-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OLEdNItM9NO0MR/1xGwwWmksgD46Br+LmrofY+nkgJy/cSbI1zAty42hgnb2qKzO tYFAYnfF50Qd8iRhpB1pnw== 0000891554-02-000565.txt : 20020414 0000891554-02-000565.hdr.sgml : 20020414 ACCESSION NUMBER: 0000891554-02-000565 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020212 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-28876 FILM NUMBER: 02535687 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 10QSB 1 d27883_10qsb.txt FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D. C. 20549 ------ FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended December 31, 2001 Commission File Number 000-28876 INTEGRATED HEALTH TECHNOLOGIES, INC. (Exact name of registrant as specified 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, including area code: (973) 926-0816 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of January 25, 2002 - --------------------------- ---------------------------------- Common Stock, Par Value 6,228,720 INTEGRATED HEALTH TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Part I: Financial Information Item 1: Consolidated Financial Statements Independent Auditor's Review Report ........................... 1 Consolidated Balance Sheet as of December 31, 2001 [Unaudited] ................................................... 2 ...3 Consolidated Statements of Operations for the three and six months ended December 31, 2001 and 2000 [Unaudited] ........... 4 Consolidated Statement of Stockholders' Equity for the six months ended December 31, 2001 [Unaudited] .................... 5 Consolidated Statements of Cash Flows for six months ended December 31, 2001 and 2000 [Unaudited] ........................ 6 ...7 Notes to Consolidated Financial Statements [Unaudited] ........ 8 ...13 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 14 ..16 Part II: Other Information ............................................ 17 Signature ............................................................. 18 Independent Accountants' Review Report We have reviewed the accompanying condensed consolidated balance sheet of Integrated Health Technologies, Inc. and Subsidiaries (formerly Chem International, Inc.) as of December 31, 2001, and the related condensed consolidated statements of operations for the six months ended December 31, 2001 and 2000, and condensed consolidated statements of cash flows for the six months ended December 31, 2001 and 2000, and condensed consolidated statement of stockholders' equity for the six months ended December 31, 2001. These condensed consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ Amper, Politziner & Mattia P.A. February 4, 2002 1 INTEGRATED HEALTH TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 [UNAUDITED] - -------------------------------------------------------------------------------- Assets: Current Assets: Cash and Cash Equivalents $ 2,121,128 Accounts Receivable - Net 1,415,249 Deferred Income Taxes 151,000 Inventories 3,404,273 Due From NuCycle Therapy, Inc. 79,535 Prepaid Expenses and Other Current Assets 251,638 ------------ Total Current Assets 7,422,823 ------------ Property and Equipment - Net 2,327,700 ------------ Other Assets: Deferred Tax Asset 102,000 Security Deposits and Other Assets 111,375 ------------ Total Other Assets 213,375 ------------ Total Assets $ 9,963,898 ============ See accompanying notes to condensed consolidated financial statements. 2 INTEGRATED HEALTH TECHNOLOGIES, INC. - ------------------------------------ CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2001 [UNAUDITED] - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Current Liabilities: Accounts Payable $ 1,992,631 Notes Payable 8,280 Accrued Expenses and Other Current Liabilities 284,067 Federal and State Income Taxes Payable 305,000 Accrued Expenses - Related Party 122,400 Capital Lease Obligation 12,698 ------------- Total Current Liabilities 2,725,076 ------------- Non-Current Liabilities: Capital Lease Obligation 17,694 ------------- Total Non-Current Liabilities 17,694 ------------- Commitments and Contingencies [10] -- ------------- 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 1,123,920 ------------- 7,249,959 Less Treasury Stock at cost, 25,800 shares (28,831) ------------- Total Stockholders' Equity 7,221,128 ------------- Total Liabilities and Stockholders' Equity $ 9,963,898 ============= See accompanying notes to condensed consolidated financial statements. 3 INTEGRATED HEALTH TECHNOLOGIES, INC. - ------------------------------------ CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED] - --------------------------------------------------------------------------------
