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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Fiscal Year ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________________ .
Commission File Number 0-14983
NUTRITION 21, INC.
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(Exact Name of Registrant as Specified in its Charter)
New York 11-2653613
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
4 Manhattanville Road
Purchase, New York 10577-2197
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (914) 701-4500
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.005 per share)
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Title of 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 Exchange Act of 1934 during
the preceding twelve (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 ninety (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
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $8,029,363 as of October 1, 2002.
The number of shares outstanding of Registrant's Common Stock as of October 1,
2002: 33,048,655.
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FORM 10-K REPORT INDEX
10-K Part
and Item No. Page No.
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PART I
Item 1 Business 3
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
PART II
Item 5 Market Price of Registrant's Common Equity and
Related Stockholder Matters 15
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7a Quantitative and Qualitative Disclosures About Market Risk 26
Item 8 Financial Statements and Supplementary Data 26
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
Item 10 Directors and Executive Officers of the Registrant 27
Item 11 Executive Compensation 31
Item 12 Security Ownership of Certain Beneficial Owners
and Management 38
Item 13 Certain Relationships and Related Transactions 40
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 41
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DISCLOSURES IN THIS FORM 10-K CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS,
INCLUDING WITHOUT LIMITATION, STATEMENTS CONCERNING THE COMPANY'S OPERATIONS,
ECONOMIC PERFORMANCE AND FINANCIAL CONDITION. THESE FORWARD-LOOKING STATEMENTS
ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE" AND
OTHER SIMILAR EXPRESSIONS GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THEIR DATES. THESE FORWARD-LOOKING STATEMENTS ARE BASED
LARGELY ON THE COMPANY'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES, INCLUDING WITHOUT LIMITATION, CHANGES IN EXTERNAL
MARKET FACTORS, CHANGES IN THE COMPANY'S BUSINESS OR GROWTH STRATEGY OR AN
INABILITY TO EXECUTE ITS STRATEGY DUE TO CHANGES IN ITS INDUSTRY OR THE ECONOMY
GENERALLY, THE EMERGENCE OF NEW OR GROWING COMPETITORS, VARIOUS OTHER
COMPETITIVE FACTORS AND OTHER RISKS AND UNCERTAINTIES INDICATED FROM TIME TO
TIME IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS REFERRED TO IN THE
FORWARD-LOOKING STATEMENTS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN
BE NO ASSURANCE THAT THE RESULTS REFERRED TO IN THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS FORM 10-K WILL IN FACT OCCUR. THE COMPANY MAKES NO COMMITMENT
TO REVISE OR UPDATE ANY FORWARD LOOKING STATEMENTS IN ORDER TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE ANY SUCH STATEMENT IS MADE.
PART I
ITEM 1. BUSINESS
THE COMPANY
NUTRITION 21, INC. (the "Company") aspires to become the leading
nutrition company specializing in branded therapeutic nutrition supplements for
disease specific conditions. The Company's first branded product, Diachrome(TM),
will be positioned to aid in the dietary management of diabetes and will be
marketed with the support of healthcare professionals. Diabetes is a chronic,
costly, and debilitating condition that has become a focus of the healthcare
community and the media alike as the incidence, prevalence, and cost of
controlling this disease is rapidly increasing. Diachrome is planned for
introduction under the Nutrition 21 label in fiscal 2003. Primary efficacy
claims will include improved insulin function and healthy blood glucose levels
for people with type 2 diabetes. The Company has commissioned its fourth
clinical trial to validate Diachrome's efficacy and pharmacoeconomic benefits.
In formulating its new business growth strategy, the Company has built
on its experience in areas such as 1) establishing the efficacy of its
nutritional products through pharmaceutical-type clinical research, 2) patenting
the results of the clinical research, and 3) marketing proprietary consumer
products. These skills were acquired and honed through running its existing
operations.
For the last five years, the Company's chromium-based patent portfolio
has supported a profitable ingredient business that concentrates on sale of a
USDA-invented and researched
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picolinate form of chromium, an essential trace mineral. The Company sells its
chromium ingredient under the Chromax(R) brand name to vitamin and supplement
manufacturers for both human and animal applications. Early clinical evidence
dating back to the 1980's demonstrated potential efficacy for Chromax chromium
picolinate as a weight loss supplement. Today, Chromax continues to be one of
the most widely utilized ingredients in supplements marketed for weight control
purposes, and mounting clinical evidence promises to yield even more exciting
possibilities for the use of the Company's chromium compounds.
Until the acquisition of Optimum Lifestyle, Inc. ("OLI") in January of
1999, the Company was primarily an ingredient supplier. With the acquisition of
OLI, the Company acquired the Lite Bites(R) brand, and branched into the sale of
branded consumer products, selling the Lite Bites Fat Fighting System on
televised shopping programs through a strategic alliance with QVC, Inc. ("QVC").
The Company now plans to expand the Lite Bites brand into new channels of
distribution. The Lite Bites System, whose efficacy is in part due to the
inclusion of Chromax as a key functional ingredient, has been shown in a double
blind well-controlled study to be five times more effective in reducing body
weight than a regimen relying solely on USDA Food Pyramid recommendations for
diet and exercise.
Over the past three years the Company has self-funded a robust clinical
development program to better understand chromium's mechanism of action, and its
relevance to insulin mediated metabolic systems. Through this effort the Company
has identified newly patented combinations of chromium, new uses for chromium,
and new food systems that can be enhanced by the inclusion of its ingredient
systems. Over the next three years, the Company's clinical development and
market development program is designed to reveal the dramatic and compelling
scope of health benefits associated with chromium which, until now, has been
under-appreciated and poorly understood by health practitioners and consumers
alike.
The Company expects to build awareness for its products through a
well-orchestrated media campaign that leverages the publication and presentation
of positive results from large-scale pharmaceutical-quality studies. Research
will be used to build consensus within the healthcare community regarding the
inherent value of its products. The Company intends to market its patented
products as nutritional supplements under the Dietary Supplement Health and
Education Act ("DSHEA") regulations. While the Company's initial entree into the
therapeutic market is focused on diabetes where its products have already shown
a clear medical benefit, the Company's research pipeline includes products for
other closely related conditions in large and growing markets.
BACKGROUND
The Company is a New York corporation that was incorporated on June 29,
1983 as Applied Microbiology, and was initially focused on the development and
commercialization of antibacterial technologies for new drugs. Beginning in
1995, the Company began to shift its focus to the development and marketing of
nutrition products.
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On August 11, 1997, the Company acquired the entire beneficial interest
in Nutrition 21, a limited partnership, as a major step in moving into the
nutrition products business. The Nutrition 21 limited partnership was engaged in
the business of developing, producing, and marketing proprietary trace minerals
as ingredients for supplements. In March 2001, the Company changed its name from
AMBI Inc. to Nutrition 21, Inc. as part of a broader program to better
communicate its expertise in proprietary, science-based, nutrition products. The
products acquired from Nutrition 21 constituted a large majority of the
Company's revenues during the fiscal year ended June 30, 2002, and provide the
technology platform for many of the products in the Company's pipeline.
In an attempt to secure a foothold in the consumer product arena, on
January 21, l999, the Company acquired substantially all of the assets and
assumed certain of the liabilities of OLI relating to the business of
developing, producing, and marketing dietary supplements, primarily nutrition
bars that are marketed under the registered trademark "Lite Bites" through the
QVC television network (the "Lite Bites Business"). These products are
manufactured to proprietary specifications under agreements with third party
manufacturers.
On August 13, 1999, the Company entered into a Strategic Alliance
Agreement with QVC that provides for the continuation of the Lite Bites
Business, and for the introduction of additional branded nutrition products for
marketing through QVC
On December 30, 1999, the Company sold its Wipe Out(R) Dairy Wipes
business to ImmuCell Corporation ("ImmuCell"). The Dairy Wipes consist of a
moistened towel using a nisin-based antibacterial formulation that is for use in
preparing dairy cows for milking. On April 12, 2000, the Company exclusively
licensed to ImmuCell worldwide rights to develop and market new antibacterial
drugs for animals using the Company's technologies.
On August 2, 2000, the Company exclusively licensed to Biosynexus
Incorporated ("Biosynexus") rights to nisin and lysostaphin antibacterial
technologies for development and marketing of new drugs for human uses. The
Company received a payment of $1.4 million, and the license provides for
milestone payments of up to $14 million, and royalties. The Company also
received warrants to acquire Biosynexus stock. The Biosynexus transaction
completed the out-licensing of the Company's rights to its antibacterial drug
technologies Since that time, the Company has applied its clinical expertise and
patent development experience exclusively to the development of proprietary
Nutrition Products.
NUTRITION PRODUCTS
INGREDIENT PRODUCTS
The Company develops and markets proprietary essential trace elements
to vitamin and nutritional supplement manufacturers, which are sold as
ingredients for use in nutritional products. Currently, the Company's flagship
product is Chromax chromium picolinate, a form of
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the essential trace mineral chromium. Chromium is required for the proper
function of insulin, the master metabolic hormone, which regulates the body's
ability to process carbohydrates, fats and protein. Proper insulin function is
therefore important to the healthy function of virtually every cell in the body.
The Company owns or has exclusive rights to 23 U.S. patents, and
various foreign patents, that cover certain chromium compositions and their
uses, including three U.S. patents that expire in 2009 for the basic nutritional
uses of chromium picolinate in the management of cholesterol, for glucose
control, and for increasing lean body mass and reducing body fat. In addition,
the Company has secured the patent rights to the uses of all forms of chromium
in the treatment of depression and other mood disorders, rights which are in
force through 2018.
The chromium patents owned by the Company also include composition of
matter patents for novel chromium picolinate complexes and their uses. The
improved chromium picolinate complexes contain combinations of chromium and
various nutrients for enhancing the benefits of chromium picolinate and have
patent protection into the year 2018. See "Proprietary Rights."
In June 2001, the Company introduced a new proprietary nutritional
composition called Diachrome(TM), comprised of two nutritional ingredients,
Chromax chromium picolinate and biotin. The composition's ingredients have been
shown to work synergistically to enhance blood sugar control and improve blood
cholesterol profiles. As a result of the significant benefits observed in the
initial study, the Company has revised its marketing approach for Diachrome from
a dietary supplement ingredient to a healthcare professional-recommended product
for the diabetes market. A clinical development program is underway to support
this important strategy.
Several other chromium compounds are in development, including Chromax
chromium picolinate combined with conjugated linoleic acid, which has been shown
to potentiate glucose uptake in muscle cells in the absence of insulin
stimulation.
The Company is also developing novel forms of other essential minerals
such as calcium taurate, arginine silicate, magnesium taurate and others for
which the Company has patent protection, and may commercialize these or other
products.
CONSUMER PRODUCTS
In addition to Ingredients, the Company develops and markets Consumer
Products. The Consumer Products are essentially applications for the Company's
proprietary ingredients. The health benefits associated with the use of these
Consumer Products have also been substantiated by pharmaceutical-type clinical
trials.
The Company's flagship Consumer Product line is the Lite Bites(R)
family of brands, which are sold on the QVC television network and the iQVC
internet site in the United States.
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The same product line is sold under the Brite Bites(TM) family of brands on the
QVC television network in the U.K. In the future, the Lite Bite brand is
expected to be sold in other channels under retail distributor alliances. The
Lite Bites products constitute part of a fat fighting system that has been
clinically shown to promote weight loss when used as part of a program including
diet and exercise.
Going forward, the Company intends to capitalize and build on the
consumer marketing experience acquired through its Lite Bites Business, to
create a new healthcare division focused on the marketing of nutritional
supplements.
CLINICAL STUDIES
Nutrition 21's Chromax chromium picolinate has been studied in more
than 37 well-controlled clinical trials. A growing and significant body of
evidence has demonstrated chromium picolinate's potential to play a significant
role in managing the health of people with diabetes and those predisposed to
insulin resistance. The Company is dedicating significant efforts to better
understand the mechanism of action involved in chromium supplementation. The
Company plans to further its clinical understanding of chromium's ability to
improve insulin function in those whose function is impaired. The Company also
plans to maximize the value of those trials by marketing its own line of branded
nutritional supplements. The Company is actively engaged in a marketing campaign
designed to communicate the clinical results and the benefits of its products to
the healthcare community.
RECENT CLINICAL STUDIES AND PRESENTATIONS
STUDIES COMPLETED IN 2001
Chromium Picolinate with Biotin Attenuates Elevation in Blood Glucose Levels in
People with Type 2 Diabetes Ingesting Medium Carbohydrate Nutritional Beverages.
Investigators: Greenberg D, Komorowski JR and Maki KC (CRO)
Effect Of A Dietary Supplement Added to a Low Calorie Diet and Exercise Program
on Bone Mass. Investigators: Greenberg D, Komorowski JR (CRO)
Enhancement of Glucose Uptake In Human Skeletal Muscle Culture: Conjugated
Linoleic Acid, CLA Isomer t10 cis12, and Chromium Picolinate. Investigators :
Juturu V, Komorowski JR, Cefalu WT ET AL., University of Vermont 2001
Absorption and Excretion of Chromium from Orally Administered Chromium Chloride,
Chromium Acetate and Chromium Oxide in Rats. Investigators: Juturu V, Komorowski
JR, Devine J (CRO)
PRESENTATIONS AND PUBLICATION IN 2001
Komorowski JR, Greenberg D, Wang ZQ, Cefalu WT ET AL. Chromium Picolinate and
Alpha Lipoic Acid act Synergistically to Enhance 2 DG Uptake in Human Skeletal
muscle culture.
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FASEB, ORLANDO, FL APRIL 2001
de la Harpe J, Greenberg D, Komorowski JR, Wang ZQ, Cefalu WT ET AL. Chromium
Picolinate and CLA Act Synergistically to Enhance Glucose Uptake in Human
Skeletal Muscle Culture. FASEB, Orlando, Fl April 2001
Sherman W, Zhang XH, Man Kim DD and Wang ZQ. Chromium Picolinate Improves Fatty
Acid -Induced Inhibition of Glucose Transport in Human Skeletal Muscle culture.
ADA, 61st Scientific Session. Philadelphia, Pa June 2001
Komorowski JR, de la Harpe J, Cefalu WT ET AL. JCR:LA-cp Rats show Improved
Lipid Profiles in Response to Diets Containing Chromium Picolinate and Biotin.
Society for the Study of Ingestive Behavior, Philadelphia, Pa June 2001
Greenberg D, Komorowski JR, Maki K. Chromium Picolinate with Biotin Attenuates
Elevation in Blood Glucose Levels in People with Type 2 Diabetes Ingesting
Medium Carbohydrate Nutritional Beverages. Journal of the American College of
Nutrition Orlando, Fl Sep 2001
Greenberg D and Komorowski JR. Effect Of A Dietary Supplement Added To A Low
Calorie Diet And Exercise Program On Bone Mass. NAASO, Montreal, Canada Oct 2001
Juturu V and Komorowski JR. Is Chromium Supplementation needed in People With
Diabetes Mellitus? Diabetes Workshop. West Virginia, Oct 2001
STUDIES COMPLETED IN 2002
Effectiveness of Chromium Picolinate in Atypical Depression: A
Placebo-Controlled Clinical Trial. PI: Davidson J, Duke University
PRESENTATIONS AND PUBLICATIONS IN 2002
Cefalu WT, Wang ZQ, Zhang XH, Baldor LC and Russell JC. Oral Chromium Picolinate
Improves Carbohydrate and Lipid Metabolism and Enhances Skeletal Muscle Glut-4
Translocation in Obese, Hyperinsulinemic (JCR-LA Corpulent) Rats. The Journal of
Nutrition 132(6):1107-14. June 2002
Davidson J, Abraham K, Connor K and McLeod MN. Effectiveness of Chromium
Picolinate in Atypical Depression: A Placebo-Controlled Clinical Trial. JOURNAL
OF BIOLOGY PSYCHIATRY (IN PRESS) 2002
Juturu V, Komorowski JR, and Devine J ET AL. Absorption and Excretion of
Chromium from Orally Administered Chromium Chloride, Chromium Acetate and
Chromium Oxide in Rats. Intern Journal Trace Elements and Electrolytes. (In
Press) 2002
Juturu V. Lite Bites case study: A Total Lifestyle System for Weight Management.
