001 2000 ------------ ------------ Sales $ 15,293,090 $ 17,974,885 Cost of Sales 13,820,829 16,687,844 ------------ ------------ Gross Profit 1,472,261 1,287,041 Selling and Administrative Expenses 3,758,957 3,276,435 ------------ ------------ Operating [Loss] (2,286,696) (1,989,394) ------------ ------------ Other Income [Expense]: (Loss)/ Gain on Sale of Equipment (12,817) 6,344 Interest Expense (91,110) (119,380) Interest Expense-Related Party -- (76,271) Partnership Income 8,765 -- Consulting Fee Income 20,000 -- Interest and Investment Income 19,244 42,603 Administrative Fee Income 170,521 -- Administrative Fee Income-Related Party 50,000 50,000 Gain on Settlement of Lawsuit 24,725 6,143,849 ------------ ------------ Other Income [Expense]-Net 189,328 6,047,145 ------------ ------------ Income [Loss] Before Income Taxes (2,097,368) 4,057,751 Federal and State Income Tax Expense [Benefit] (647,465) 914,056 ------------ ------------ Net Income [Loss] $ (1,449,903) $ 3,143,695 ============ ============ Net Income [Loss] Per Common Share: Basic $ (.24) $ .61 ============ ============ Diluted $ (.24) $ .60 ============ ============ Average Common Shares Outstanding 5,963,956 5,169,185 Dilutive Potential Common Shares: Warrants and Options -- 86,738 ------------ ------------ Average Common Shares Outstanding-assuming dilution 5,963,956 5,225,923 ============ ============ See accompanying notes to consolidated financial statements. F-5 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
Common Stock Additional Treasury Stock Total ------------------------- Preferred Paid-in Retained ------------------------- Stockholders' Shares Par Value Stock Capital Earnings Shares Cost Equity ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Balance- July 1, 1999 5,178,300 $ 10,357 $ -- $ 4,847,405 $(1,599,270) -- $ -- $ 3,258,492 ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Purchase of Treasury Stock -- -- -- -- -- 25,800 (28,831) (28,831) Net Income -- -- -- -- 3,143,695 -- -- 3,143,695 ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Balance- June 30, 2000 5,178,300 10,357 -- 4,847,405 1,544,425 25,800 (28,831) 6,373,356 Common Stock Issued for Purchase of Land And Building 1,050,420 2,100 -- 1,247,900 -- -- -- 1,250,000 Issuance of Stock Options -- -- -- 18,277 -- -- -- 18,277 Net (Loss) -- -- -- -- (1,449,903) -- -- (1,449,903) ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Balance- June 30, 2001 6,228,720 $ 12,457 $ -- $ 6,113,582 $ 94,522 25,800 $ (28,831) $ 6,191,730 =========== =========== ============= =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, -------------------------- 2001 2000 ----------- ----------- Operating Activities: Net Income [Loss] $(1,449,903) $ 3,143,695 ----------- ----------- Adjustments to Reconcile Net Income [Loss] to Net Cash Provided By [Used for] Operating Activities: Depreciation and Amortization 353,875 339,811 Loss on Sale of Fixed Assets 12,817 -- Amortization of Discount on Note Payable -- 38,826 Deferred Income Taxes (34,000) (36,000) Bad Debt Expense 40,428 170,387 Consulting Expense-Stock Options 18,277 -- Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable (832,574) 410,705 Inventories (362,167) 241,949 Prepaid Expenses and Other Current Assets (62,304) (15,352) Security Deposits and Other Assets (35,593) (22,269) Refundable Federal Income Taxes (408,648) (161,707) Increase [Decrease] in: Accounts Payable 819,518 201,823 Accrued Expenses and Other Liabilities 422,859 (213,239) ----------- ----------- Total Adjustments (67,512) 954,934 ----------- ----------- Net Cash-Operating Activities (1,517,415) 4,098,629 ----------- ----------- Investing Activities: Proceeds From Sale of Fixed Assets 9,500 -- Purchase of Property and Equipment (109,457) (168,590) Loans to Stockholders 75,891 1,130 ----------- ----------- Net Cash-Investing Activities (24,066) (167,460) ----------- ----------- Financing Activities: Note Receivable (35,000) -- Proceeds from Notes Payable 2,564,471 927,504 Repayment of Notes Payable (2,435,415) (3,305,863) Purchase of Treasury Stock -- (28,831) ----------- ----------- Net Cash-Financing Activities 94,056 (2,407,190) ----------- ----------- Net Change in Cash and Cash Equivalents (1,447,425) 1,523,979 Cash and Cash Equivalents-Beginning of Year 1,823,009 299,030 ----------- ----------- Cash and Cash Equivalents-End of Year $ 375,584 $ 1,823,009 =========== ===========
See accompanying notes to consolidated financial statements. F-7 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, ----------------------- 2001 2000 ---------- ---------- Supplemental Disclosures of Cash Flow Information: Cash paid during the years for: Interest $ 91,110 $ 183,075 Income Taxes 15,374 1,205,160 Supplemental Schedule of Investing and Financing Activities: Note payable issued in payment of accounts payable, trade -- $1,500,000 Proceeds from lawsuit used in payment of note payable -- 1,333,333