Three months ended Six months ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 ---- ---- ---- ---- Sales $ 6,375,881 $ 3,063,629 $ 11,460,875 $ 5,492,089 Cost of Sales 4,986,562 2,906,997 9,172,835 5,132,648 ------------ ------------ ------------ ------------ Gross Profit 1,389,319 156,632 2,288,040 359,441 Selling and Administrative Expenses 1,049,458 1,010,216 1,981,508 1,732,836 ------------ ------------ ------------ ------------ Operating Income/[Loss] 339,861 (853,584) 306,532 (1,373,395) ------------ ------------ ------------ ------------ Other Income [Expense]: Administrative Fee Income 71,497 50,000 162,056 50,000 Consulting Fee Income 12,000 -- 24,000 -- Gain on Settlement of Lawsuit -- -- 1,157,960 -- Interest Expense (18,381) (28,055) (39,724) (48,247) Interest and Investment Income 5,326 2,208 9,816 18,445 ------------ ------------ ------------ ------------ Total Other Income [Expense] 70,442 24,153 1,314,108 20,198 ------------ ------------ ------------ ------------ Income [Loss] Before Income Taxes 410,303 (829,431) 1,620,640 (1,353,197) Federal and State Income Tax [Benefit] 202,438 (208,835) 591,242 (405,715) ------------ ------------ ------------ ------------ Net Income [Loss] $ 207,865 $ (620,596) $ 1,029,398 $ (947,482) ============ ============ ============ ============ Net Income [Loss] Per Common Share: Basic $ .03 $ (.11) $ .17 $ (.17) ============ ============ ============ ============ Diluted $ .03 $ (.11) $ .15 $ (.17) ============ ============ ============ ============ Average Common Shares Outstanding 6,228,720 6,228,720 6,228,720 5,703,510 Dilutive Potential Common Shares: Options 896,630 -- 448,315 -- ------------ ------------ ------------ ------------ Average Common Shares Outstanding-assuming dilution 7,125,350 6,228,720 6,677,035 5,703,510 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements 4 INTEGRATED HEALTH TECHNOLOGIES, INC. - ------------------------------------ CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 2001 [UNAUDITED] - --------------------------------------------------------------------------------
Additional Total Common Stock Preferred Paid-in Retained Treasury Stock Stockholders' Shares Par Value Stock Capital Earnings Shares Cost Equity ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance- July 1, 2001 6,228,720 $ 12,457 $ -- $6,113,582 $ 94,522 25,800 $ (28,831) $6,191,730 Net Income for the six months ended December 31, 2001 -- -- -- -- 1,029,398 -- -- 1,029,398 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance- December 31, 2001 6,228,720 $ 12,457 $ -- $6,113,582 $1,123,920 25,800 $ (28,831) $7,221,128 ========== ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. 5 INTEGRATED HEALTH TECHNOLOGIES, INC. - ------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - --------------------------------------------------------------------------------
Six months ended December 31, ------------ 2 0 0 1 2 0 0 0 ------- ------- Operating Activities: Net Income [Loss] $ 1,029,398 $ (947,482) ------------- ------------- Adjustments to Reconcile Net Income [Loss] to Net Cash Provided By [Used for] Operating Activities: Depreciation and Amortization 167,550 169,503 Deferred Income Taxes 61,000 5,000 Bad Debt Expense 56,782 18,000 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 742,243 (251,700) Inventories 194,572 (1,074,861 Refundable Federal Income Taxes 625,000 (416,000) Due From NuCycle Therapy, Inc. (44,113) -- Prepaid Expenses and Other Current Assets 18,234 (100,492) Security Deposits and Other Assets 12,232 (2,567) [Decrease] Increase in: Accounts Payable (183,521) 697,516 Federal and State Income Taxes Payable 305,000 -- Accrued Expenses and Other Liabilities (237,843) 226,133 ------------- ------------- Total Adjustments 1,717,136 (729,468) ------------- ------------- Net Cash - Operating Activities 2,746,534 (1,676,950) ------------- ------------- Investing Activities: Loans to Stockholders (73,075) -- Repayment of Note Receivable 173,993 -- Note Receivable (141,050) -- Purchase of Property and Equipment (144,938) (53,967) ------------- ------------- Net Cash-Investing Activities (185,070) (53,967) ------------- ------------- Financing Activities: Proceeds from Notes Payable 1,807,245 494,932 Repayment of Notes Payable (2,623,165) (166,123) ------------- ------------- Net Cash-Financing Activities (815,920) 328,809 ------------- ------------- Net Increase/[Decrease] in Cash and Cash Equivalents 1,745,544 (1,402,108) Cash and Cash Equivalents - Beginning of Periods 375,584 1,823,009 ------------- ------------- Cash and Cash Equivalents - End of Periods $ 2,121,128 $ 420,901 ============= =============