Weight loss Foods and Supplements Conference, Chicago, Il Feb 2002
Juturu V and J Komorowsk JR. Is Chromium Needed for Individuals with
Cardiovascular Disease? FASEB, Experimental Biology 16(4)2002
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Rimm EB, Guallar E, Giovannucci E, AshcerioA, Stampfer MJ,. Willet WC and Hu F.
Toenail Chromium Levels and Risk of Coronary Heart Disease Among Normal and
Overweight Weight Men. 42nd Annual Conference on the Epidemiology and Prevention
of Cardiovascular Disease and Obesity. American Heart Association, April 2002
JuturuV, and Komorowski, J.R. Chromium In the Management of Improving Insulin
Sensitivity. TEMA II June 2-6, CA., 2002. The Journal of Nutrition (suppl). 2002
Juturu V and Komorowski JR. Chromium: A Systematic Overview and Meta Analysis.
62nd Annual Meeting & Conferences. American Diabetes Associatio, June 2002
Juturu V and Komorowski JR. Conjugated Linoleic Acid and Metabolic Syndrome: An
overview. ISSFAL, Quebec, Canada May 2002
Juturu V and Komorowski JR. Antimutagenic Activity of Chromium Picolinate in the
Salmonella Assay. XIV World Congress of Pharmacology, July 2002.
Juturu V and Komorowski JR. Reply to Althuis MD. Glucose and Insulin responses
to dietary chromium supplements: A Meta-Analysis. (In Press) The American
Journal Clinical Nutrition 2002
GOVERNMENTAL REGULATION
DIETARY SUPPLEMENTS AND PHARMACEUTICALS
Depending upon the ingredients of a specific product, some nutrition
products can be marketed in the U.S. under DSHEA or the Orphan Drug Act. The
Company's human nutrition products fall in regulatory categories that do not
require FDA approval for marketing but are subject to monitoring by the FDA. In
addition to FDA regulations, the Federal Trade Commission ("FTC") regulates
product-advertising claims. Prior to the Company's acquisition of Nutrition 21,
Nutrition 21 and the FTC entered into a consent agreement which culminated in an
FTC order that, among other things, requires that claims for dietary supplements
be supported by competent and reliable scientific evidence. Independent of this
order, the Company maintains a commitment to validating its product claims
through double-blind placebo controlled clinical trials. The Company is unique
in its commitment to scientific rigor and has long maintained an interest in
marketing only those products whose efficacy can be substantiated through
clinical research.
In 2002, chromium picolinate was certified as generally recognized as
safe for use in foods (GRAS) by an expert panel which reviewed a substantial
dossier of clinical evidence confirming the safety of chromium picolinate. In
addition to sales for human consumption, the Company sells chromium picolinate
for use in certain animal feed applications, having been approved by the FDA for
use as a supplement in animal feed for swine in 1996.
The Company currently markets its products as dietary supplements.
Going forward, Nutrition 21 intends to continue to market its products as
nutritional supplements. The existing
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product portfolio will continue to be marketed as Dietary Supplements under the
DSHEA regulations. The new product marketing strategy will focus on the clinical
value of proprietary formulations, like Diachrome, which are expected to be
marketed as a physician-recommended nutrition therapy for people with diabetes
and/or impaired insulin function.
Diachrome has been clinically shown to improve various diabetes
endpoints including glycated hemoglobin as well as fasting and postprandial
glucose levels. However, the current regulatory environment for dietary
supplements does not allow reference to diabetes or the health parameters
defining this condition (e.g. healthy blood glucose metabolism). As such, the
Company plans to market Diachrome within the regulatory context of a Medical
Food. The nutritional benefits of Diachrome meet all of the regulatory
requirements for a Medical Food: it is ingested orally; it is for the dietary
management of a specific disease condition; it is for use under on-going medical
supervision; and it will be promoted mainly to the healthcare community.
RESEARCH AND DEVELOPMENT
The Company researches and identifies product candidates, and conducts
preclinical, formulation, and clinical trials on its nutrition products and
product candidates. These efforts are conducted in cooperation with leading
clinicians and academic institutions including Harvard University, University at
Buffalo, Veterans Health Care System, Buffalo, Penn State University, University
of Alberta, Northern General Hospital, UK, Wameford Hospital at Oxford
University, University of Miami, Tufts University, Purdue University, University
of Pennsylvania, Jefferson University, Duke University, Oakland Children's
Hospital, SUNY Stony Brook University, UCLA, UCSF, Baylor College of Medicine,
University of Massachusetts, and University of Vermont. During the fiscal years
ended June 30, 2002, 2001 and 2000, approximately 1.0 million, 1.9 million, and
2.6 million, respectively, were spent on research and development by the
Company. This research is in support of marketing opportunities that can be
captured through the existing DSHEA regulatory channels, greatly enhancing the
speed and reducing the costs associated with new product introductions.
PROPRIETARY RIGHTS
TRADEMARKS
Chromax, Diachrome, Selenomax, SelenoPure, Zinmax, and Magnemax are
among the more well known trademarks owned by Nutrition 21: Chromax for chromium
picolinate; Diachrome for chromium picolinate and biotin; Selenomax for high
selenium yeast, SelenoPure for yeast-free selenium; Zinmax for zinc picolinate;
and Magnemax for manganese picolinate. Brite Bites, Cardia, Lite Bites, Lite
Bites Fat-Fighting System Chewies, and Metabolic Makeover are trademarks used by
the Company in the marketing of its Consumer Products in the US, while Brite
Bites is a UK trademark.
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NUTRITION PATENTS
The Company invests a substantial amount of time, effort, and resources
in developing and validating novel nutritional technologies. To prevent others
from copying and/or taking advantage of the Company's extensive investment in
research and innovation, the Company has incorporated the strategic use of
intellectual property ("IP"), principally patents, into its overall business
plan.
The Company enforces its patent rights to exclude others from copying
the Company's patented technology. The Company also licenses its patent rights
to others in exchange for royalties or access to complementary technology. The
strategic use of patents protects the Company's initial investment in innovation
as well as generates additional monies which can be used to fund additional
research and development of new products.
The nutritional supplement industry had traditionally viewed patent
protection as a marketing tool, not as a strategic tool providing a competitive
advantage. Patent rights were rarely, if ever, enforced. In this environment,
smaller companies were less likely to invest in innovation, knowing that larger
companies with greater manufacturing and marketing capacity could freely copy
its products. However, the Company has proved that IP can be used strategically
to level the playing field by providing smaller companies the means for
protecting their investment and generating new sources of revenue. This new
environment encourages investment in innovation and is just another instance in
which Nutrition 21 is leading by example.
The Company presently has 36 issued US patents and 10 pending US patent
applications with foreign equivalents covering novel compositions and therapies
directed towards significant health conditions such as cardiovascular disease,
depression, polycystic ovary syndrome, both type 1 and type 2 diabetes, and
sports nutrition.
The pending applications build upon Nutrition 21's expertise in
technology areas such as nutritional mineral supplements and demonstrate
Nutrition 21's commitment to expand into complementary technologies. As a leader
in therapeutic chromium research, Nutrition 21 enjoys a dominant patent position
in the area of nutritional supplementation with chromium picolinate. Nutrition
21 research has further enhanced this position by generating discoveries
directed towards the synergistic effects of combining chromium with compounds
such as biotin, alpha lipoic acid, conjugated linoleic acid (CLA), and CLA
isomers. Most notable among these are issued patents and pending patent
applications covering the positive effects of chromium and biotin on type 2
diabetes and which further protect unauthorized copying of the Diachrome
product. Outside of the chromium arena, Nutrition 21 continues to develop the
area of arginine silicate, a patented compound that has shown great promise in
therapies for bone and joint health, cardiovascular disease, and glucose
metabolism. In addition to holding patents covering the compound, methods for
making the compound, and various therapeutic uses, the recent Nutrition 21
discoveries of a novel method for producing commercial quantities of arginine
silicate may facilitate bringing the benefits of arginine silicate closer to
market.
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The Company maintains non-disclosure safeguards, including
confidentiality agreements, with employees and certain consultants. There can be
no assurance, however, that others may not independently develop similar
technology or that secrecy will not be breached despite any agreements that
exist.
PHARMACEUTICAL PATENTS
The Company owns more than 200 patents relating to, among other things,
the expression and production of proteins by recombinant Bacillus strains;
plasmid vectors and methods of construction; expression and production of
recombinant lysostaphin; novel bacteriocin compositions and their use as broad
spectrum bactericides; the use of bacteriocin compositions to treat bovine
mastitis; the use of bacteriocin compositions in oral healthcare; the use of
bacteriocin compositions on skin for healthcare and hygiene; and the use of
bacteriocin compositions in gastrointestinal healthcare. These patents are
licensed to AZWELL, Biosynexus, and ImmuCell.
The Company maintains trade secret protection for bacterial strains,
technical know-how, and other information it considers proprietary and
beneficial for the manufacture, use, regulatory approval, and marketing of the
Company's products.
COMPETITION
The nutritional products industry is intensely competitive.
Competitors include major companies with raw materials and finished product
divisions that also engage in the development and sale of dietary supplements.
Many of these competitors have financial and technical resources as well as
production and marketing capabilities substantially greater than those of the
Company. In addition, many of the Company's competitors have experience
significantly greater than that of the Company in the development and testing of
new or improved products.
The Company believes that its success in competing with others will
in part be based on enforcing its patent portfolio. In addition, the Company
expects its clinical research to provide competitive insulation as it will have
a substantial lead on any nutrition product Company which attempts to replicate
its clinical development efforts as a way to build claims or support for other
similar product concepts.
Although the Company holds exclusive rights to basic patents
covering the nutritional uses of chromium picolinate and its other
chromium-based supplements, the industry does not always recognize the value of
a patented position. The industry is fragmented, and both foreign and domestic
companies appear willing at times to disregard patent rights.
MANUFACTURING
Contractors, who manufacture to the Company's specifications, sometimes
using the Company's proprietary technology, manufacture the Company's
Ingredients and Consumer Products. The Company believes that it has adequate
inventory of products to accommodate a suspension in the manufacture of any of
its products. There are numerous sources of supply for
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all of the raw materials used in the manufacture of the Company's Ingredients
and Consumer Products.
The Company's Ingredient products are manufactured in bulk and then
sold as raw materials to customers who incorporate them into over 900 finished
products such as vitamin/mineral formulas, dietary supplements, baked goods,
beverages and other products. These products are sold by the Company's customers
under a variety of brands throughout the world through natural/health food
stores, supermarkets, drug stores, and mass merchandisers, and also through
direct sales and catalogue sales.
The Company's Consumer Products are manufactured and packed out in
consumer-sized quantities. They are currently sold exclusively through the QVC
electronic network, but the Company plans to expand into other channels of
distribution in FY 2003.
The Company plans to continue to outsource its manufacturing and
packaging needs as it expands its business to include the marketing and
distribution of branded therapeutic supplements, utilizing best of class vendors
who can satisfy the Company's strict quality standards.
EMPLOYEES
As of June 30, 2002, the Company had 27 full-time employees, of whom 3
were executive employees, 8 were administrative, 11 were engaged in marketing
and sales, and 5 were involved in research, process and product development, and
manufacturing. The Company does not have a collective bargaining agreement with
any of its personnel and considers its relationship with its employees to be
satisfactory.
ITEM 2. PROPERTIES
Since September 1998, the Company maintains its headquarters pursuant
to a seven and one-half year lease at 4 Manhattanville Road, Purchase, New York
10577-2197 (Tel: 914-701-4500). In fiscal 2002, the Company's surrendered a
portion of its leased premises, and received a reduction in its annual rental
for its headquarters location from $589,420 to $370,443 which sum is due in
monthly installments. The rent is subject to annual increases over the term of
the lease based on increases in certain building operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company in the ordinary course of its business has brought patent
infringement actions against companies that are selling chromium picolinate in
violation of the Company's patent rights. As of this date, two of these actions
are ongoing, and the Company intends to vigorously protect its proprietary
rights. Various actions have been terminated on terms that the Company believes
will protect its rights.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fiscal quarter ended June 30, 2002.
14
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MATTERS RELATING TO COMMON STOCK
The Company's Common Stock began trading on May 14, 2002 on the Nasdaq
SmallCap Market System under the symbol "NXXI". The Company's Common Stock
previously traded on the Nasdaq National Market System. If the Company does not
achieve a minimum $1 closing bid price for certain periods prior to February 10,
2003, the Company's Common Stock will be delisted. In that event, the Company
expects its Common Stock to be traded on the Nasdaq Bulletin Board Exchange.
The Company has not paid a cash dividend to its public shareholders on
its Common Stock. The Company intends to retain all earnings for the foreseeable
future for use in the operation and expansion of its business and, accordingly,
the Company does not contemplate paying any cash dividends on its Common Stock
in the near future.
The following table sets forth the high and low sales prices as
reported by the Nasdaq Market for the Common Stock.
COMMON STOCK
Fiscal Quarter Ended High Low
- --------------------------------------------------------------------------------
September 30, 2000 $3.094 $1.50
December 31, 2000 $1.563 $0.875
March 31, 2001 $1.563 $0.656
June 30, 2001 $1.23 $0.87
September 30, 2001 $1.70 $0.74
December 31, 2001 $0.96 $0.60
March 31, 2002 $0.98 $0.63
June 30, 2002 $0.74 $0.54
As of September 25, 2002, there were approximately 446 holders of
record of the Common Stock. The Company believes that the number of beneficial
owners is substantially greater than the number of record holders, because a
large portion of its Common Stock is held of record in broker "street names."
15
ADOPTION OF SHAREHOLDERS RIGHTS PLAN
The Company adopted a Shareholder Rights Plan on September 12,
2002. Under this plan, the Company will distribute, as a dividend, one preferred
share purchase right for each share of Common Stock of the Company held by
stockholders of record as of the close of business on September 25, 2002. The
Rights Plan is designed to deter coercive takeover tactics, including the
accumulation of shares in the open market or through private transactions, and
to prevent an acquiror from gaining control of the Company without offering a
fair price to all of the Company's stockholders. The Rights will expire on
September 11, 2012.
Each Right initially will entitle stockholders to buy one
one-thousandth of a share of newly created Series H Participating Preferred
Stock of the Company for $3.00. Each one one-thousandth of a share of the
Preferred Stock is designed to be the functional equivalent of one share of
Common Stock. The Rights will be exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's Common Stock (30% in the
case of a person or group that is currently a 15% holder) or commences a tender
or exchange offer upon consummation of which such person or group would
beneficially own 15% or more the Company's Common Stock.
If any person or group (an "Acquiring Person") becomes the beneficial
owner of 15% or more of the Company's Common Stock (30% in the case of a person
that is currently a 15% holder), then (1) the rights become exercisable for
Common Stock instead of Preferred Stock, (2) the rights held by the Acquiring
Person and certain affiliated parties become void, and (3) the rights held by
others are converted into the right to acquire, at the purchase price specified
in the Right, shares of Common Stock of the Company having a value equal to
twice such purchase price. The Company will generally be entitled to redeem the
Rights, at $.001 per right, until 10 days (subject to extension) following a
public announcement that an Acquiring Person has acquired a 15% position.
16
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize selected consolidated financial data
that should be read in conjunction the more detailed financial statements and
related footnotes and management's discussion and analysis of financial
condition and results of operations included herein. Figures are stated in
thousands of dollars, except per share amounts.