See accompanying notes to consolidated financial statements. F-8 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [1] Business Effective January 5, 2001 the Company amended its corporate charter and changed its name to "Integrated Health Technologies, Inc." (formerly Chem International, Inc.) and began trading using the NASDAQ symbol IHTC for its common stock and the symbol IHTCW for its Class A redeemable warrants. On April 25, 2001 the Company's securities were delisted from the Nasdaq SmallCap Market because the Company failed to comply with the minimum bid price requirements for continued listing as set forth in Marketplace Rule 4310c(4). The Company's securities continue to be traded on the OTC electronic bulletin board. Integrated Health Technologies, Inc. [the "Company"] is engaged primarily in the manufacturing, marketing and sales of vitamins, nutritional supplements and herbal products. Its customers are located primarily throughout the United States. [2] Liquidity The Company believes that with the supplemental payment of approximately $1.1 million dollars received on August 1, 2001, under the terms of a settlement Agreement which was originally signed on January 20, 2000 with a major supplier in connection with a multi-district class action lawsuit, the available cash on hand and the operating plan for the fiscal year ended June 30, 2002 the Company will have sufficient working capital to meet its needs for the current year. [3] Summary of Significant Accounting Policies Principles of Consolidation- The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and balances have been eliminated in consolidation. Fair Value of Financial Instruments Generally accepted accounting principles require disclosing the fair value of financial instruments to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company uses a variety of methods and assumptions, which are based on estimates of market conditions and risks existing at the time. For certain instruments, including cash and cash equivalents, accounts receivable, notes receivable, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value. Cash and Cash Equivalents- Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. Inventories-Inventory is valued by the first-in, first-out method, at the lower of cost or market. Depreciation- The Company follows the general policy of depreciating the cost of property and equipment over the following estimated useful lives: Building 15 Years Leasehold Improvements 15 Years Machinery and Equipment 7 Years Machinery and Equipment Under Capital Leases 7 Years Transportation Equipment 5 Years F-9 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [3] Summary of Significant Accounting Policies [Continued] Machinery and equipment are depreciated using accelerated methods while leasehold improvements are amortized on a straight-line basis. Depreciation expense was $353,874 and $339,811 for the years ended June 30, 2001 and 2000, respectively. Amortization of equipment under capital leases is included with depreciation expense. Estimates- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition- The Company recognizes revenue upon shipment of the product. All returns and allowances are estimated and recorded currently. Advertising- Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $165,633 and $284,888 for the years ended June 30, 2001 and 2000, respectively. Stock-Based Compensation-Statement of Financial Accounting Standards 123 "Accounting for Stock Based Compensation" ("SFAS 123") allows a Company to adopt a fair value based method of accounting for its stock-based compensation plans or continue to follow the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion "APB") No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. [4] Investment in Partnership- The Company was a 49% partner in Natural Health Science, LLC (the "Partnership"). The Partnership is engaged in the sale of "Pycnogenol" (a raw material used in the production of nutritional supplements). In April 2001 the Company sold its ownership in the Partnership for its net investment of $8,765 which represented the Company's share of the profits for the year ending December 31, 2000. In addition to the partnership income, the Company also receives administrative fee income from the Partnership. The Company received $185,099 in administrative fee income and $20,000 in consulting fee income for the year ended June 30, 2001. The Company currently receives $20,000 per month in administrative fee income. The Company purchased raw materials in the amount of $185,600 from the Partnership for the year ended June 30, 2001. [5] Inventories Raw materials $ 1,607,296 Work-in-Process 1,158,019 Finished Goods 833,530 ------------ Total $ 3,598,845 ============ [6] Property and Equipment Land and Building $ 1,250,000 Leasehold Improvements 1,157,960 Machinery and Equipment 2,657,679 Machinery and Equipment Under Capital Leases 156,561 Transportation Equipment 32,152 ------------ Total 5,254,352 Less: Accumulated Depreciation and Amortization 2,904,040 ------------ Total $ 2,350,312 ============ F-10 