See accompanying notes to condensed consolidated financial statements. 6 INTEGRATED HEALTH TECHNOLGIES, INC. - ----------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED] - -------------------------------------------------------------------------------- Six months ended ---------------- December 31, ------------ 2001 2000 ---- ---- Supplemental Disclosures of Cash Flow Information: Cash paid during the periods for: Interest $ 39,724 $ 16,180 Income Taxes $ 225,425 $ 2,080 See accompanying notes to condensed consolidated financial statements. 7 INTEGRATED HEALTH TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED] - -------------------------------------------------------------------------------- [1] Business Integrated Health Technologies, Inc. [the "Company"] is engaged primarily in the manufacturing, marketing and sales of vitamins, nutritional supplements and herbal products. Its manufacturing customers are located primarily throughout the United States. [2[ Liquidity The Company currently has purchases orders of approximately $2 million dollars on hand for shipment in the third and fourth quarters of fiscal 2002. The Company believes that anticipated sales coupled with the purchase orders and the remaining balance available under the revolving line of credit will meet cash needs for operations. [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. Inter-company transactions and balances have been eliminated in consolidation. Basis of Reporting - The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, such interim statements include all adjustments, which are considered necessary in order to make the interim financial statements not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's annual report to stockholders incorporated by reference in the Company's annual report on Form 10-KSB for the fiscal year ended June 30, 2001. The results of operations for the six months ended December 31, 2001 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2002. 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 Machinery and equipment are depreciated using accelerated methods while leasehold improvements are amortized on a straight-line basis. Depreciation expense was $167,550 and $169,503 for the six months ended December 31, 2001 and 2000, respectively. Amortization of equipment under capital leases is included with the 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 or revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition - The Company generally recognizes revenue upon shipment of the product. All returns and allowances are estimated and recorded currently. 8 INTEGRATED HEALTH TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 [UNAUDITED] - -------------------------------------------------------------------------------- [3] Summary of Significant Accounting Policies (Continued) Advertising - Costs incurred for producing and communicating advertising are expensed when incurred. Advertising expense was $16,333 and $65,999 for the six months ended December 31, 2001 and 2000 respectively. [4] Inventories Inventories consist of the following at December 31, 2001: Raw Materials $ 1,539,195 Work-in-Process 796,698 Finished Goods 1,068,380 ----------- Total $ 3,404,273 =========== [5] Property and Equipment Property and equipment comprise the following at December 31, 2001: Land and Building $ 1,250,000 Leasehold Improvements 1,157,960 Machinery and Equipment 2,802,616 Machinery and Equipment Under Capital Leases 156,561 Transportation Equipment 32,152 ----------- Total 5,399,289 Less: Accumulated Depreciation and Amortization 3,071,589 ----------- Total $ 2,327,700 =========== [6] Notes Payable Notes Payable: Bio Merieux Vitek, Inc. (a) $ 8,280 Merchant Financial Corporation (b) -- ----------- Totals 8,280 Less: Current Portion 8,280 ----------- 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 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 Technologies, Inc. At December 31, 2001 there were no borrowings under the credit line. The loan agreement with Merchant Financial Corporation contains certain financial covenants relating to the maintenance of tangible net worth. At December 31, 2001 the Company was in compliance with its tangible net worth covenants. 9 INTEGRATED HEALTH TECHNOLGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 [UNAUDITED] - -------------------------------------------------------------------------------- [6] Notes Payable (Continued) The following are maturities of long-term debt for each of the next five years: December 31, - ------------ 2002 $ 8,280 2003 -- 2004 -- 2005 -- 2006 -- ----------- Totals $ 8,280 =========== [7] 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 December 31, 2001 had a cost of $47,016 accumulated depreciation of $13,576 with a net book value of $33,440. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at December 31, 2001 are as follows: Total Minimum Lease Payments $ 47,016 Amount Representing Interest (16,624) ----------- Present Value of Net Minimum Lease Payment 30,392 Current Portion (12,698) ----------- Long-Term Capital Lease Obligation $ 17,694 =========== The following are maturities of long-term capital lease obligations: December 31, - ------------ 2002 $ 12,698 2003 10,678 2004 5,953 2005 1,063 ----------- Total $ 30,392 =========== [8] 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 December 31, 2001 the Company's uninsured cash balances totaled approximately $1,934,000. The Company does not require collateral in relation to cash credit risk. 10 INTEGRATED HEALTH TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 [UNAUDITED] - -------------------------------------------------------------------------------- [Significant Risks and Uncertainties (Continued) [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 December 31, 2001 is $47,460. [9] Major Customer For the six months ended December 31, 2001 and 2000, approximately 53% and 69% of revenues were derived from one customer. The loss of this customer would have an adverse effect on the Company's operations. Two other customers accounted for 20% and 13% of consolidated sales for the six months ended December 31, 2001 and no other customers accounted for more than 10% of consolidated net sales for the six months ended December 31, 2001. Accounts receivable from these customers comprised approximately 40% and 46% of total accounts receivable at December 31, 2001 and 2000, respectively. [10] Commitments and Contingencies [A] Leases Related Party Leases - 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 of the Board 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 a minimum annual rental of $346,000 through January 10, 2002 plus increases in real estate taxes and building operating expenses. 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 six months ended December 31, 2001 and 2000 on this lease was approximately $225,000 and $221,000 respectively. Other Lease Commitments - The Company leases warehouse equipment for a five year period providing for an annual rental of $15,847 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 Lease Party Lease December 31, Commitment Commitment Total - ------------ ---------- ---------- ----- 2002 $ 91,191 $ 323,559 $ 414,750 2003 55,562 323,559 379,121 2004 26,684 323,559 350,243 2005 8,124 323,559 331,683 2006 2,708 323,559 326,267 Thereafter -- 2,688,135 2,688,135 ----------- ----------- ----------- Total $ 184,269 $ 4,305,930 $ 4,490,199 =========== =========== =========== Total rent expense, including real estate taxes and maintenance charges, was approximately $265,000 and $245,000 for the six months ended December 31, 2001 and 2000, respectively. Rent expense is stated net of sublease income of approximately $400 and $2,200 for the six months ended December 31, 2001 and 2000, respectively. 11 INTEGRATED HEALTH TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 [UNAUDITED] - -------------------------------------------------------------------------------- [10] Commitments and Contingencies (Continued) [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 year ending June 30, 2002. These agreements are subject to annual increases equal to at least the increase in the consumer price index for the Northeastern area. [C] Investment in and Royalties Receivable from Martin Health Care products, Inc. - On February 10, 1998, the Company signed an exclusive manufacturer agreement with Martin Health Care Products, Inc. to provide to Martin Health Care certain products for a ten year period. In connection with the agreement, the Company also agreed to forgive from Martin Health Care outstanding invoices totaling $22,000. In return for the forgiveness, Martin agreed to pay to the Company a royalty on sales of certain products and to issue to the Company 15,000 shares of common stock in Martin Health Care Products, Inc. The Company has recorded the cost for the common stock at $1,000 and has recorded the royalties as a non-current asset in the amount of $21,000. No royalties have been paid as of December 31, 2001. [D] 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. [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, 2002. [11] 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 six months ended December 31, 2001 and 2000, by the Company was $6,600 and $6,600, respectively. [12] 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. Short-term debt and long-term debt including long-term debt to a related party is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value. [13] New Accounting Pronouncements 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 adopted SFAS No 133 in the fiscal year ending June 30, 2001. SFAS No. 133 is not expected to have a material impact on the financial statements. 12 INTEGRATED HEALTH TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 [UNAUDITED] - -------------------------------------------------------------------------------- [14] Equity Transactions [A] Tender Offer-On May 21, 2001 the company made a tender offer for all of the outstanding common stock of NuCycle Therapy, Inc. and all outstanding warrants. The total consideration offered was $400,000. On July 11, 2001, the tender offer was accepted and resulted in Chem Acquisition Corp.