SELECTED STATEMENT OF YEAR ENDED JUNE 30,
OPERATIONS DATA: 2002(3) 2001 2000 1999(2) 1998(1)
- ------------------------------------------------------------------------------------------------------------
Total Revenues $14,668 $23,252 $32,814 $28,301 $20,758
Gross Profit 10,324 17,036 27,034 23,519 17,802
Operating (Loss) Income (7,789) (955) 7,041 6,469 1,467
(Loss) Income Before Taxes (6,011) 1,400 7,004 6,347 1,168
Income Taxes -- 335 523 482 116
Net (Loss) Income (6,011) 1,065 6,490 5,865 1,052
Diluted (Loss) Earnings per Share (0.19) 0.03 0.20 0.19 (0.04)
AT JUNE 30,
SELECTED BALANCE SHEET DATA: 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Working Capital (deficit) $8,002 $6,392 $6,486 $1,879 $(2,269)
Total Assets 28,100 38,887 41,085 34,541 20,735
Total Liabilities 2,151 6,495 10,430 12,950 10,437
Long-Term Obligations -- 122 1,278 3,807 1,543
Redeemable Preferred Stock -- 418 676 921 --
Stockholders' Equity 25,949 31,974 29,979 20,670 10,298
- ---------------------------
(1) Consolidated Statements of Operations include the operations of Nutrition
21 from August 11, 1997, the date of acquisition.
(2) Consolidated Statements of Operations include the operations of the Lite
Bites business from January 1, 1999, the effective date of acquisition.
(3) Consolidated Statements of Operations include a $7.1 million non-cash
charge for the impairment of goodwill.
17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein.
OVERVIEW
The following table sets forth items in the Consolidated Statements of
Operations as a percent of revenues:
Fiscal Year
Percent of Revenues
2002 2001 2000
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Gross profit* 69.7 70.1 82.1
Selling, general and administrative expense 50.1 44.4 40.6
Research and development expenses 6.9 8.4 8.0
Operating (loss) income (53.1) (4.1) 21.5
Net (loss) income (41.0) 4.6 19.8
*Based upon percent of net sales
RESULTS OF OPERATIONS
1. Year ended June 30, 2002 vs. Year ended June 30, 2001
REVENUES
Net sales of $14.3 million for fiscal year 2002 declined $6.5 million when
compared to net sales of $20.8 million in fiscal 2001. The decline is primarily
due to softness in retail sales of vitamin and mineral supplements, industry
consolidation, and a shortfall in sales of nutrition bars and related dietary
supplement products as a result of a short-term quality control issue at the
Company's supplier of Lite Bites products.
Other revenues for fiscal year 2002 of $0.4 million declined $2.0 million when
compared to $2.4 million of other revenues in fiscal 2001. Fiscal 2001 included
$1.9 million of license fees earned from Biosynexus Incorporated in accordance
with a License Agreement entered into on August 2, 2000 and ImmuCell Corporation
in accordance with a License Agreement entered into on April 12, 2000.
COST OF GOODS SOLD
Cost of goods sold in fiscal year 2002 of $4.3 million declined $1.9 million
when compared to $6.2 million in fiscal year 2001. The reduction in cost of
goods is directly related to lower sales
18
in fiscal year 2002. Gross margin on product sales of 69.7% in fiscal 2002
declined 0.4% when compared to 70.1% in fiscal 2001. The decline is due
primarily to product mix, with lower margin products accounting for a greater
proportion of the Company's revenue
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for fiscal 2002 of $7.3 million
decreased $3.0 million when compared to $10.3 million for fiscal 2001. The
decrease is due primarily to cost savings attributable to a restructuring
undertaken by the Company during the second quarter of fiscal 2001, reductions
in advertising and consulting expenditures, and containment of non-strategic
expenditures.
RESEARCH AND DEVELOPMENT
Research costs of $1.0 million for fiscal year 2002 decreased $0.9 million when
compared to $1.9 million for fiscal year 2001. The decrease principally reflects
cost savings attributable to the restructuring undertaken by the Company in the
second quarter of fiscal 2001 and the Company's decision to terminate its
Internet business at that time.
GOODWILL IMPAIRMENT
The Company adopted SFAS No. 142 effective July 1, 2001. Under SFAS No. 142,
goodwill is no longer amortized but reviewed for impairment annually, or more
frequently if certain indicators arise. The Company is required to complete the
initial step of a transitional impairment test within six months of adoption of
SFAS No. 142 and to complete the final step of the transitional impairment test
by the end of the fiscal year. The initial step was completed in the first
quarter of fiscal 2002. In addition, the Company assesses the impairment of
identifiable intangible assets and goodwill whenever events or changes in
circumstances indicate that the carrying value of the relevant assets may not be
recoverable. Management's judgment regarding the existence of impairment is
based on factors such as significant changes in the manner or the use of
acquired assets or the Company's overall business strategy; significant negative
industry or economic trends; significant declines in the Company's stock price
for a sustained period and the Company's market capitalization relative to book
value. Upon adoption, Goodwill in the amount of $4.1 million included in patents
and trademarks since acquisition (although accounted for separately by the
Company and included therein because of its estimated economic life) has been
reclassified in the accompanying balance sheets in accordance with the
requirements of SFAS No. 142. Due to declining market conditions, as well as a
change in business strategy, it was determined that a $7.1 million impairment
charge was warranted. The Company used a discounted cash flow analysis for
purposes of estimating the fair value of its reporting unit.
OTHER INCOME
Other income of $1.8 million in fiscal 2002 and $2.3 million in fiscal 2001, was
due primarily to amounts earned on the settlement of patent infringement
lawsuits.
19
INCOME TAXES
The effective tax rate for fiscal 2002 was 0.0% compared to 24.0% in fiscal
2001. The difference between the effective rate and the federal statutory rate
of 34% is due primarily to changes in the deferred tax valuation allowance,
non-deductible amortization and impairment charges.
2. Year ended June 30, 2001 vs. Year ended June 30, 2000
REVENUES
Net sales of $20.8 million for fiscal 2001 declined $11.5 million when compared
to net sales of $32.3 million for fiscal 2000. The decline is due primarily to
price reductions instituted in August 2000 on expiration of a patent exclusively
licensed to the Company on the Company's Chromax(R) chromium picolinate product.
Partially offsetting the decline was a 40% increase in the volume of Chromax
chromium picolinate sold in fiscal 2001 vs. fiscal 2000.
Other revenues of $2.4 million for fiscal 2001 increased $1.9 million when
compared to other revenues of $0.5 million in fiscal 2000. Fiscal 2001 included
$1.9 million of license fees earned from Biosynexus Incorporated in accordance
with a License Agreement entered into on August 2, 2000, and ImmuCell
Corporation in accordance with a License Agreement entered into on April 12,
2000.
COST OF GOODS SOLD
Cost of goods sold of $6.2 million for fiscal 2001 increased $0.4 million when
compared to $5.8 million in fiscal 2000. In fiscal 2000, cost of goods sold
included the impact of the Company's Wipe Out(R) Dairy Wipes business, which was
sold prior to fiscal 2001. The gross margin on product sales for fiscal 2001 was
70.1% as compared to 82.1% in fiscal 2000. The decrease in the gross margin
percentage is due primarily to the price reductions instituted in August 2000 on
the expiration of the exclusively licensed patent on the Company's Chromax(R)
chromium picolinate product as well as the mix of products sold.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for fiscal 2001 of $10.3 million
decreased $3.0 million when compared to $13.3 million in fiscal 2000. The
decrease is due primarily to lower royalty expense due to the expiration of the
licensed patent in August 2000; a reduction in the use of outside consultants as
well as cost savings resulting from a restructuring undertaken by the Company.
Partially offsetting these reductions was a non-recurring charge of $0.5 million
related to the departure of the Company's previous CEO.
RESEARCH AND DEVELOPMENT
Research costs of $1.9 million for fiscal 2001, decreased $0.7 million when
compared to $2.6 million for the same period a year ago. The decrease is due
primarily to the cost savings resulting from a restructuring undertaken by the
Company in the second quarter of fiscal 2001.
20
RESTRUCTURING AND OTHER CHARGES
The Company recorded $2.4 million for restructuring and other non-recurring
charges, related to its nutritional products segment, in the second quarter of
fiscal 2001. A $1.6 million restructuring charge was recorded as part of the
Company's initiative to reduce costs and to create a more flexible and efficient
organization. Included in the restructuring charge were $0.7 million of cash
termination benefits associated with the separation of twenty employees. All of
the affected employees left their positions as of June 30, 2001. All of the
termination benefits were paid in fiscal 2001. This cash outlay was funded
through cash from operations. Approximately $0.9 million of the restructuring
charge relates to the Company's decision to discontinue its efforts to launch NO
YO, a consumer weight loss product intended for the retail channel and to
consolidate certain of the Company's facilities.
Other charges of $0.7 million include a non-cash write off of the carrying value
of the website development costs related to NutritionU.com, the Company's online
nutrition education internet Company. The Company believes that since sufficient
uncertainty surrounds the ability of the Company to find strategic partners for
NutritionU.com, there will be no substantive future benefit to be derived from
the website development costs. In addition, other charges include $0.1 million
for the write off of the remaining carrying value of a license fee for one of
its products.
OPERATING (LOSS) INCOME
The Company's operating loss was $1.0 million for fiscal 2001 as compared to
operating income of $7.0 million for the same period a year ago. The price
reductions offered to the Company's chromium picolinate customers and the
non-recurring charges recorded in the second quarter of fiscal 2001 were the
contributing factors. Partially offsetting these factors were license fees of
$1.9 million earned from Biosynexus Incorporated an ImmuCell Corporation in
accordance with the License Agreements entered into on August 2, 2000 and April
12, 2000, respectively.
INTEREST INCOME, NET AND OTHER INCOME
Interest income, net of $13 thousand dollars, for fiscal 2001 was $126 thousand
dollars greater than the comparable period a year earlier. Interest income was
derived primarily from the investment of funds received from the successful
settlement of patent infringement claims.
Other income of $2.3 million for fiscal 2001 includes the successful settlements
of patent infringement claims brought by the Company.
INCOME TAXES
The effective tax rate for fiscal 2001 was 24.0% as compared to 7.5% in fiscal
2000. The difference between the effective tax rate and the federal statutory
tax rate of 34% is due primarily to the utilization of fully reserved tax credit
carryforwards. The effective tax rate in fiscal year 2000 of 7.5% differed from
the federal statutory tax rate of 34%, due primarily to utilization of the
federal loss carryforwards.
21
NUTRITIONAL PRODUCTS
1. Year ended June 30, 2002 vs Year ended June 30, 2001
Nutritional products revenues of $14.2 for fiscal 2002 decreased $6.9 million,
when compared to nutritional products revenues of $21.1 million for fiscal 2001.
The decrease in revenues is primarily due to the softness in retail sales of
vitamin and mineral supplements, continuing industry consolidation and price
reductions offered to the Company's chromium picolinate customers in fiscal
2001.
Nutritional products operating loss for fiscal 2002 was $8.0 million, which
included a $7.1 million non-cash charge for impairment of goodwill, compared to
$2.9 million in fiscal 2001.
2. Year ended June 30, 2001 vs. Year ended June 30, 2000
Nutritional product revenues of $21.1 million for fiscal 2001 decreased $11.1
million, when compared to nutritional product revenues of $32.2 million for
fiscal 2000. The decrease in revenues is primarily due to reductions in the
selling price of chromium picolinate offered to our ingredient product
customers, as a result of the expiration of the composition-of-matter patent in
August 2000. The decrease was partially offset by a 40% increase in the volume
of Chromax chromium picolinate sold in fiscal 2001 vs. fiscal 2000.
Nutritional products operating loss for fiscal 2001 was $2.9 million as compared
to operating income of $7.0 million for the same period a year ago. The decrease
is due primarily to the reduction in the selling price of chromium picolinate,
and the funding of the operations of NutritionU.com.
PHARMACEUTICAL PRODUCTS
1. Year ended June 20, 2002 vs Year ended June 30, 2001.
Pharmaceutical products revenues for fiscal 2002 of $0.4 million decreased $1.7
million when compared to $2.1 million for fiscal 2001. License fees earned from
users of the Company's patented technologies in fiscal 2001 did not recur in
fiscal 2002.
Pharmaceutical products operating income of $0.2 million for fiscal 2002
decreased $1.7 million when compared to $1.9 million in fiscal 2001. The primary
reason for the decline was no significant license fees were earned in fiscal
2002.
2. Year ended June 30, 2001 vs. Year ended June 30, 2000
Pharmaceutical product revenues of $2.1 million for fiscal 2001 increased $1.5
million when compared to $0.6 million for fiscal 2000. The increase is due
primarily to license fees earned from users of the Company's patented
technologies.
22
Pharmaceutical products operating income for fiscal 2001 was $1.9 million
compared to $63 thousand in the comparable period a year ago. The increase is
due primarily to license fees earned from users of the Company's patented
technologies.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2002 of $5.0 million declined $0.4 million
when compared to $5.4 million of June 30, 2001. As of June 30, 2002, the Company
had a working capital surplus of $8.0 million, compared to a working capital
surplus of $6.4 million as of June 30, 2001. Paydown of the current portion of
long-term debt and contingent payments payable in fiscal 2002 account for the
improvement in working capital.
Net cash provided by operations for fiscal 2002 was $4.5 million compared to
$3.6 million in fiscal year 2001. Changes in working capital account for the
improvement.
Net cash used in investing activities for fiscal 2002 was $4.2 million compared
to $5.0 million in fiscal 2001. Lower contingent payments to the previous owners
of Nutrition 21 was the primary reason for the improvement. In addition, the
Company invested $1.0 million in short-term instruments in fiscal year 2002.
Net cash used in financing activities was $1.7 million compared to $1.8 million
in fiscal 2001. Debt repayments in fiscal year 2002 were less than fiscal year
2001. The cash savings in fiscal year 2002 were partially offset by redemptions
of preferred stocks in excess of fiscal 2001 levels.
On December 14, 2001, the Company finalized a one-year $4.0 million line of
credit with Fleet National Bank.
On September 30, 2001, in accordance with the Purchase Agreement for the
acquisition of Nutrition 21, the Company paid the former owners of Nutrition 21
approximately $1.8 million. On September 30, 2000, the Company paid the former
owners of Nutrition 21 approximately $3.6 million, representing the full amount
of the contingent payment due for the 12-month period September 1999 through
August 2000. The Company utilized cash generated from operations to satisfy the
contingent payment.
In accordance with the Agreement of Purchase and Sale of Assets of OLI entered
into on January 19, 1999, the Company paid the former owners of OLI $1.0 million
in cash on January 7, 2002. On February 8, 2001, in satisfaction of a contingent
payment requirement, the Company paid the former owners of OLI $1.0 million in
cash, and issued to them 941 shares of its Series G Preferred Stock. The Company
used cash generated from operations to satisfy the cash portion of the
contingent payments.
The Company's primary sources of financing are cash generated from operations
and the Fleet National Bank revolving credit facility. The availability under
the Fleet National Bank Line of Credit is based on the Company's eligible
accounts receivable and inventory. At June 30, 2002, the availability under the
revolving line of credit was $2.1 million.
23
The Company believes that cash generated from operations and cash available
under the revolving credit facility will provide sufficient liquidity to fund
operations, debt service and other scheduled payments for the next twelve
months.
Future acquisition activities and any increases in marketing and research and
development expenses over the present levels may require additional funds. The
Company intends to seek any necessary additional funding through arrangements
with corporate collaborators, through public or private sales of its securities,
including equity securities, or through bank financing arrangements. The Company
does not currently have any specific arrangements for additional financing and
there can be no assurance that additional funding will be available at all or on
terms acceptable to the Company.