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [7] Notes Payable Bio Merieux Vitek, Inc. (a) $ 16,223 Medallion Business Credit, LLC (b) 636,966 Summit Business Capital Corp. (c) 66,387 Merchant Financial Corporation (d) 1,566 ------------ Totals 721,142 Less: Current Portion 721,142 ------------ Non-current Portion $ -- ============ (a) Five year 10% equipment note dated April 1, 1997 providing for monthly payments of $1,698 for principal and interest. The note is collateralized by laboratory equipment. (b) Under the terms of a revolving credit note which expires on November 5, 2001, the Company may borrow up to $1,000,000 at 3% above the prime-lending rate. The loan is collateralized by the inventory, receivables and equipment of Integrated Health Technologies, Inc., and its two operating subsidiaries, Manhattan Drug Company, Inc. and Vitamin Factory, Inc. The note has been guaranteed by the Company's principal stockholder. At June 30, 2001 the interest rate was 10.5%. (c) Non-Interest bearing Promissory Note dated August 30, 2000 providing for ten consecutive monthly installments for the purchase of inventory. (d) Under the terms of a revolving credit note which expires on December 21, 2002, the Company may borrow up to $1,000,000 at 4% above the prime lending rate. The loan is collateralized by the inventory, receivables and equipment of IHT Health Products, Inc. a subsidiary of Integrated Health Technology, Inc. At June 30, 2001 the interest rate was 11%. The loan agreements with Medallion Business Credit, LLC and Merchant Financial Corporation contain certain financial covenants relating to the maintenance of specified liquidity, the tangible net worth. The Company was in compliance with all of its financial covenants. The following are maturities of long-term debt for each of the next five years: June 30, 2002 $ 721,142 2003 -- 2004 -- 2005 -- 2006 -- ------------- Totals $ 721,142 ============= [8] Capital Lease The Company acquired warehouse and office equipment under the provisions of two long-term leases. The leases expire in March 2003 and July 2003, respectively. The equipment under the capital leases as of June 30, 2001 has a cost of $47,016 and accumulated depreciation of $10,218, with a net book value of $36,798. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at June 30, 2001 are as follows: F-11 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [8] Capital Leases (Continued) Total Minimum Lease Payments $ 47,016 Amount Representing Interest (10,994) --------------- Present Value of Net Minimum Lease Payments 36,022 Current Portion (11,727) --------------- Long-Term Capital Lease Obligation $ 24,295 =============== The following are maturities of long-term capital lease obligations: June 30, 2002 $ 14,194 2003 5,973 2004 4,125 ------------ Totals $ 24,295 ============ [9] Income Taxes Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at June 30, 2001 follow: Current assets and liabilities Allowance for doubtful account $ 52,000 Inventory overhead capitalization 45,000 Other accruals 123,000 ------------ Net current deferred tax asset (liability) $ 220,000 ============ Long-Term assets and liabilities Depreciation $ 94,000 ============ The provision for income taxes consists of the following: June 30, 2001 2000 --------- --------- Deferred tax (benefit) $ (34,000) $ (36,000) Current tax expense (benefit) (613,465) 950,056 --------- --------- $(647,465) $ 914,056 ========= ========= The statutory income tax rate differs from the effective tax rate used in the financial statements as a result of the permanent differences, change in statutory tax rate and current year net operating losses. A reconciliation of the statutory tax rate to the effective tax rate for the year ended June 30 is as follows: F-12 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [9] Income Taxes (Continued) 2001 2000 --------- --------- Computed (benefit) provision at the statutory tax (34)% 34% State tax rate -- 6 Reversal of prior year tax accruals -- (5) Change in valuation allowance -- (8) Change in estimated tax rate -- (2) Other 3 -- --------- --------- Effective income tax rate (31)% 25% ========= ========= [10] Profit-Sharing Plan The Company maintains a profit-sharing plan, which qualifies under Section 401(k) of the Internal Revenue Code, covering all nonunion employees meeting age and service requirements. Contributions are determined by matching a percentage of employee contributions. The total expense for the years ended June 30, 2001 and 2000 was $59,631 and $53,214, respectively. [11] Significant Risks and Uncertainties [A] Concentrations of Credit Risk-Cash- The Company maintains balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At June 30, 2001, the Company's uninsured cash balances totaled approximately $500,000. [B] Concentrations of Credit Risk-Receivables- The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company does not require collateral in relation to its trade accounts receivable credit risk. The amount of the allowance