(a wholly-owned subsidiary) acquiring 2,298,309 shares of NuCycle Therapy, Inc. common stock which represented approximately 72% of NuCycle. On September 1, 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. There was no gain or loss on the sale of NuCycle Therapy, Inc. Sales, gross profit and selling and administrative expenses for the period from July 11, 2001(date of acquisition) through September 1, 2001(date of sale), respectively, totaled $30,629, $12,963 and $20,890. The Company, on September 1, 2001, then entered into a Licensing Agreement with NuCycle whereby the Company obtained exclusive license to manufacture, market and sell vitamin and mineral supplements using NuCycle's technology. [B] Incentive Stock Options-On October 19, 2001, the Company granted 236,250 incentive stock options for a term of ten years commencing on October 19, 2001 to its officers and employees at the exercise price of $.075 per share and 130,000 stock options at $.0825 per share for a term of five years commencing on October 19, 2001. [C] Non-Statutory Stock Options-On October 19, 2001, the Company granted 493,750 non-statutory stock options to officers, directors and members of its Scientific Advisory Board at the exercise price of $.075 for a term of ten years commencing on October 19, 2001 and 270,000 non-statutory stock options at $.0825 for a term of 10 years commencing on October 19, 2001. 13 Item 2. INTEGRATED HEALTH TECHNOLOGIES, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following discussion should be read in conjunction with the historical information of the Company and notes thereto. Six months ended December 31, 2001 Compared to six months ended December 31, 2000 Results of Operations The Company's net income for the six months ended December 31, 2001 was $1,029,398 as compared to the net loss of $(947,482) for the six months ended December 31, 2000. This increase in net income of approximately $2,000,000 is primarily the result of a $1,700,000 increase in operating income resulting from a corresponding increase in gross profit of approximately $1,900,00, an increase in other income of approximately $1,300,000 due to the settlement of a Class Action Lawsuit and an increase in Federal and state income taxes of approximately $1,000,000. Sales for the six months ended December 31, 2001 and 2000 were $11,460,875 and $5,492,089, respectively, an increase of approximately $6,000,000 or 109%. For the six months ended December 31, 2001 the Company had sales to one customer, who accounted for 53% of net sales in 2001 and 69% in 2000. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the six months ended December 31, 2001 totaled $99,812 as compared to $252,202 for the six months ended December 31, 2000, a decrease of 60%. The Company has been experiencing a decline in 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 $1,235,378 for the six months ended December 31, 2001 as compared to $1,134,609 for the six months ended December 31, 2000, an increase of $100,769 or 9%. 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 six months ended December 31, 2001 totaled $1,695,448 as compared to $1,148,185 for the four months ended December 31, 2000. Cost of sales increased to $9,172,835 for the six months ended December 31, 2001 as compared to $5,132,648 for the six months ended December 31, 2000. Cost of sales decreased as a percentage of sales to 80% for the six months ended December 31, 2001 from 93% for the six months ended December 31, 2000. The decrease in cost of sales is due to greater manufacturing efficiencies. Selling and administrative expenses for the six months ended December 31, 2001 were $1,981,508 versus $1,732,836 for the same period a year ago. The increase of $248,672 was primarily attributable to a decrease in advertising of $49,666, an increase in bad debt expense of $38,782, an increase in royalty and commission expense of $56,782, a decrease in officers salaries of $102,737, an increase in consulting fees of $68,421, an increase in public relations fees of $22,982 and an increase in office salaries of $101,374 due to the commencement of the IHT Health Products, Inc. distribution business. Other income [expense] was $1,314,108 for the six months ended December 31, 2001 as compared to $20,198 for the six months ended December 31, 2000. The increase of $1,293,910 is primarily the result of the proceeds received of $1,157,960 from the settlement of a Class Action Lawsuit and the increase in administrative fee income of $112,056. 