The Company's Common Stock began trading on May 14, 2002 on the Nasdaq SmallCap
Market System under the symbol "NXXI". The Company's Common Stock previously
traded on the Nasdaq National Market System. If the Company does not achieve a
minimum $1 closing bid price for certain periods prior to February 10, 2003, the
Company's Common Stock will be delisted. In that event, the Company expects its
Common Stock to be traded on the Nasdaq Bulletin Board Exchange.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses. On an on-going basis, the Company evaluates its
estimates, including those related to uncollectible accounts receivable,
inventories, goodwill, intangibles and other long-lived assets. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
o The Company maintains allowances for uncollectible accounts receivable
for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
o The Company carries inventories at the lower of cost or estimated net
realizable value. If actual market conditions are less favorable than
those projected by management write-downs may be required.
o Property, plant and equipment, goodwill, patents, trademarks and other
intangible assets owned by the Company are amortized, excluding
goodwill effective July 1, 2001, over their estimated useful lives.
Useful lives are based on management's
24
estimates over the period that such assets will generate revenue.
Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Future adverse changes in market conditions or
poor operating results of underlying capital investments or intangible
assets could result in losses or an inability to recover the carrying
value of such assets, thereby possibly requiring an impairment charge
in the future.
SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations", and No. 142
"Goodwill and other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. See Note 15 for further discussion on the impact of SFAS No. 142
on Nutrition 21's 2002 financial position and results of operations for the year
ended June 30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and will be effective for the
Company's fiscal year beginning July 1, 2002. Management does not anticipate
that the adoption of SFAS No. 144 will have a material impact on Nutrition 21's
financial position or results of operations.
25
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. The Company has no financial instruments that
give it exposure to foreign exchange rates or equity prices.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At a meeting held on January 12, 2001, the Audit Committee of the Board of
Directors of the Company approved the engagement of Ernst & Young LLP as its
independent auditors for the fiscal year ending June 30, 2001 to replace the
firm of KPMG LLP, who were dismissed as auditors of the Company effective
January 18, 2001.
The audit reports of KPMG LLP on the consolidated financial statements of AMBI
Inc. and subsidiaries as of and for the years ended June 30, 2000 and 1999, did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
26
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Year Joined
Name and Age Company Position
- --------------------------------------------------------------------------------
Gail Montgomery (49) 1999 President, Chief
Executive Officer,
and Director
John H. Gutfreund (72) 2000 Chairman of the Board
P. George Benson, PhD (56) 1998 Director
Warren D. Cooper, MD (49) 2002 Director
Audrey T. Cross, PhD (57) 1995 Director
Alan J. Kirschbaum (57) 1999 Senior Vice President,
Finance and Treasury,
Marvin Moser, MD (78) 1997 Director
Robert E. Pollack, PhD (62) 1995 Director
Benjamin T. Sporn (64) 1986 Senior Vice President,
General Counsel, and
Secretary
Andrew H. Wertheim (46) 2002 Chief Operating Officer
Gail Montgomery has been President, Chief Executive Officer and a
Director of the Company since September 29, 2000, when she succeeded Fredrick D.
Price. From July 1999 to September 2000, she served the Company's Nutrition 21
subsidiary in various capacities, most recently as Vice President and General
Manager. From November 1998 to July 1999, Ms. Montgomery was President of Health
Advantage Consulting, a consulting firm, which provided strategic planning, new
product introduction, and market development services to the nutrition industry.
From 1992 to 1998 she worked for Diet Workshop, a diet franchise network, most
recently as President and CEO. From 1979 to 1992, Ms. Montgomery has served in
various capacities in the health and fitness sector. She received a BA from
Douglas College of Rutgers University in communications.
27
P. George Benson, PhD, was elected a Director of the Company in July
1998. Dr. Benson is Dean of the Terry College of Business and holds the Simon S.
Selig, Jr. Chair for Economic Growth at the University of Georgia. Dr. Benson
was previously the Dean of the Faculty of Management at Rutgers University and a
professor of decision sciences at the Carlson School of Management of the
University of Minnesota. In 1997, he was appointed by the U.S. Secretary of
Commerce to a three-year term as one of the nine judges for the Malcolm Baldrige
National Quality Award. In 1996, Business News New Jersey named Dr. Benson one
of New Jersey's "Top 100 Business People". He received a BS from Bucknell
University and a PhD in business from the University of Florida.
Warren D. Cooper, MD was elected a Director of the Company in April
2002. Dr. Cooper is president and founder of Coalesence, Inc., a consultancy
focused on business and product development for the pharmaceutical and
healthcare industries. From 1995 to 1999, Dr. Cooper was the business unit
leader of Cardiovascular Business Operations at AstraZeneca Pharmaceuticals LP.
For three years before that he was executive director of the Medical Affairs &
Drug Development Operations in the Astra/Merck Group of Merck & Co. Over a
five-year period from 1987 to 1992, Dr. Cooper served as executive director for
Worldwide Clinical Research Operations and as senior director for Clinical
Research Operations (Europe) at Merck Research Laboratories. He was with Merck,
Sharp & Dohme, U.K., from 1980 to 1987, first as a clinical research physician
and later as director of medical affairs. Dr. Cooper is a member of the Medical
Advisory Board of Zargis Medical Corp. (a Siemens joint venture). He also holds
memberships in the American Association of Pharmaceutical Physicians, the
American Society of Hypertension and the International Society of Hypertension.
He received a B. Sc. in physiology and an M.B. B.S. (U.K. equivalent to U.S. MD)
form The London Hospital Medical College, University of London.
Audrey T. Cross, PhD, was elected a Director of the Company in January
1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human
Nutrition at the School of Public Health of Columbia University since 1988. She
also works as a consultant in the areas of nutrition and health policy. She has
served as a special assistant to the United States Secretary of Agriculture as
Coordinator for Human Nutrition Policy and has worked with both the United
States Senate and the California State Senate on nutrition policy matters. Dr.
Cross received a BS in dietetics, a Master of Public Health in nutrition and a
PhD from the University of California at Berkeley, and a JD from the Hastings
College of Law at the University of California at San Francisco.
John H. Gutfreund was elected a Director of the Company in February
2000 and Chairman of the Board in September 2001. Mr. Gutfreund is Senior
Managing Director and Executive Committee Member of C. E. Unterberg, Towbin,
investment bankers, and President of Gutfreund & Company, Inc., a New York-based
financial consulting firm that specializes in advising select corporations and
financial institutions in the United States, Europe and Asia. He is the former
chairman and chief executive officer of Salomon Inc., and past vice chairman of
the New York Stock Exchange and a past board member of the Securities Industry
Association. Mr. Gutfreund is active in the management of various civic,
charitable, and philanthropic organizations, including the New York Public
Library, Montefiore Medical Center, The
28
Brookings Institution, Council on Foreign Relations, Honorary Trustee, Oberlin
(Ohio) College, and Chairman of the Aperture Foundation. Mr. Gutfreund is also a
director of AccuWeather, Inc., Ascent Assurance, Inc., Evercel Inc., LCA-Vision,
Inc., Maxicare Health Plans, Inc., The LongChamp Core Plus Fund Ltd., and The
Universal Bond Fund. He received a BA from Oberlin College.
Alan J. Kirschbaum was elected Senior Vice President in March 2001, and
is the Company's Principal Financial Officer. From October 1999 to March 2001,
he served the Company as Controller. From 1996 to 1999, Mr. Kirschbaum was Vice
President and Controller of AMS Asset Management Services. From 1984 to 1996, he
held a series of increasingly responsible financial positions with Ascom
Timeplex, Inc. He holds a BS from Pennsylvania State University, an MBA from
Pace University, and is a Certified Public Accountant.
Marvin Moser, MD was elected to the Board of Directors in October 1997.
He is clinical professor of medicine at Yale and senior medical consultant at
the National High Blood Pressure Education Program of the National Heart, Lung
and Blood Institute. Dr. Moser's work has focused on various approaches to the
prevention and treatment of hypertension and heart disease. He has published
extensively on this subject with over 400 publications. He has authored or
contributed to more than 30 books and numerous physician and patient education
programs. He is editor-in chief of the Journal of Clinical Hypertension. Dr.
Moser is also a member of the Board of The Third Avenue Value Funds and the
Trudeau Institute. Dr. Moser holds a BA from Cornell University and an MD from
Downstate University College of Medicine.
Robert E. Pollack, PhD, was elected a Director of the Company in
January 1995. Dr. Pollack has been a Professor of Biological Sciences at
Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of
Columbia College. Prior thereto he was Professor of Microbiology at the State
University of New York School of Medicine at Stony Brook, Senior Scientist at
Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in
Israel, and NIH Fellow in the Department of Pathology at New York University
School of Medicine. He is the author of more than one hundred research papers on
the molecular biology of viral oncogenesis, a dozen articles in the popular
press, and three books. He received a BA in physics from Columbia University and
a PhD in biology from Brandeis University.
Benjamin T. Sporn has been legal counsel to the Company since 1990 and
has served as Secretary of the Company since 1986, and was appointed Senior Vice
President and General Counsel in February 1998. He was an attorney with AT&T
from 1964 until December 1989 when he retired from AT&T as a General Attorney
for Intellectual Property Matters. Mr. Sporn was a director of the Company from
1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute
and a JD degree from American University.
Andrew H. Wertheim was elected Chief Operating Officer in August 2002.
From 1997 to 2002, he was President and Chief Operating Officer of A L Systems,
Inc., a computer software company. From 1997 to 1998, he served as Senior Vice
President, Marketing & Sales for MenuDirect Corporation, a company that
specialized in nutritional products for people on medical and lifestyle
restricted diets. From 1992-1997, Mr. Wertheim was Vice President,
29
Marketing & Sales for Estee Corporation, a leading manufacturer of foods for
people with Diabetes. Before that, he was Director of Marketing for Progresso
Soups from 1984-1991 and Marketing Manager at Kellogg's from 1979-1983. He
received his B.S. in Communications from Boston University and his MBA in
Marketing from Northeastern University.
The directors serve for a term of one year and until their successors
are duly elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to the provisions of the employment agreements described
below. There are no family relationships among directors or executive officers.
ARRANGEMENTS REGARDING THE ELECTION OF DIRECTORS
So long as Burns Philp & Company Limited (an owner of 24% of the
Company's outstanding common shares) owns at least 20% of the Company's
outstanding common stock, BP is entitled to nominate one member for election to
the Company's Board. Currently, BP has not nominated a member for election to
the Company's Board. See Item 13. Certain Relationships and Related
Transactions.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an audit committee consisting of Dr. Benson, Dr.
Cooper, and Mr. Gutfreund. In addition, the Company has a compensation committee
consisting of Dr. Cross, Mr. Gutfreund, and Dr. Pollack. During the year ended
June 30, 2002, the audit committee met four times, and the compensation
committee met four times.
30
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
during the periods indicated for (i) the chief executive officer during fiscal
year 2002 and (ii) certain other persons that served as executive officers in
fiscal year 2002 whose total annual salary and bonus was in excess of $100,000.
SUMMARY COMPENSATION TABLE (1)(2)
========================================================================================================================
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION
-----------------------------------------------------------------------------------
PERIOD SALARY BONUS SECURITIES ($)
($) ($) UNDERLYING
OPTIONS
(#)
- ------------------------------------------------------------------------------------------------------------------------
Gail Montgomery, President,
Chief Executive Officer and Director 7/27/99 - 6/30/00 113,180 50,000 25,000
-----------------------------------------------------------------------------------
7/1/00 - 6/30/01 257,307 275,000 200,000
-----------------------------------------------------------------------------------
7/1/01 - 6/30/02 275,000 500,000
- ------------------------------------------------------------------------------------------------------------------------
Alan J. Kirschbaum, Senior Vice
President, Finance and Treasury, 7/1/99 - 6/30/00 137,500 15,000 15,000
and Principal Financial Officer
-----------------------------------------------------------------------------------
7/1/00 - 6/30/01 150,000 30,000 75,000
-----------------------------------------------------------------------------------
7/1/01 - 6/30/02 150,000
- ------------------------------------------------------------------------------------------------------------------------
Benjamin T. Sporn, Senior Vice
President, General Counsel and 7/1/99 - 6/30/00 190,000 75,000
Secretary
-----------------------------------------------------------------------------------
7/1/00 - 6/30/01 207,500 66,688 165,000
-----------------------------------------------------------------------------------
7/1/01 - 6/30/02 207,500
========================================================================================================================
(1) The above compensation does not include the use of an automobile and
other personal benefits, the total value of which do not exceed as to any named
officer or director, the lesser of $50,000 or 10% of such person's annual salary
and bonus.
31
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission (the "Commission"), the table omits a number of columns reserved for
types of compensation not applicable to the Company.
None of the individuals listed above received any long-term incentive plan
awards during the fiscal year.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a three-year employment agreement with
Gail Montgomery as President and Chief Executive Officer, effective as of
September 1, 2002. The agreement provides for an annual salary of $275,000,
$300,000, and $325,000 in the successive years under the agreement, and for
performance bonuses based on achieving defined revenue targets. Ms. Montgomery
is also entitled to additional payments equal to one year's salary plus an
additional month of salary for defined years of service, if her employment is
terminated without cause before the agreement expires, or if the Company fails
to offer to enter into a new one-year agreement upon expiration. If Ms.
Montgomery's employment is terminated or she resigns within six months after a
change of control (as defined) the Company will pay to her 2.99 times her annual
salary and previous year's bonus plus certain gross-ups, but these payments will
be reduced to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code. The Company in July 2002 granted to Ms. Montgomery
options to purchase an aggregate of 1,175,000 shares of common stock at $0.39
per share, of which options to purchase 325,000 shares were granted subject to
later approval by shareholders. If prior to September 10, 2003 the shareholders
do not approve the grant to her of these 325,000 options, these options will
convert to a stock appreciation right ("SAR") on the same general terms as would
have applied to these options, except that upon exercise the Company will pay to
her the SAR's in-the-money value in cash or common stock.
The Company has entered into a three-year employment agreement with
Andrew Wertheim as Chief Operating Officer, effective as of August 5, 2002. The
agreement provides for an annual salary of $225,000, $250,000, and $275,000 in
the successive years under the agreement, and for performance bonuses based on
achieving defined revenue targets. Mr. Wertheim is also entitled to additional
payments equal to one year's salary, if his employment is terminated without
cause before the agreement expires. If Mr. Wertheim's employment is terminated
or he resigns within six months after a change of control (as defined) the
Company will pay to him 2.99 times his annual salary and previous year's bonus
plus certain gross-ups, but these payments will be reduced to the extent
necessary to prevent the application of Section 280G of the Internal Revenue
Code. The Company in August 2002 granted to Mr. Wertheim options to purchase an
aggregate 675,000 shares of common stock at $0.36 per share,
The Company entered into a four-year agreement with Benjamin Sporn
effective September 1, 2002 which provides for his services as Senior Vice
President, General Counsel, and Secretary as an employee during the first two
years of the term, and as General Counsel as a consultant during the balance of
the term. Mr. Sporn's salary and fees will be $207,500,
32
$225,000, $150,000 and $100,000 in successive years under the agreement, plus
performance bonuses based on achieving defined revenue targets. Mr. Sporn is
also entitled to additional payments equal to two years' salary if his
employment is terminated without cause before the agreement expires. If Mr.
Sporn's employment is terminated or he resigns within six months after a change
of control (as defined) the Company will pay to him 2.99 times his annual salary
and previous year's bonus plus certain gross-ups, but these payments will be
reduced to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code. The Company in July 2002 granted to Mr. Sporn options
to purchase an aggregate of 225,000 shares of common stock at $0.39 per share.