for uncollectible accounts at June 30, 2001 is $128,389. [12] Major Customer For the years ended June 30, 2001 and 2000, approximately 28% or $4,300,000 and 51% or $9,200,000 of revenues were derived from one customer. The loss of this customer would have an adverse affect on the Company's operations. In addition, for the years ended June 30, 2001 and 2000, an aggregate of approximately 32% and 24%, respectively, of revenues were derived from two other customers; no other customers accounted for more than 10% of consolidated sales for the years ended June 30, 2001 and 2000. Accounts receivable from these customers comprised approximately 31% and 44% of total accounts receivable at June 30, 2001 and 2000, respectively. [13] Commitments and Contingencies [A] Leases Related Party Leases- Certain manufacturing and office facilities were leased from Morristown Holding Company, Inc., (formerly Gerob Realty Partnership) whose owners are stockholders of the Company. The lease, which expired on December 31, 2000 provided for a minimum annual rental of $60,000, plus payment of all real estate taxes. Rent and real estate tax expense for the years ended June 30, 2001 and 2000 on this lease was approximately $5,000 and $105,000, respectively. Unpaid rent due to Morristown Holding Company, Inc. and Gerob at June 30, 2001 has been separately disclosed as accrued expenses on the consolidated balance sheet. The balance due was $122,400 as of June 30, 2001. Other warehouse and office facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is 90% owned by the Company's chairman and principal stockholder and certain family members and 10% owned by the Company's Chief Financial Officer. The lease was effective on January 10, 1997 and provides for minimum F-13 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [13] Commitments and Contingencies [Continued] annual rental of $346,000 through January 10, 2002 plus increases in real estate taxes and building operating expenses. Rent expense has been straight-lined over the life of the lease. At its option, the Company has the right to renew the lease for an additional five year period. On April 28, 2000 the lease was amended reducing the square footage and extending the lease to May 31, 2015. Rent expense for the years ended June 30, 2001 and 2000 on this lease was approximately $455,000 and $456,000. Other Lease Commitments- The Company leases warehouse equipment for a five year period providing for an annual rental of $23,114 and office equipment for a five year period providing for an annual rental of $8,365. The Company leases automobiles under non-cancelable operating lease agreements, which expire through 2004. The minimum rental commitment for long-term non-cancelable leases is as follows: Related Year Ending Lease Party Lease June 30, Commitment Commitment Total -------- ------------- --------------- --------------- 2002 $ 99,716 $ 323,559 $ 423,275 2003 75,830 323,559 399,389 2004 41,202 323,559 364,761 2005 10,640 323,559 334,199 2006 6,790 323,559 330,349 Thereafter -- 2,858,105 2,858,105 ------------- --------------- --------------- Total $ 234,178 $ 4,475,900 $ 4,710,078 ============= =============== =============== Total rent expense, including real estate taxes and maintenance charges, was approximately $523,000 and $556,000 for the years ended June 30, 2001 and 2000, respectively. Rent expense is stated net of sublease income of approximately $3,000 and $12,000 for the years ended June 30, 2001 and 2000, respectively. [B] Employment Agreements- Effective July 1, 1999, the Company entered into three year employment agreements with its four executive officers which provide for aggregate annual salaries of $495,000 for the years ending June 30, 2001 and 2002, respectively. These agreements are subject to annual increases equal to at least the increase in the consumer price index for the Northeastern area. [C] Litigation- The Company is unable to predict its ultimate financial exposure with respect to its prior sale of certain products which may have contained allegedly contaminated Tryptophan which is the subject of numerous lawsuits against unrelated manufacturers, distributors, suppliers, importers and retailers of that product. However, management does not presently believe the outcome of these actions will have a material adverse effect on the Company. [D] Consulting Agreements- The Company entered into a consulting agreement with a financial public relations firm to provide financial communications and investor relations. The agreement is for a 12-month period and provides for a yearly retainer of $54,000. In addition the Company has issued to the consultants options to purchase 75,000 shares of its common stock at an exercise price of $1.10 and 75,000 shares at an exercise price of $1.75 [E] Development and Supply Agreement- On April 9, 1998, the Company signed a development and supply agreement with Herbalife International of America, Inc. ["Herbalife"] whereby the Company will develop, manufacture and supply