14 INTEGRATED HEALTH TECHNOLOGIES, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Three months ended December 31, 2001 Compared to three months ended December 31, 2000 Results of Operations The Company's net income for the three months ended December 31, 2001 was $207,865 as compared to the net loss of $(620,596) for the three months ended December 31, 2000. This increase in net income of approximately $830,000 is primarily the result of a $1,200,000 increase in operating income resulting from a corresponding increase in gross profit of approximately $1,230,000, and an increase in Federal and state income taxes of approximately $400,000. Sales for the three months ended December 31, 2001 and 2000 were $6,375,881 and $3,063,629, respectively, an increase of approximately $3,300,000 or 108%. For the three months ended December 31, 2001 the Company had sales to one customer, who accounted for 55% of net sales in 2001 and 43% in 2000. The loss of this customer would have an adverse affect on the Company's operations. Retail and mail order sales for the three months ended December 31, 2001 totaled $39,208 as compared to $115,334 for the three months ended December 31, 2000, a decrease of 66%. The Company has been experiencing a decline in 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 $596,852 for the three months ended December 31, 2001 as compared to $601,984 for the three months ended December 31, 2000, a decrease of $5,132 or 1%. 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 three months ended December 31, 2001 totaled $719,838 as compared to $690,787 for the three months ended December 31, 2000, an increase of $29,051 or 4%. Cost of sales increased to $4,986,562 for the three months ended December 31, 2001 as compared to $2,906,997 for the three months ended December 31, 2000. Cost of sales decreased as a percentage of sales to 78% for the three months ended December 31, 2001 from 95% for the three months ended December 31, 2000. The decrease in cost of sales is due to greater manufacturing efficiencies. Selling and administrative expenses for the three months ended December 31, 2001 were $1,049,458 versus $1,010,216 for the same period a year ago. The increase of $39,242 was primarily attributable to a decrease in officers salaries of $50,744, a decrease in advertising of $24,536, an increase in bad debt expense of $38,782, an increase in royalty and commission expenses of $35,028, and an increase in office salaries of $45,381 due to the commencement of the IHT Health Products, Inc. distribution business. Other income [expense] was $70,442 for the three months ended December 31, 2001 as compared to $24,153 for the three months ended December 31, 2000. The increase of $46,289 is primarily the result of a decrease in interest expense of $9,674 and an increase in administrative fee income of $21,497. Liquidity and Capital Resources At December 31, 2001 the Company's working capital was $4,697,747 an increase of $1,009,931 over working capital at June 30, 2001. Cash and cash equivalents were $2,121,128 at December 31, 2001, an increase of $1,745,544 from June 30, 2001. The Company generated $2,746,534 and utilized $1,676,950 for operations for the six months ended December 31, 2001 and 2000, respectively. The primary reasons for the increase in cash provided for operations for the six months ended December 31, 2001 are net income of approximately $1,000,000, a decrease in accounts receivable of approximately $740,000, a decrease in inventories of approximately $195,000, a decrease in refundable Federal Income Taxes of approximately $625,000, a decrease in accrued expenses of approximately $240,000 and an increase in Federal and State Income Taxes Payable of approximately $300,000. The Company 15 INTEGRATED HEALTH TECHNOLOGIES, INC. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Liquidity and Capital Resources-Continued currently has purchase orders of approximately $2.2 million dollars on hand for shipment in the second and third quarters of fiscal 2002. The Company believes that anticipated sales coupled with the purchase orders and the remaining balance available under the revolving line of credit will meet the cash needs for operations. The Company utilized $185,070 and $53,967 in investing activities for the six months ended December 31, 2001 and 2000, respectively. The Company utilized net cash of $815,920 and generated $328,809 from debt financing activities for the six months ended December 31, 2001 and 2000, respectively. The Company's total annual commitment at December 31, 2001 for the next five years of $1,802,064 consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment and automobiles. Effective July 1, 1999, the Company entered into three year employment agreements with four executive officers which provide for aggregate annual salaries of $495,000 for the year sending June 30, 2002. 16 Part II: Other Information INTEGRATED HEALTH TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- Item 1: Legal Proceeding None Item 2: Changes in Securities None Item 3: Defaults Upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8K None 17 SIGNATURES - -------------------------------------------------------------------------------- Pursuant to the requirements 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. Date: February 4, 2002 By:/s/ Seymour Flug ---------------------- Seymour Flug, President and Chief Executive Officer Date: February 4, 2002 By:/s/ Eric Friedman ---------------------- Eric Friedman, Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----