The following tables set forth information with regard to options
granted during the fiscal year (i) to the Company's Chief Executive Officer, and
(ii) to other officers of the Company named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value At
Individual Grants Assumed Annual Rates Of Stock
Price Appreciation For Option
Term
- -------------------------------------------------------------------------------------------
Percent Of --------------------------------
Total
Number Of
Securities Options Exercise
Underlying Granted To Of Base
Options Employees In Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---------------------------------------------------------------------------------------------------------------------------
A. Alan J. Kirschbaum
- ---------------------------------------------------------------------------------------------------------------------------
B. Gail Montgomery 500,000 40.65 $1.18 7/24/11 $371,520 $940,770
- ---------------------------------------------------------------------------------------------------------------------------
C. Benjamin T. Sporn
- ---------------------------------------------------------------------------------------------------------------------------
33
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Unexercised Options at Value of Unexercised In-the-Money
Acquired realized ($) FY-End (#) Options at FY-End
in
Exercise
(#)
-----------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------
Alan J. 0 0 54,000 61,000 $0 $0
Kirschbaum
- ---------------------------------------------------------------------------------------------------------------------
Gail 0 0 95,000 630,000 $0 $0
Montgomery
- ---------------------------------------------------------------------------------------------------------------------
Benjamin T. Sporn 0 0 150,834 96,666 $0 $0
- ---------------------------------------------------------------------------------------------------------------------
The following table sets forth securities authorized for issuance under equity
compensation plans as of June 30, 2002.
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------------------------------------------------------------------------------------------------
Plan Category NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION
WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS (EXCLUDING SECURITIES
------------------- ------------------- REFLECTED IN COLUMN (a))
(a) (b) ------------------------
(c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 3,417,989 $1.90 1,331,166
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved (1) 222,000 $0.683 2,278,000
by security holders (2) 810,000 $2.607
- ---------------------------------------------------------------------------------------------------------------------
Total 4,449,989 3,609,166
- ---------------------------------------------------------------------------------------------------------------------
(1) 2001 Stock Option Plan to provide non-executives, who render services to the
Company additional incentives to advance the interests of the Company. Neither
directors nor executive officers of the Company may be granted Stock Options
under the Plan (Exhibit 10.69).
(2) Warrants granted from time to time as an inducement to various persons or
entities to enter into transactions with the Company.
34
PENSION PLANS
NUTRITION 21, INC.
Eligible employees of the Company are entitled to participate in the
Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a
non-contributory pension plan (the "Pension Plan") maintained by Burns Philp as
long as Burns Philp maintains the Pension Plan and owns at least 20% of the
Company's outstanding Common Stock. Burns Philp currently holds approximately
24% of the Company's outstanding Common Stock. Assuming retirement at age 65,
the Pension Plan provides benefits equal to the greater of (a) 1.1% of the
employee's final average earnings multiplied by the number of years of credited
service plus 0.65% of the employee's final average earnings in excess of the
average of the contribution and the benefit bases in effect under Section 230 of
the Social Security Act for each year in the 35-year period ending with the year
of Social Security retirement age as calculated under Section 401(l)(5)(E) of
the Code and Table I of IRS Notice 89-70, multiplied by the employee's years of
credited service up to 35, minus any predecessor plan benefit in the case of an
employee who participated in a predecessor plan or (b) $24 multiplied by the
number of years of credited service up to 25 years plus $12 multiplied by the
years of employment from 26-40 years, minus any predecessor plan benefit in the
case of an employee who participated in a predecessor plan. The "final average
earnings" are the average earnings during the five highest-paid consecutive
calendar years within the last ten calendar years of credited service with the
Company. Earnings include the salary and bonus listed in the summary
compensation table. Earnings, which may be considered under the Pension Plan,
are limited to $200,000 per year subject to annual cost of living adjustments as
determined by the IRS.
The following table sets forth estimated annual benefits payable upon
retirement, assuming retirement at age 65 in 2002 and a single life annuity
benefit, according to years of credited service and final average earnings. The
benefits listed are not subject to any deduction for Social Security or other
offset amounts.
35
YEARS OF CREDITED SERVICE
Final average
earnings 15 20 25 30 35
- --------------------------------------------------------------------------------
$25,000 $4,320 $5,760 $7,200 $8,160 $9,600
$50,000 $9,240 $12,360 $15,360 $18,480 $21,600
$75,000 $15,840 $21,120 $26,400 $31,680 $36,960
$100,000 $22,320 $29,760 $37,320 $44,760 $52,200
$150,000 $35,520 $47,280 $59,160 $71,040 $82,800
$200,000 $48,600 $64,800 $81,000 $97,200 $113,520
and up
Alan J. Kirschbaum, Gail Montgomery, and Benjamin T. Sporn each have
3.5, 2.9, and 10 years, respectively, of credited service under the Pension Plan
as of June 30, 2002, and, at age 65, would have approximately 11, 19, and 11
years of credited service, respectively.
CERTAIN OTHER INFORMATION
In 2002, the Board of Directors adopted a 2002 Inducement Stock Option
Plan under which the Company can issue options to purchase up to 2,500,000
common shares to induce individuals to become employed by the Company. As of
September 28, 2002, the Company granted 675,000 options under this Plan at an
average exercise price of $0.36. The Plan was not submitted to shareholders for
approval.
DIRECTOR COMPENSATION
Non-management Directors each receive a quarterly director's fee of
$1,800 and the Chairman of the Board receives a quarterly director's fee of
$3,600. Each also receives $500 for each meeting of the Board attended in
person, $250 for each meeting of the Board attended telephonically, and each
receives annually options to acquire 10,000 shares of Common Stock. Such options
granted to Directors during the fiscal year ended June 30, 2002 were granted at
an exercise price of $0.785.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required
36
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from July 1, 2001 through June 30, 2002, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors determines executive compensation taking into
consideration recommendations of the Compensation Committee. No member of the
Company's Board of directors is an executive officer of a company whose
compensation committee or board of directors includes an executive officer of
the Company.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of October 1, 2002, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's executive officers and
directors and (iii) all executive officers and directors of the Company as a
group. Unless otherwise indicated, each stockholder's address is c/o the
Company, 4 Manhattanville Road, Purchase, New York 10577-2197.
Shares Owned Beneficiald of Record (1)
Name and Address No. of Shares ly an % of Total
P. George Benson (2) 70,000 *
Audrey T. Cross (3) 94,000 *
Warren D. Cooper (4) 10,000 *
John H. Gutfreund (5) 90,000 *
Alan J. Kirschbaum (6) 68,500 *
Gail Montgomery (7) 455,000 1.36
Marvin Moser (8) 155,000 *
Robert E. Pollack (4) 100,000 *
Benjamin T. Sporn (9) 201,459 *
Andrew D. Wertheim (4) 50,000 *
Wyeth (10) 3,478,261 10.75
5 Giralda Farms
Madison, NJ 07940
Burns Philp & Company Limited (11) 7,763,837 24.00
7 Bridge Street
Sydney, NSW 2000, Australia
All Executive Officers and Directors 1,293,959 3.78
as a Group (9 persons) (12)
- ------------------
* Less than 1%
38
(1) Unless otherwise indicated, each person has sole investment and
voting power with respect to the shares indicated. For purposes of this
table, a person or group or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date, which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security
which such person or group of persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purposes of
computing the percentage ownership of such person or persons, but is
not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 60,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(3) Includes 90,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(4) Consists of shares issuable upon exercise of currently exercisable
options under the Company's Stock Option Plans.
(5) Includes 40,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(6) Includes 58,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(7) Includes 435,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(8) Includes 145,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(9) Includes 167,334 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(10) Formerly American Home Products Corporation.
(11) Consists of shares owned by subsidiaries.
(12) Includes 1,105,334 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 12, 1996, the Company completed the sale of its UK-based food
ingredients subsidiary, Aplin & Barrett Limited ("A&B"), to Burns Philp &
Company Limited ("BP") for $13.5 million in cash and the return to the Company
of 2.42 million shares of the Company's Common Stock held by BP. The sale
included the Company's nisin-based food preservative business. In connection
with the transaction, the Company and A&B entered into two License Agreements.
Pursuant to the first License Agreement, the Company is exclusively licensed by
A&B for the use of nisin generally in pharmaceutical products and animal
healthcare products. Pursuant to the second License Agreement, A&B is
exclusively licensed by the Company generally for the use of nisin as a food
preservative and for food preservation. As long as BP owns at least 20% of the
Company's outstanding common stock, BP is entitled to nominate one member for
election to the Company's Board. BP has not nominated a member for election to
the Company's Board. The amount of consideration for the sale was arrived at
through arms-length negotiation and a fairness opinion was obtained. As of June
30, 2002, BP owned 7,763,837 shares of Common Stock, and continues such Common
Stock ownership as of the date hereof.
In October 1998, the Company issued 3,478,261 shares of Common Stock to
Wyeth for $4.0 million. Wyeth currently holds approximately 10.75% of the
Company's outstanding Common Stock. Under a separate agreement in October 1998,
Wyeth paid the Company $1.0 million for exclusive rights to sell the Company's
Cardia Salt in retail markets in the United States. During fiscal 2001, Wyeth
made payments to the Company of $500,000.
On July 1, 2000, the Company licensed its remaining rights to sell
lysostaphin for research purposes, to Benjamin T. Sporn, its senior vice
president, for $300,000, payable in cash over a three-year period. Payments of
$200,000 have been made, and a payment of $100,000 is due prior to July 1, 2003.
The price and other terms of the transaction were established through
arms-length negotiations.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements on page F-1 and are filed as part of this
annual report.
2. Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not
applicable, not required, or because the information is included
in the Consolidated Financial Statements.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
Exhibits, which are being filed herewith, and the Exhibits, which
are incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the
fiscal quarter ended June 30, 2002.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NUTRITION 21, INC.
By: /s/ Gail Montgomery
---------------------------
Gail Montgomery, President,
CEO and Director
Dated: October 15, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of October 15, 2002 by the following
persons on behalf of Registrant and in the capacities indicated.
/s/ Gail Montgomery
------------------------------
Gail Montgomery, President,
CEO and Director
/s/ John H. Gutfreund
------------------------------
John H. Gutfreund,
Chairman of the Board
/s/ P. George Benson
------------------------------
P. George Benson, Director
/s/ Warren D. Cooper
------------------------------
Warren D. Cooper Director
/s/ Audrey T Cross
------------------------------
Audrey T. Cross, Director
/s/ Marvin Moser
------------------------------
Marvin Moser, Director
/s/ Robert E. Pollack
------------------------------
Robert E. Pollack, Director
/s/ Alan J. Kirschbaum
------------------------------
Alan J. Kirschbaum, Principal
Financial Officer
42
CERTIFICATIONS
I, Gail Montgomery, certify that:
1. I have reviewed this annual report on Form 10-K of Nutrition 21, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 9, 2002
/s/ GAIL MONTGOMERY
- -------------------
Gail Montgomery
President and Chief Executive Officer
I, Alan J. Kirschbaum, certify that:
1. I have reviewed this annual report on Form 10-K of Nutrition 21, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: October 9, 2002
/s/ ALAN J. KIRSCHBAUM
- ----------------------
Alan J. Kirschbaum
Principal Financial Officer
43
EXHIBITS
3.01 Certificate of Incorporation (1)
3.01a Certificate of Amendment to the Certificate of Incorporation (2)
3.01b Certificate of Amendment to the Certificate of Incorporation (3)
3.01c Certificate of Amendment to the Certificate of Incorporation (11)
3.01d Certificate of Amendment to the Certificate of Incorporation (11)
3.01e Certificate of Amendment to the Certificate of Incorporation (12)
3.02 Amended and Restated By-laws (2)
10.01 Form of Incentive Stock Option Plan (8)
10.02 Form of Non-qualified Stock Option Plan (8)
10.02a Form of 1989 Stock Option Plan (1)
10.02b Form of 1991 Stock Option Plan (1)
10.02c Form of 1998 Stock Option Plan (15)
10.24 Exclusive Option and Collaborative Research Agreement dated July 1,
1988 between the Company and the University of Maryland (4)
10.25 License and License Option Agreement dated December 15, 1988 between
the Company and Babson Brothers Company (4)
10.36 Agreement, dated October 6, 1992 between the Company and PHRI (5)
10.47 Employment Agreement dated August 30, 1994 between the Company and
Fredric D. Price, as amended and restated (6)
10.48 Lease dated as of February 7, 1995, between the Company and Keren
Limited Partnership (7)
10.49 Share Purchase Agreement dated as of December 12, 1996, by and among
Applied Microbiology, Inc., Aplin & Barrett Limited and Burns Philp
(UK) plc. (9)
10.50 License Agreement dated as of December 12, 1996 between Licensee
Applied
44
Microbiology, Inc. and Licensor Aplin & Barrett Limited. (9)
10.51 License Agreement dated as of December 12, 1996 between Licensee Aplin
& Barrett Limited and Licensor Applied Microbiology, Inc. (9)
10.52 Supply Agreement dated as of December 12, 1996 between Aplin & Barrett
Limited and Applied Microbiology, Inc. (9)
10.53 Investors' Rights Agreement dated as of December 12, 1996 between
Applied Microbiology, Inc. and Burns Philp Microbiology. Pty Limited.
(9)
10.54 Revolving Loan and Security Agreement dated as of December 12, 1996
between Burns Philp Inc. as Lender and Applied Microbiology, Inc. as
Borrower. (9)
10.55 Stock and Partnership Interest Purchase Agreement dated as of August
11, 1997, for the purchase of Nutrition 21. (10)
10.57 Sublease dated as of September 18, 1998, between the Company and
Abitibi Consolidated Sales Corporation (12)
10.58 Stock Purchase Agreement dated as of September 17, 1998 between
American Home Products Corporation and AMBI Inc. (13)*
10.59 License, Option, and Marketing Agreement dated as of September 17, 1998
between American Home Products, acting through its Whitehall-Robins
Healthcare division, and AMBI Inc. (13)*
10.60 Amended and Restated Revolving Credit and Term Loan Agreement dated as
of January 21, 1999 between State Street Bank & Trust Company as Lender
and the Company and Nutrition 21 as Borrower. (14)
10.61 Agreement of Purchase and Sale of Assets made as of January 19, 1999 by
and among Dean Radetsky and Cheryl Radetsky, Optimum Lifestyle, Inc.
and AMBI Inc. (14)
10.62 Strategic Alliance Agreement dated as of August 13, 1999 between AMBI
Inc. and QVC, Inc. (15)*
10.63 Asset Purchase Agreement made as of December 30, 1999, by and between
ImmuCell Corporation and AMBI Inc. (16)
10.64 License Agreement entered into as of August 2, 2000 between AMBI Inc.
and Biosynexus Incorporated. (17)*
10.65 License and Sublicense Agreement entered into as of August 2, 2000
between AMBI Inc. and Biosynexus Incorporated. (17)*
10.66 Amendment effective as of June 30, 2000, to the Amended and Restated
Revolving
45
Credit and Term Loan Agreement dated as of January 21, 1999 between
Citizens Bank of Massachusetts (successor in interest to loans
originally made by State Street Bank & Trust Company) as Lender and the
Company and Nutrition 21 as Borrower. (17)
10.67 Employment Agreement dated as of October 16, 2000 between AMBI Inc. and
Gail Montgomery. (18)
10.68 Consulting Agreement entered into as of September 29, 2000 between AMBI
Inc. and Fredrick D. Price. (19)
10.69 Amended and Restated By-laws, and Rights Agreement adopted September
12, 2002 (20)
10.70 Nutrition 21, Inc. 2001 Stock Option Plan. (21)
10.71 Nutrition 21, Inc. 2002 Inducement Stock Option Plan. (21)
10.72 Nutrition 21, Inc. Change of Control Policy adopted September 12, 2002.
(21)
10.73 Employment Agreement entered into as of September 1, 2002 between
Nutrition 21, Inc. and Gail Montgomery. (21)
10.74 Employment Agreement entered into as of August 5, 2002 between
Nutrition 21, Inc. and Andrew Wertheim. (21)
10.75 Employment Agreement entered into as of September 1, 2002 between
Nutrition 21, Inc. and Benjamin Sporn (21)
23.1 Consent of Ernst & Young LLP (21)
23.2 Consent of KPMG LLP (21)
99.1 Certification of President and Chief Executive Officer (21)
99.2 Certification of Principal Financial Officer (21)
- --------------------------------------
(1) Incorporated by reference to the Company's Report on Form 10-K for
1991.