certain nutritional products to Herbalife through December 31, 2001. [F] Manufacturing Agreement- On February 14, 1998, the Company signed a manufacturing agreement with Pilon International, PLC., a company that supplies Zepter International, a world-wide direct sales distributor of consumer products. The Company will manufacture and develop dietary supplements through the year 2001. F-14 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 [14] Related Party Transactions During the year ended June 30, 1997, the Company entered into a consulting agreement with the brother of the Company's Chairman of the Board on a month to month basis for $1,100 per month. The total consulting expense recorded per this verbal agreement for the years ended June 30, 2001 and 2000 was $13,200 for each year. [15] Equity Transaction [A] Purchase of Manufacturing Facility-On August 30, 2000 the Company issued to Morristown Holding Company, Inc. 1,050,420 shares of its common stock in exchange for the manufacturing and office facility it had been renting. [B] Consultant Agreement/Stock Options-In connection with a consulting agreement dated July 18, 2000 the Company has issued 75,000 options on its common stock exercisable at $1.10 per share and 75,000 options exercisable at $1.75 per share [See Note 11G]. Should the Company choose not to renew the consulting agreement the consultants have agreed to give back 50,000 shares of the $1.75 options. The options are exercisable for five years from the date the agreement was signed. [C] Stock Option Plan - The Company has adopted a stock option plan for the granting of options to employees, officers, directors and consultants of the Company to purchase up to 5,000,000 shares of common stock, at the discretion of the Board of Directors. Stock option grants are limited to a total of 2,500,000 shares for "incentive stock options" and 2,500,000 shares for "non-statutory options" and may not be priced less than the fair market value of the Company's common stock at the date of grant. Options granted are generally for ten year periods, except that options granted to a 10% stockholder [as defined] are limited to five year terms. On July 20, 2001 the Company granted to its employees 200,000 incentive stock options for a term of ten years at the exercise price of $1.00. On December 19, 2000 the Company granted 497,333 incentive stock options for a term of 10 years at an exercise price equal to the market price ($.75) on the date of grant and 120,480 incentive stock options at an exercise price equal to 110% of the market price ($.83). The Company also granted 171,667 non-statutory stock options to officers, directors, and members of its Scientific Advisory Board at the exercise price of $.75 and 179,520 non-statutory stock options at $.83 No dividends are expected to be paid during the life of the options. Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee's stock options under the fair-value method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for June 30: 2001 2000 --------- --------- Risk-free interest rate 5.5% 6.6% Expected volatility 137.3% 104.1% Dividend yield -- -- Expected life 8.0 years 7.6 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options F-15 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 [15] Equity Transactions [Continued] have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair-value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's life. The Company's pro forma information follows: 2001 2000 -------------- ------------- Pro forma net income, (loss) $ (1,965,129) $ 2,545,855 ============== ============= Pro forma net income, (loss) per share Basic $ (.33) $ .49 ============== ============= Diluted $ (.33) $ .48 ============== ============= The Company recorded compensation expense for stock options issued in the amount of $18,000 and $0 for the years ended June 30, 2001 and 2000. A summary of the Company's stock option activity, and related information for the years ended June 30, follows: Weighted Weighted Average Average Exercise Number of Exercise Options Price Exercisable Price ------- ----- ----------- ----- Outstanding June 30, 1999 940,175 $ 2.82 940,175 $ 2.82 Granted 1,590,000 0.52 Exercised -- -- Terminated (15,000) 3.50 ---------- Outstanding 2,515,175 1.36 925,175 2.82 June 30, 2000 Granted 1,319,000 0.88 Exercised -- -- Terminated (20,000) 0.50 ---------- Outstanding June 30, 2001 3,814,175 1.20 2,495,175 1.36 ========== Weighted-average fair value of options granted during the year 2001 2000 ---- ---- Where exercise price 0.81 0.50 equals stock price Where exercise price 1.03 0.55 exceeds stock price Where stock price -- -- exceeds exercise price F-16 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 [15] Equity Transactions [Continued] Following is a summary of the status of stock options outstanding at June 30, 2001:
Outstanding Options Exercisable Options --------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Exercise Remaining Average Average Price Range Number Contractual Life Exercise Price Number Exercise Price ------------- ------ ---------------- -------------- ------ -------------- $ .50 - .55 1,570,000 7.9 0.52 1,570,000 0.52 $ .75 - .83 969,000 9.3 0.77 0 0 $1.00 - 1.10 275,000 6.7 1.03 0 0 $1.50 - 1.65 320,604 6.2 1.53 320,604 1.53 $1.75 75,000 4.0 1.75 0 0 $3.50 - 3.85 604,571 5.2 3.52 604,571 3.52 ------------ ---------- ----- ------ --------- ---- $0.50 - 3.85 3,814,175 7.4 1.20 2,495,175 1.36
There were no warrants exercised for the fiscal years ended June 30, 2001 and 2000. [D] Consultant Agreement/Stock Options- In connection with a consulting agreement dated March 20, 1998, the Company has issued three options for 45,000 shares of common stock [See Note 12E]. Each option is exercisable for 15,000 shares at exercise price of $1.125, $2.50 and $4.00, respectively. These options are exercisable until five years following the date of this agreement. [E] Related Party Promissory Note- On March 12, 1998, the Company negotiated a three year promissory note for $750,000 with its Chairman and then President. The note was repaid in January 2000. As consideration for the loan, the Corporation issued a Class C Warrant to purchase 150,000 shares of common stock at the aggregate purchase price of $1.75 per share. The warrant is exercisable for a four year period commencing one year after the issuance of the note and expires on March 12, 2003. [16] New Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities and measure them at fair value. Under certain circumstances, the gains or losses from derivatives may be offset against those from the items the derivatives hedge against. The Company has adopted SFAS No. 133 in the fiscal year ending June 30, 2001. SFAS No. 133 did not have a material impact on the financial statements. In July 2001, FAS No. 141, "Business Combinations" (FAS 141") and FAS No. 142 "Goodwill and Other Intangible Assets" (FAS 142") were issued. FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. FAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment, at least annually, in accordance with the provisions of FAS 142. FAS 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and be reviewed for impairment in accordance with FAS No. 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed of". The provisions of FAS 141 are effective immediately, except with regard to business combinations prior to July 1, 2001. FAS 142 will be effective as of January 1, 2002. Goodwill and other intangible assets acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of FAS 142. The Company is currently evaluating the effect that the adoption of FAS 142 will have on its results of operations and its financial position. F-17 INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 [17] Subsequent Events Litigation Settlement - On August 1, 2001, the Company received a supplemental payment of approximately $1.1 million dollars under the terms of a settlement Agreement which was originally signed on January 20, 2000 with a major supplier in connection with a multi-district consolidated class action brought on behalf of direct purchasers of vitamin products. Tender Offer- On March 5, 2001 the Company entered into an Agreement and plan of Reorganization with NuCycle Therapy, Inc. ("NuCycle") whereby Chem Acquisition Corp., (a wholly-owned subsidiary) will acquire NuCycle Therapy, Inc. and NuCycle Therapy, Inc. will become a wholly-owned subsidiary of the Company. On May 21, 2001 the original agreement was amended and restated to provide that Chem Acquisition Corp. will make a tender offer for all of the outstanding common stock of NuCycle Therapy, Inc. and all outstanding warrants. The total consideration offered will be $400,000. The tender offer was accepted on July 11, 2001 and resulted in Chem Acquisition Corp. acquiring 2,298,309 shares of NuCycle common stock which represented approximately 72% of NuCycle. On August 29, 2001 NuCycle Therapy, Inc. held a special meeting of stockholders and approved the Amended and Restated Agreement and Plan of Reorganization. The Company, in September 2001, then entered into a Licensing Agreement with NuCycle whereby the Company obtained the exclusive license to manufacture, market and sell vitamin and mineral supplements using NuCycle's technology. In September 2001 the Company then sold NuCycle to certain investors for the same $400,000 to recoup the Company's investment. Certain of the investors are also shareholders and officers of the Company. NuCycle desired to pursue the development of drugs and pharmaceuticals with its technology and the Company did not want to fund such development. F-18 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. INTEGRATED HEALTH TECHNOLOGIES, INC. AND SUBSIDIARIES Date: September 24, 2001 By: /s/ Seymour Flug ----------------------------------------- Seymour Flug, President and Chief Executive Officer Date: September 24, 2001 By: /s/ Eric Friedman ----------------------------------------- Eric Friedman, Chief Financial Officer F-19