(2) Incorporated by reference to the Company's Report on Form 8-K dated
September 4, 1992.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8 dated August 8, 1996, file No. 333-09801.
(4) Incorporated by reference to the Company's Report on Form 10-K for
1988.
46
(5) Incorporated by reference to the Company's Report on Form 10-K for the
fiscal period January 31, 1992 through August 31, 1992.
(6) Incorporated by reference to the Company's Report on Form 10-K for
1994.
(7) Incorporated by reference to the Company's Report on Form 10-K for
1995.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 originally filed April 15, 1986, file No. 33-4822.
(9) Incorporated by reference to the Company's Report on Form 8-K dated
December 27, 1996.
(10) Incorporated by reference to the Company's Report on Form 8-K dated
August 25, 1997.
(11) Incorporated by reference to the Company's Report on Form 10-K/A2 for
1997.
(12) Incorporated by reference to the Company's Report on Form 10-K/A for
1998.
(13) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30. 1998.
(14) Incorporated by reference to the Company's Report on Form 8-K dated
February 3, 1999.
(15) Incorporated by reference to the Company's Report on Form 10-K for
1999.
(16) Incorporated by reference to ImmuCell Corporation's Report on Form 8-K
dated January 13, 2000.
(17) Incorporated by reference to the Company's Report on Form 10-K for 2000
(18) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended December 31. 2000.
(19) Incorporated by reference to the Company's Report on From 10-K for 2001
(20) Incorporated by reference to the Company's Report on Form 8-K dated
September 18, 2002.
(21) Filed Herewith.
* Subject to an order by the Securities and Exchange Commission granting
confidential treatment. Specific portions of the document for which confidential
treatment has been granted have been blacked out. Such portions have been filed
separately with the Commission pursuant to the application for confidential
treatment.
47
NUTRITION 21, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
JUNE 30, 2002
PAGE
REPORTS OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2002 AND 2001 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JUNE 30, 2002, 2001 AND 2000 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
YEARS ENDED JUNE 30, 2002, 2001 AND 2000 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Nutrition 21, Inc.
We have audited the accompanying consolidated balance sheets of Nutrition 21,
Inc. (the "Company") as of June 30, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended June 30, 2002. Our audits also included the
related financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nutrition 21, Inc.
at June 30, 2002 and 2001, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended June 30, 2002, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 16, 2002,
except for Note 24, as to which the date is
September 12, 2002
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Nutrition 21, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholder's equity, and cash flows of Nutrition 21, Inc. and subsidiaries,
formerly known as AMBI Inc., as of June 30, 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Nutrition 21, Inc. and subsidiaries, formerly known as AMBI, Inc., for the
year ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Stamford, CT
September 15, 2000
F-3
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, June 30,
2002 2001
------- -------
ASSETS
Current assets:
Cash and cash equivalents $3,974 $5,355
Short-term investments 1,000 --
Accounts receivable (less allowance for doubtful accounts of
$19 in 2002 and $45 in 2001) 2,219 3,963
Other receivables 1,097 1,650
Inventories 1,075 1,322
Prepaid expenses and other current assets 788 475
------- -------
Total current assets 10,153 12,765
Property and equipment, net 654 633
Patents and trademarks (net of accumulated amortization of $12,721 17,073 18,682
in 2002 and $10,375 in 2001)
Goodwill (net of accumulated amortization of $886 in 2001) -- 6,491
Other Assets 220 316
------- -------
TOTAL ASSETS $28,100 $38,887
======= =======
See accompanying notes.
F-4
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, JUNE 30,
2002 2001
---- ----
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 1,125
Accounts payable and accrued expenses 2,102 3,371
Contingent payments payable 43 1,855
Preferred dividends payable 6 22
-------- --------
Total current liabilities 2,151 6,373
Other long-term obligations -- 122
-------- --------
TOTAL LIABILITIES 2,151 6,495
-------- --------
Commitments and contingent liabilities
REDEEMABLE PREFERRED STOCK
Series E convertible preferred, 1,500 shares issued; 191
shares outstanding at June 30, 2001 -- 191
Series F convertible preferred, 575 shares issued; 227 shares
outstanding at June 30, 2001 -- 227
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000 shares
Series G convertible preferred, 1,769 shares issued, 471 and 941
shares outstanding at June 30, 2002 and 2001, respectively
(aggregate liquidation value $477) 471 941
Common stock, $0.005 par value, authorized 65,000,000 shares;
33,048,655 shares and 32,342,818 shares issued and outstanding at
June 30, 2002 and 2001, respectively 165 161
Additional paid-in capital 63,936 63,196
Accumulated deficit (38,501) (32,324)
Less: treasury stock, at cost, 136,000 shares (122) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 25,949 $ 31,974
-------- --------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
$ 28,100 $ 38,887
======== ========
See accompanying notes
F-5
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEAR ENDED JUNE 30,
-------------------
2002 2001 2000
---- ---- ----
Net sales $14,314 $20,809 $32,289
Other revenues 354 2,443 525
---------- ---------- ----------
REVENUES 14,668 23,252 32,814
Cost of goods sold 4,344 6,216 5,780
---------- ---------- ----------
GROSS PROFIT 10,324 17,036 27,034
Selling, general & administrative expense 7,349 10,321 13,314
Research & development expense 1,017 1,946 2,610
Depreciation & amortization expense 2,619 3,359 4,069
Restructuring & other charges -- 2,365 --
Goodwill impairment 7,128 -- --
---------- ---------- ----------
OPERATING (LOSS) INCOME (7,789) (955) 7,041
Interest income 94 304 306
Interest (expense) (110) (291) (419)
Other income 1,794 2,342 76
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (6,011) 1,400 7,004
Income taxes -- 335 523
Minority interest in subsidiary -- -- 9
---------- ---------- ----------
NET (LOSS) INCOME $(6,011) $1,065 $6,490
========== ========== ==========
Basic (loss) earnings per share $(0.19) $0.03 $0.21
========== ========== ==========
Diluted (loss) earnings per share $(0.19) $0.03 $0.20
========== ========== ==========
Weighted average number of common
shares - basic 32,621,918 31,781,403 30,741,861
========== ========== ==========
Weighted average number of common
shares and equivalents - diluted 32,621,918 31,879,614 32,546,198
========== ========== ==========
See accompanying notes.
F-6
NUTRITION 21, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Preferred Stock
Series G Common Stock
Shares $ Shares $
------ ------ ------ ------
Balance at June 30, 1999 -- -- 30,152,306 $150
Conversion of Series E preferred stock to common stock -- -- 243,546 1
Common stock issued on exercise of options and warrants -- -- 959,508 4
Common stock issued for Optimum Lifestyle, Inc. contingent -- -- 200,000 1
payment
Issuance of warrants -- -- -- --
Preferred stock dividends declared -- -- -- --
Preferred stock issued for Optimum Lifestyle, Inc. 828 828 -- --
contingent payment
Conversion of Series G preferred stock to common stock (165) (165) 26,067 2
Net income for the year -- -- -- --
----- ------- ----------- ------
Balance at June 30, 2000 663 663 31,581,427 158
----- ------- ----------- ------
Conversion of Series E preferred stock to common stock -- -- 231,136 1
Cancellation of stock exercise -- -- (315,408) (2)
Premium on redemption of Series F preferred stock -- -- -- --
Issuance of warrants -- -- -- --
Preferred stock dividends declared -- -- -- --
Preferred stock issued for Optimum Lifestyle, Inc.
contingent payment 941 941 -- --
Conversion of Series G preferred stock to common stock (663) (663) 845,663 4
Net income for the year -- -- -- --
----- ------- ----------- ------
Balance at June 30, 2001 941 941 32,342,818 161
----- ------- ----------- ------
Conversion of Series E preferred stock to common stock -- -- 155,605 1
Issuance of warrants -- -- -- --
Preferred stock dividends declared -- -- -- --
Premium on redemption of Series F preferred stock -- -- -- --
Conversion of Series G preferred stock to common stock (470) (470) 686,232 3
Repurchase of common stock for treasury -- -- (136,000) --
Net loss for the year -- -- -- --
----- ------- ----------- ------
Balance at June 30, 2002 471 $471 33,048,655 $165
===== ======= =========== ======
Additional Accumulated Treasury
Paid-In Capital Deficit Stock Total
$ $ $ $
-------- --------- ----- --------
$60,045 $(39,525) -- $20,670
249 -- -- 250
1,251 -- -- 1,255
503 -- -- 504
80 -- -- 80
-- (98) -- (98)
-- -- -- 828
163 -- -- --
-- 6,490 -- 6,490
------- -------- ------- -----------
62,291 (33,133) -- 29,979
------- -------- ------- -----------
236 -- -- 237
2 -- -- --
-- (110) -- (110)
8 -- -- 8
-- (146) -- (146)
-- -- -- 941
659 -- -- --
-- 1,065 -- 1,065
------- -------- ------- -----------
63,196 (32,324) -- 31,974
------- -------- ------- -----------
193 -- -- 194
80 -- -- 80
-- (51) -- (51)
-- (115) -- (115)
467 -- -- --
-- -- (122) (122)
-- (6,011) -- (6,011)
------- -------- ------- -----------
$63,936 $(38,501) $(122) $25,949
======= ======== ======= ===========
See accompanying notes.
F-7
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED JUNE 30,
2002 2001 2000
------- ------- ------
Cash flows from operating activities:
Net (loss) income $(6,011) $1,065 $6,490
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 2,619 3,359 4,069
Goodwill impairment write-off 7,128 -- --
Deferred taxes (725) (298) --
(Gain) loss on disposal of inventory and equipment (55) (23) 11
Gain on sale of product line -- -- (19)
Consulting expense -- -- 196
Issuance of warrants 80 8 80
Changes in assets and liabilities:
Accounts receivable 1,744 624 (607)
Other receivables 710 (1,186) 9
Inventories 231 60 (129)
Prepaid and other current assets 26 540 (32)
Other assets 96 46 (161)
Accounts payable and accrued expenses (1,391) (563) (521)
------- ------- ------
Net cash provided by operating activities 4,452 3,632 9,386
------- ------- ------
Cash flows from investing activities:
Contingent payments for acquisitions (2,770) (4,637) (4,005)
Purchases of property and equipment (274) (167) (194)
Payments for patents and trademarks (336) (209) (541)
Proceeds from sale of assets 200 32 512
Purchase of investments (1,000) -- --
------- ------- ------
Net cash used in investing activities (4,180) (4,981) (4,228)
------- ------- ------
Cash flows from financing activities:
Debt repayments (1,125) (1,500) (2,250)
Purchase of common stock for treasury (122) -- --
Proceeds from exercise of options and warrants -- -- 1,255
Capital lease obligation repayments -- -- (63)
Redemption of redeemable preferred stock (345) (177) --
Preferred stock dividends paid (61) (107) (70)
------- ------- ------
Net cash used in financing activities (1,653) (1,784) (1,128)
------- ------- ------
Net (decrease) increase in cash and cash equivalents (1,381) (3,133) 4,030
Cash and cash equivalents at beginning of year 5,355 8,488 4,458
------- ------- ------
Cash and cash equivalents at end of year $3,974 $5,355 $8,488
======= ======= ======
See accompanying notes.
F-8
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) CONSOLIDATION
Effective March 8, 2001, Nutrition 21, Inc. (the Company)
changed its name from AMBI Inc. The consolidated financial
statements include the results of operations of the Company,
and its wholly owned subsidiary, Nutrition 21, LLC. All
intercompany balances and transactions have been eliminated in
consolidation.
b) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States 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. Estimates also affect
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
c) CASH EQUIVALENTS
The Company considers all liquid interest-earning investment
with a maturity of three months or less to be cash equivalents.
Investments with maturities beyond one year may be classified
as short-term based on their highly liquid nature and because
such marketable securities represent the investment in cash
that is available for current operations. All cash and
short-term investments are classified as available for sale and
are recorded at market value using the specific identification
method: unrealized gains and losses would be reflected in
Accumulated Comprehensive Income. Cash equivalents included in
the accompanying financial statements include money market
accounts, bank overnight investments and commercial paper.
d) INVENTORIES
Inventories are carried at the lower of cost (on a first-in,
first-out method) or estimated net realizable value.
e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the related assets' estimated useful lives. The
estimated useful lives are as follows:
Leasehold improvements -- Term of lease
Furniture and fixtures -- 7 years
Machinery and equipment -- 5 to 7 years
Office equipment -- 3 to 5 years
Computer equipment 3 to 5 years
f) PATENTS AND TRADEMARKS
The Company capitalizes certain patents and trademarks. Patents
and trademarks are amortized over their estimated economic
lives, ranging from 3 to 15 years.
g) REVENUE RECOGNITION
Sales revenue from proprietary ingredient products is
recognized when title transfers, upon shipment of the product.
Sales revenue from finished nutritional products are also
recognized when title transfers, which is upon delivery at the
customer site. There are no customer acceptance provisions to
lapse before the recognition of any product revenue. Only
revenue where collectability of accounts receivables is
probable is recognized. Other revenues are comprised primarily
of license and royalty fees recognized as earned in accordance
with agreements entered into by the Company when there is no
further involvement required by the Company.
F-9
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
-------------------------------------------------------
h) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to the differences between
the financial statement carrying amounts of assets and liabilities
and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the
enactment date. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will
not be realized.
j) STOCK-BASED COMPENSATION
The Company continues to account for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Compensation cost for stock options, if any, is
measured as the excess of the quoted market price of the Company's
stock at the date of grant over the amount an employee must pay to
acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123.
"Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair-value method of
accounting for stock-based employee compensation plans. The
Company has elected to remain on its current method of accounting
as described above, and has adopted the disclosure requirements of
SFAS No. 123.
k) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED
-----------------------------------------------------------
Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
l) RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB")
issued statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 141 prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 142 changes
the way companies account for goodwill in that goodwill will no
longer be amortized, but should be tested for impairment at least
annually. The Company elected to adopt early SFAS No. 142 in the
quarter ended September 30, 2001. See Note 15 for further
discussion on the impact of SFAS No. 142 on Nutrition 21's 2002
financial position and results of operations for the year ended
June 30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The FASB's new rules
on asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and is effective for the Company's fiscal year
beginning July 1, 2002. Management does not anticipate that the
adoption of SFAS No. 144 will have a material impact on Nutrition
21's financial position or results of operations.
F-10
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
-------------------------------------------------------
m) ADVERTISING COSTS
Advertising costs are expensed as they are incurred. The amount
charged to expense during fiscal 2002, 2001 and 2000 was $0.4
million, $0.8 million and $1.4 million, respectively.
n) RECLASSIFICATIONS
Certain reclassifications have been made to prior years' financial
statement amounts to conform to the 2002 presentation.
Note 2: ACQUISITIONS
LITE BITES BUSINESS
On January 21, l999, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Optimum
Lifestyle, Inc. ("OLI") relating to the business of developing,
producing, and marketing dietary supplements, primarily nutrition
bars which are marketed under the trademark "Lite-Bites" through
the QVC Inc. television network (the "Lite Bites Business"). These
products are manufactured to proprietary specifications under
agreements with third party manufacturers. The purchase price paid
by the Company was $6.1 million in cash, including related
transaction costs, and 1,304,347 shares of restricted Common Stock
of the Company, valued at $1.4 million.
The acquisition was accounted for under the purchase method. Based
upon the allocation of purchase price, the transaction resulted in
$6.1 million in identifiable intangible assets, primarily
trademarks and non-compete agreements, and $1.5 million of
goodwill. Prior to July 1, 2001, the Company was amortizing
goodwill over fifteen years and amortizing the identifiable
intangible assets over their useful economic lives, which range
from 3 to 15 years. During the year ended June 30, 2002, the
Company recorded approximately $0.4 million in amortization
expense related to other intangible assets.
Additional contingent payments are made to the former owners of
OLI depending primarily on sales levels of the Lite Bites Business
achieved during the five year period following closing and/or the
availability of Lite Bites products through certain distribution
channels in the future as follows: a maximum of $3.0 million in
cash and/or Nutrition 21 common stock, at the option of the former
owners of OLI, payable $1.0 million on each of the first three
anniversaries of the acquisition; $3.0 million in newly issued
Nutrition 21 preferred stock, payable $1.5 million, subject to
adjustment for the achievement of net sales levels, on each of the
first two anniversaries of the acquisition, in newly issued
Nutrition 21 preferred stock; and a single payment of $1.0 million
in cash, subject to achieving certain sales levels in new markets,
prior to the fifth anniversary of the acquisition. During fiscal
2002, the Company, in satisfaction of the contingent payment
requirement paid $1.0 million in cash resulting in an increase in
goodwill. During fiscal 2001, the Company, in satisfaction of the
contingent payment requirement, paid $1.0 million in cash and
issued 941 shares of its Series G Preferred Stock, which resulted
in an increase in goodwill of $1.9 million. During fiscal 2000,
the Company, in satisfaction of the contingent payment
requirement, paid $0.4 million in cash, issued 200,000 shares of
its Common Stock and issued 828 shares of its Series G Preferred
Stock. As result, goodwill was increased by $1.8 million in fiscal
2000.
F-11
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: SHORT-TEM INVESTMENT
June 30
2002 2001
Available for sale:
3.10% corporate bond, maturing 12/05/03 $1,000 --
At June 30, 2002, the fair market value of available for sale securities
approximated the cost, as such, there were no unrealized gain or loss.
Note 4: INVENTORIES
The components of inventories at June 30, 2002 and 2001 are as
follows (in thousands):
2002 2001
---- ----
Raw materials $ 444 $ 471
Finished goods 631 851
------ -------
Total inventories $1,075 $ 1,322
====== =======
Note 5: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, short-term investments and
accounts receivable approximate carrying amounts due to the short
maturities of these instruments.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents and accounts receivable. The Company places its
cash primarily in market interest rate accounts, overnight investments
and short-term investments. The Company had $0.9 million in overnight
investments; $3.0 million invested in mutual money market funds and $1.0
million in short term investments at June 30, 2002. The Company had $0.4
million in overnight investments and $5.0 million invested in commercial
paper at June 30, 2001.
The Company sells its products to customers in the Americas and Europe.
The Company performs ongoing credit evaluations of its customer's
financial conditions and limits the amount of credit extended as deemed
appropriate, but generally requires no collateral. The Company maintains
reserves for credit losses and, to date, such losses have been within
management's expectations.
One customer accounted for approximately 28%, 29% and 19% of net sales
for fiscal years 2002, 2001 and 2000, respectively. In addition, one
customer accounted for 23% and 33% of accounts receivable net, in fiscal
2002 and 2001, respectively.
Note 6: RELATED PARTY TRANSACTIONS
On September 17, l998, the Company commenced a strategic alliance with
Wyeth (formerly American Home Products Corporation) ("Wyeth") for retail
distribution of the Company's proprietary nutrition products. As part of
the alliance, Wyeth's Whitehall-Robins Healthcare Division was granted
an exclusive license to sell the Company's Cardia(R) Salt in retail
markets in the United States and received a first negotiation option for
exclusive rights and licenses for additional nutrition products for
retail distribution in the United States. The Company retained the
exclusive rights to market its products in both direct response and
ingredient channels. On October 8, l998, the Company received a
non-refundable payment of $1.0 million for the rights granted to Wyeth.
Also on October 8, l998, Wyeth paid $1.15 per share or a total of $4.0
million for 3,478,261 shares of the Company's Common Stock. For fiscal
years ended 2001 and 2000, respectively, the Company received
approximately $0.5 million in license fees from Wyeth.
F-12
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: RELATED PARTY TRANSACTIONS (CONTINUED)
A former officer's employment with the Company terminated on September
29, 2000. Effective as of such date, the Company entered into a
consulting agreement. The agreement is for the period of October 1, 2000
through June 30, 2004, and provides for payment of $206,250 for the
period from October 1, 2000 through June 30, 2001, and a fee at an
annual rate of $100,000 thereafter. All of the former officer's stock
options (900,000 shares) became fully vested and became exercisable
until June 30, 2004. Upon the occurrence of a change of control (as
defined in the agreement), the agreement terminates and the Company is
required to pay to the former officer a lump-sum payment equal to the
fees that would have been paid to him over the remaining term of the
agreement had the change of control not occurred.
On July 1, 2001 Company licensed its remaining rights to sell
lysostaphin for research purposes, to its senior vice president, for
$300,000, payable in cash over a three-year period. Payments of $200,000
have been made, and a payment of $100,000 is due prior to July 1, 2003.
The price and other terms of the transaction were established through
arms-length negotiations.
Note 7: PROPERTY AND EQUIPMENT, NET
The components of property and equipment, net, at June 30, 2002 and
2001 are as follows (in thousands):
2002 2001
---- ----
Furniture and fixtures $ 422 $ 496
Machinery and equipment 135 135
Office equipment & leasehold improvements 561 301
Computer equipment 732 726
------ ------
1,850 1,658
Less: accumulated depreciation (1,196) (1,025)
------ -----
Property and equipment, net $ 654 $ 633
====== =====
Note 8: PATENTS AND TRADEMARKS
During fiscal year 2002, changes in intangible assets relate to the
investment of $1.0 million in existing patents, which will be amortized
over the remaining life of the patents. No significant residual value is
estimated for these intangible assets. Intangible assets amortization
expense was $2.4 million for fiscal 2002 and $2.7 million for fiscal
2001. The components of intangible assets were as follows:
June 30,
2002 2001
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Patents and licenses $9,228 $(5,582) $8,740 $(4,902)
Trademarks, trade names and other 20,566 (7,139) 20,317 (5,473)
------- -------- ------- --------
Intangible assets $29,794 $(12,721) $29,057 $(10,375)
======= ========= ======= ========
Amortization expense for the net carrying amount of intangible assets at
June 30, 2002 is estimated to be $2.3 million in fiscal years 2003
through 2007 respectively.
F-13
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9: LINES OF CREDIT AND LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2001 (in
thousands):
2001
----
Citizens Bank term loan $ 1,125
Obligations under capital leases --
-------
1,125
Less: Current portion (1,125)
-------
$ --
=======
On December 14, 2001, the Company finalized a one-year $4.0 million
line of credit with Fleet National Bank. Based on eligible accounts
receivable and inventory, the availability under the revolving line of
credit at June 30, 2002 was $2.1 million. At June 30, 2002, the Company
had no borrowings under the revolving line of credit.
On January 21, 1999, the Company entered into an Amended and Restated
Revolving Credit and Term Loan Agreement (the "Loan Agreement") with
Citizens Banks of Massachusetts ("Citizens"); (successor in interest to
loans originally issued to the Company by State Street Bank and Trust
Company), which Loan Agreement amended and restated a prior agreement
with Citizens. Certain financial covenants of the Loan Agreement were
further amended effective as of June 30, 2000. The Loan Agreement was
for a $5.5 million term loan and a $4.0 revolving credit facility for
the purposes of acquiring the Lite Bites Business and for general
corporate purposes. Loans from Citizens bear interest at the prime rate
plus 1% (7.75% at June 30, 2001) and was due February 1, 2002.
During fiscal year 2001, the Company has made monthly payments of
principal of $0.1 million plus interest on the loan. There was no
outstanding balance on the revolving line of credit at June 30, 2001.
On December 14, 2001, the Loan Agreement was terminated.
Note 10: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following items are included in accounts payable and accrued
expenses at June 30, 2002 and 2001 (in thousands):
2002 2001
---- ----
Accounts payable $1,115 $ 1,179
Consulting and professional fees payable 46 204
Royalty fees --- 112
Accrued compensation and benefits 109 983
Taxes payable 725 475
Other accrued expenses 107 418
------ -------
$2,102 $ 3,371
====== =======
Note 11: REDEEMABLE PREFERRED STOCK
On December 10, l998, the Company issued 1,500 shares of non-voting
Series E Preferred Stock ("E Preferred") with a par value of $0.01 per
share. On that date, the Company's outstanding Series C Preferred Stock
of 222 shares and accrued dividends thereon of $542 thousand were
exchanged for 1,500 shares of E Preferred with a face amount of $1,500,
$1.0 million in cash and the issuance of 324,689 shares of the
Company's Common Stock. As a result of this exchange transaction, the
Company recorded a one-time incremental preferred dividend of $242
thousand, representing the excess of the consideration exchanged over
the carrying value of the then outstanding C Preferred. In addition,
the agreement provides for a payment of at least $250 thousand on the
second anniversary of the agreement. The total amount of the payment is
subject to increases based on increases in the Company's equity
securities. The E Preferred has a conversion price of $1.25 per share.
The fixed conversion rate is subject to adjustments in certain
circumstances. In addition each holder of E Preferred, may under
certain circumstances, redeem all or a portion of such shares at the
greater of 125% of the conversion amount ($1,000 per share) or the
product of the conversion rate ($800 per share) and the closing sale
price of the Common Stock on the date immediately preceding such
redemption. The E Preferred bears dividends at a rate of 10% per annum
payable in cash or, at the option of the Company, in shares of Common
Stock. The E Preferred is subject to conversion at any time, at the
option of the holder, and is subject to mandatory conversion after
three years. During fiscal 2002, 191 shares of Company's E Preferred
plus accrued dividends on these shares were converted in 155,605 shares
of Common Stock.
F-14
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11: REDEEMABLE PREFERRED STOCK (CONTINUED)
During fiscal 2001, 285 shares of the Company's E Preferred plus
accrued dividends on these shares were converted into 231,136 shares of
Common Stock. During fiscal 2000, 297 shares of the Company's E
Preferred plus accrued dividends on these shares were converted into
243,546 shares of Common Stock On January 27, l999, the Company issued
575 shares of non-voting Series F Preferred Stock ("F Preferred") with
a par value of $0.01 per share. On that date, the Company's then
outstanding 5,750 shares of Series D Preferred Stock ("D Preferred")
and accrued dividends thereon of $59 thousand were exchanged for 575
shares of F Preferred with a face amount of $575 thousand, 78,166
shares of the Company's Common Stock and the resetting of the exercise
price of the 5,000 previously issued warrants of the Company, issued in
connection with D Preferred from $2.72 to $1.25. As a result of this
exchange transaction, the Company recorded a one-time incremental
preferred dividend of $81 thousand, representing the excess of the
consideration exchanged over the carrying value of the then outstanding
D Preferred. The F Preferred has a conversion price of $1.25 per share.
The fixed conversion rate is subject to adjustments in certain
circumstances. In addition, each holder of F Preferred, may under
certain circumstances, redeem all or a portion of such shares at the
greater of 125% of the conversion amount ($1,000 per share) or the
product of the conversation rate ($800 per share) and the closing sale
price of the common stock on the date immediately preceding such
redemption. In addition, if the average of the closing bid price of the
common stock for all trading days during a calendar month is less than
$1.875, each holder of F Preferred shares may redeem up to 10% of the
face amount of the F Preferred at 150% of the conversion amount ($1,000
per share).
The F Preferred bears dividends at a rate of 10% per annum payable in
cash, or at the option of the Company, in shares of Common Stock. The F
Preferred is subject to conversion at any time at the option of the
holders, and is subject to mandatory conversion after three years.
During fiscal year 2002, 227 shares of the Company's F Preferred plus
accrued dividends on these shares were redeemed for $0.3 million. As a
result of these transactions, the Company recorded a premium on
redemption of $115 thousand representing the excess of the
consideration paid over the carrying value of the then outstanding F
Preferred. During fiscal year 2001, 116 shares of the Company's F
Preferred plus accrued dividends on these shares were redeemed for $0.2
million.
Note 12: STOCKHOLDERS' EQUITY
SERIES G CONVERTIBLE PREFERRED STOCK
In January 1999, the Company created a non-voting Series G Convertible
Preferred Stock ("G Preferred") with a par value of $0.01 per share.
The G Preferred bears dividends of $50 per share per annum. The G
Preferred is convertible into Common Stock at the average closing price
of the Common Stock during the 10 days immediately preceding
conversion. The G Preferred is subject to mandatory conversion after
three years from the date of issuance. During the fiscal year ended
June 30, 2002, 470 shares of the Company's G Preferred were converted
into 686,232 shares of the Company's common stock. On February 12,
2001, the Company issued 941 shares of G Preferred, and converted 663
shares of G Preferred into 845,663 shares of the Company's Common
Stock. On January 22, 2000, the Company issued 828 shares of G
Preferred. On March 21, 2000, 165 shares of G Preferred were converted
into 26,067 shares of the Company's Common Stock.
WARRANTS
The Company, from time to time, issues warrants to purchase Common
Stock to non-employees for services rendered. Warrants are granted to
purchase the Company's Common Stock with exercise prices set at fair
market value on the date of grant. The terms of the warrants vary
depending on the circumstances, but generally terminate in three to
five years.
F-15
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12: STOCKHOLDERS' EQUITY (CONTINUED)
The Company had outstanding warrants for the purchase of its common
stock as follows:
Number of Exercise price
Warrants Per Share
-------- ----------
Outstanding at June 30, 1999 1,405,685 $1.18-$6.75
Issued 647,460 $1.80-$3.65
Exercised (556,759) $1.80-$4.84
Cancelled (147,460) $1.18-$4.13
---------
Outstanding at June 30, 2000 1,348,926 $1.25-$6.75
Issued 50,000 $0.89
Exercised (8,265) $2.72
Cancelled (258,524) $1.25-$6.75
---------
Outstanding at June 30, 2001 1,132,137 $0.89-$6.30
Issued 160,000 $0.63-$0.74
Exercised -- --
Cancelled (482,137) $1.25 -$6.30
---------
Outstanding at June 30, 2002 810,000 $0.63-$3.65
=======
The warrants expire between 2003 and 2007. Certain of the warrants
include anti-dilution clauses.
Warrants outstanding and exercisable at June 30, 2002, are as follows:
Warrants Outstanding Warrants Exercisable
---------------------------------------- -------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Number Contractual Exercise Number Exercise Average
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---------- -------- ----------- -------------
$0.63 - $1.50 290,000 4.45 $0.99 270,000 $0.96
$2.59 - $3.62 100,000 0.85 $2.91 100,000 $2.91
$3.65 - $6.30 420,000 2.36 $3.65 420,000 $3.65
------- -------
810,000 790,000
======= =======
On August 13, 1999, the Company issued in connection with a strategic
alliance agreement with QVC, 420,000 warrants to purchase Common Stock
with vesting at various dates and with exercise prices subject to
change based on the terms of the agreement.
The Company recorded compensation expense associated with the issuance
of warrants to third parties of $80 thousand, $8 thousand and $80
thousand during fiscal years 2002, 2001 and 2000, respectively.
STOCK BASED COMPENSATION
On April 10, 1986, the Company adopted a Nonqualified Stock Option Plan
whereby options to purchase 250,000 shares of the Company's common
stock may be granted to consultants and Scientific Advisory Board
members.
The Company adopted five Stock Option Plans ("Plans") whereby options
to purchase an aggregate of 8,750,000 shares of the Company's common
stock may be granted to employees, consultants and others who render
services to the Company. The exercise price per share for the options
granted under the Plans may not be less than the fair value of the
Company's Common Stock on the date of grant. The options issuable
pursuant to the Plans expire between 1999 and 2009. Approximately
3,500,000 options remain available for grant under the Plans.
F-16
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12: STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity related to the Company's stock
option plans is as follows:
Number of Exercise Price
Options Per Share
---------- -------------
Outstanding at June 30, 1999 2,953,785 $0.75 - $6.00
Issued 446,500 $2.03 - $7.56
Exercised (398,194) $0.84 - $3.25
Cancelled (352,700) $0.93 - $6.00
---------
Outstanding at June 30, 2000 2,649,391 $0.75 - $7.56
Issued 1,280,889 $0.81 - $2.63
Exercised - -
Cancelled (978,181) $0.75 - $5.00
---------
Outstanding at June 30, 2001 2,952,099 $0.81 - $7.56
Issued 1,230,000 $0.55 - $1.23
Exercised -- --
Cancelled (542,110) $0.69 - $7.56
--------
Outstanding at June 30, 2002 3,639,989 $0.55 - $5.63
=========
Each of these options is entitled to one share of common stock. Stock
options generally vest ratably over five years from the date of grant
and expire within five years from the date of vesting.
Options outstanding and exercisable at June 30, 2002 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- --------------------------- ----------- ---------
$0.55 - $1.19 1,604,589 7.06 $1.00 486,217 $0.98
$1.23 - $1.94 893,000 3.63 $1.74 690,400 $1.80
$2.03 - $3.75 1,039,900 2.75 $2.88 954,600 $2.89
$4.00 - $5.62 102,500 3.17 $4.52 102,500 $4.52
--------- ---------
3,639,989 2,233,717
========= =========
The per share weighted-average fair value of stock options granted
during fiscal 2002, 2001 and 2000 was $0.15, $0.20 and $0.45,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
2002 2001 2000
---- ---- ----
Risk-free interest rate 3.8% 5.2% 5.6%
Expected life-years 2.0 2.5 2.5
Expected volatility 45.6% 45.8% 45.6%
Expected dividend yield -- -- --
F-17
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized in the financial
statements for its employee stock options, which have an exercise price
equal to the fair value of the stock on the date of the grant. Had the
Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net
income (loss) would have been reduced (increased) to the pro forma
amounts indicated below (in thousands):
2002 2001 2000
---- ---- ----
Net (loss) income
As reported $(6,011) $1,065 $6,490
Pro forma (6,394) $ 633 $6,257
Basic (loss) earnings per share
As reported $(0.19) $0.03 $0.21
Pro forma $(0.20) $0.02 $0.20
Diluted (loss) earnings per share
As reported $(0.19) $0.03 $0.20
Pro forma $(0.20) $0.02 $0.19
The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts because the calculation
does not take into consideration pro forma compensation expense related
to grants made prior to 1995.
Note 13: EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended June 30, 2002,
2001 and 2000 are as follows (in thousands, except share and per share
amounts):
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated.
Year ended June 30
2002 2001 2000
---- ---- ----
Basic (loss) earnings per share:
Net (loss) income $(6,011) $1,065 $6,490
Less: Dividends on preferred shares (51) (146) (98)
Premium on redemption of preferred stock (115) (110) --
---------- ---------- -----------
(Loss) income available to common stockholders $(6,177) $809 $6,392
========== ========== ===========
Weighted average shares: 32,621,918 31,781,403 30,741,861
========== ========== ===========
Basic (loss) earnings per share $(0.19) $0.03 $0.21
========== ========== ===========
Diluted (loss) earnings per share:
(Loss) income available to common stockholders $(6,177) $809 $6,392
Add: Dividends and premium on preferred stock -- -- 98
---------- ---------- -----------
(Loss) income available to common stockholders $(6,177) $809 $6,490
========== ========== ===========
Weighted average shares: 32,621,918 31,781,403 30,741,861
Plus incremental shares from assumed conversions:
Preferred stock -- -- 785,004
Stock option plans -- 98,211 1,019,333
---------- ---------- -----------
Adjusted weighted average shares 32,621,918 31,879,614 32,546,198
========== ========== ===========
Diluted (loss) earnings per share $(0.19) $0.03 $0.20
========== ========== ===========
Diluted (loss) earnings per share for the years ended June 30, 2002 and
2001, do not reflect the incremental shares from the assumed conversion
of preferred stock (377,181 and 833,313 shares, respectively) as the
effect of such inclusion would be anti-dilutive.
F-18
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14: RESTRUCTURING AND OTHER CHARGES
The Company recorded $2.4 million for restructuring and other
non-recurring charges, relating to its Nutritional Products segment, in
the second quarter of fiscal 2001. A $1.6 million restructuring charge
was recorded as part of the Company's initiative to reduce costs and to
create a more flexible and efficient organization. Included in the
restructuring charge were $0.7 million of cash termination benefits
associated with the separation of twenty employees. All of the affected
employees left their positions with the Company as of June 30, 2001.
All of the termination benefits were paid. This cash outlay was funded
through cash from operations. Approximately $0.9 million of the
restructuring charge relates to the Company's decision to discontinue
its efforts to launch NO YO, a consumer weight loss product intended
for the retail channel and to consolidate certain of the Company's
facilities. At June 30, 2001, all restructuring charges accrued during
the fiscal year 2001 had been paid.
Other charges of $0.7 million include a non-cash write off of the
carrying value of the website development costs related to
NutritionU.com, the Company's online nutrition education internet
company. The Company believes that since sufficient uncertainty
surrounds the ability of the Company to find strategic partners for
NutritionU.com, there will be no substantive future benefit to be
derived from the website development costs. In addition, other charges
include $0.1 million for the write off of the remaining carrying value
of a license fee for one of its products.
Note 15: OTHER INCOME
During the fiscal year 2002, the Company recorded as other income $1.8
million from the settlement of patent infringement claims related to
chromium picolinate and a sale of assets. At June 30, 2002, cash
proceeds of $0.6 million from the settlements remain to be collected.
Note 16: SEGMENT REPORTING
Effective in fiscal 1999, the Company adopted FASB Statement No. 131
"Disclosures about Segments of an Enterprise and Related Information"
which established revised standards for reporting information about
operating segments. Pursuant to Statement No. 131, the Company's
reporting segments are nutritional products and pharmaceutical
products.
A summary of business data for the Company's reportable segments for
the fiscal years 2002, 2001, and 2000 follows. Information by business
segment (in thousands):
2002 2001 2000
---- ---- ----
REVENUES
Nutritional Products $14,237 $21,127 $32,224
Pharmaceutical Products 431 2,125 590
------- ------- -------
$14,668 $23,252 $32,814
======= ======= =======
OPERATING (LOSS) INCOME
Nutritional Products $(8,046) $(2,876) $6,978
Pharmaceutical Products 257 1,921 63
------- ------- -------
$(7,789) $(955) $7,041
======= ======= =======
DEPRECIATION AND AMORTIZATION
Nutritional Products $2,497 $3,216 $3,918
Pharmaceutical Products 122 143 151
------- ------- -------
$2,619 $3,359 $4,069
======= ======= =======
SEGMENT ASSETS
Nutritional Products $27,186 $37,698
Pharmaceutical Products 914 1,189
------- -------
$28,100 $38,887
CAPITAL EXPENDITURES
Nutritional Products $3,044 $5,013 $4,740
Pharmaceutical Products -- -- --
------- ------- -------
-- -- --
$3,044 $5,013 $4,740
======= ======= =======
F-19
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16: SEGMENT REPORTING (CONTINUED)
Information by geographic segment (in thousands):
Geographic information about the Company's revenues, which is based on
the location of the buying organization, is presented below:
2002 2001 2000
---- ---- ----
REVENUES
United States $13,950 $21,526 $31,533
United Kingdom 718 1,726 1,281
------- ------- -------
$14,668 $23,252 $32,814
======= ======= =======
PROPERTY AND EQUIPMENT, NET
United States $654 $633
United Kingdom -- --
------- -------
$654 $633
======= =======
One nutritional product segment customer accounted for approximately
28%, 29% and 19% of the segment revenue in fiscal 2002, 2001 and 2000,
respectively
Presented below is a reconciliation of total business segment operating
income to consolidated income before income taxes:
2002 2001 2000
---- ---- ----
Total segment operating (loss) income $(7,789) $(955) $7,041
Other, net 1,778 2,355 (37)
------- ------ ------
(Loss) Income before income taxes $(6,011) $1,400 $7,004
======= ====== ======
Note 17 GOODWILL
The Company adopted SFAS No. 142 effective July 1, 2001. Under SFAS No.
142, goodwill is no longer amortized but reviewed for impairment
annually, or more frequently if certain indicators arise. The Company
is required to complete the initial step of a transitional impairment
test within six months of adoption of SFAS No. 142 and to complete the
final step of the transitional impairment test by the end of the fiscal
year. The initial step was completed in the first quarter of fiscal
2002. In addition, the Company assesses the impairment of identifiable
intangible assets and goodwill whenever events or changes in
circumstances indicate that the carrying value of the relevant assets
may not be recoverable. Management's judgment regarding the existence
of impairment is based on factors such as significant changes in the
manner or the use of acquired assets or the Company's overall business
strategy; significant negative industry or economic trends; significant
declines in the Company's stock price for a sustained period and the
Company's market capitalization relative to book value. Upon adoption,
Goodwill in the amount of $4.1 million included in patents and
trademarks since acquisition (although accounted for separately by the
Company and included therein because of its estimated economic life)
has been reclassified in the accompanying balance sheets in accordance
with the requirements of SFAS No. 142. Due to declining market
conditions, as well as a change in business strategy, it was determined
that a $7.1 million impairment charge was warranted. The Company used a
discounted cash flow analysis for purposes of estimating the fair value
of its reporting unit. Had the Company been accounting for its goodwill
under SFAS No. 142 for all periods presented, the Company's net income
and earnings per share would have been as follows:
F-20
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 GOODWILL (CONTINUED)
Year-ended
June 30,
2002 2001 2000
---- ---- ----
Reported net (loss) income: $(6,011) $1,065 $6,490
Add back goodwill amortization, net of tax --- 475 250
------- ------ ------
Adjusted net income (loss) $(6,011) $1,540 $6,740
======= ====== ======
Basic (loss) earnings per share:
Reported net (loss) income $(0.19) $0.03 $0.21
Goodwill amortization, net of tax --- 0.02 0.01
------- ------ ------
Adjusted net (loss) income $(0.19) $0.05 $0.22
======= ====== ======
Diluted earnings per share:
Reported net (loss) income $(0.19) $0.03 $0.20
Goodwill amortization, net of tax 0.02 0.01
------- ------ ------
--
Adjusted net (loss) income $(0.19) $0.05 $0.21
======= ====== ======
Note 18: PENSION PLAN
Eligible employees of the Company are entitled to participate in the
Burns Philp Inc. Retirement Plan for Non-Bargaining Union Employees
(the "Pension Plan"), a defined benefit pension plan, as long as Burn
Philp maintains the Pension Plan and owns at least 20% of the Company's
outstanding Common Stock. Burns Philp currently holds approximately 24%
of the Company's outstanding Common Stock.
During fiscal 2002, 2001, and 2000, the Company made contributions to
the Pension Plan of $106 thousand, $100 thousand and $104 thousand,
respectively.
Note 19: INCOME TAXES
Provisions for income taxes for the years ended June 30, 2002, 2001 and
2000 consist of the following (in thousands):
2002 2001 2000
---- ---- ----
Current $725 $633 $523
Deferred (725) (298) ---
---- ---- -----
$--- $335 $523
==== ==== =====
Income tax expense attributed to pre-tax income differed from the
amounts computed by applying the US federal statutory tax rate to
pre-tax income as a result of the following (in thousands):
2002 2001 2000
---- ---- ----
Income taxes (benefit) at U.S. statutory rate $(2,044) $476 $2,381
Increase/reduction in income taxes resulting from:
Change in valuation allowance 1,607 (263) --
Utilization of operating loss carryforward -- -- (2,316)
Goodwill book basis in excess of tax 263
State taxes, net of federal benefit (268) 26 420
Other items 442 96 38
------- ----- -----
$ --- $ 335 $ 523
======= ===== =====
F-21
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19: INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred
taxes and deferred tax assets and deferred tax liabilities at June 30,
2002 and 2001 are presented below (in thousands):
2002 2001
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 515 $597
Accrued expenses 234 289
Allowance for doubtful accounts 8 18
Inventory reserve -- 12
Intangible assets, principally due to amounts
capitalized for financial reporting purposes 1,370 742
Other 118 --
------- -------
Total gross deferred tax assets 2,245 1,658
Less valuation allowance (1,607) (1,360)
------- -------
Net deferred tax assets $638 $298
======= =======
Deferred tax liabilities:
Deferred tax assets are included in prepaid expense and other current
assets
At June 30, 2002, the Company has available, for state income tax
purposes, net operating loss carry forwards of approximately $10.0
million expiring in varying amounts through 2015. Ultimate utilization
of such net operating losses may be significantly curtailed if a
significant change in ownership of the Company were to occur. A
valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
Note 20: COMMITMENTS AND CONTINGENT LIABILITIES
In October 1995, the Company entered into an exclusive license
agreement whereby the Company received a license to sell a patented
salt alternative in the United States. During the term of the License,
the Company agreed to pay a royalty of 4.5% of net sales of the salt
alternative. The Company may terminate the License upon 60 days prior
written notice. The Company is required to make royalty payments
quarterly through 2007. In connection with this agreement, the Company
recorded royalty expense of $0.2 million for the fiscal year ended June
30, 2002, and $0.5 million for the fiscal years ended June 30, 2001 and
2000. In addition, the Company has an exclusive license from the USDA
for the duration of a patent that covered chromium picolinate and its
uses. In connection with this agreement, the Company recorded royalty
expense of $46 thousand; $0.7 million for the fiscal years ended June
30, 2001, 2000, respectively. These royalty amounts are included in
selling, general and administrative expenses in the statement of
operations.
The Company has entered into various research and license agreements
with certain universities to supplement the Company's research
activities and to obtain for the Company rights to certain technology.
The agreements generally require the Company to fund the research and
to pay royalties based upon a percentage of product sales.
The Company leases certain office space in the United States. The lease
expires in the year 2006. Payments under this lease were approximately
$0.5 million in fiscal 2002, $0.6 million in fiscal 2001, and $0.7
million in fiscal 2000. Future non-cancelable minimum payments under
this lease are as follows (in thousands):
F-22
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
YEAR AMOUNT
---- ------
2003 370
2004 370
2005 370
2006 261
-----
Total $1,371
======
Note 21: SUPPLEMENTAL CASH FLOW INFORMATION
2002 2001 2000
---- ---- ----
Supplemental disclosure of cash flow information (in thousands)
Cash paid for interest $ 62 $243 $390
Cash paid for income taxes 504 146 382
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property & equipment -- 152 181
Obligation for N21 contingent payment 369 1,938 3,143
Obligation for Lite Bites contingent payment 589 970 441
Issuance of common stock for Series E conversion -- 237 304
Issuance of common stock for Series G conversion -- 663 121
Issuance of Series G preferred stock for Optimum
Lifestyle, Inc. contingent payment -- 941 828
Note 22: RISKS AND UNCERTAINTIES
The Company buys certain of its inventories from single suppliers.
Management believes that other suppliers could provide similar products
at comparable terms. As a result, management believes a change in
suppliers would not disrupt on-going operations and would not affect
operating results adversely.
Note 23: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
In Thousands, Except Per Share Data Quarter Quarter Quarter Quarter (a)
----------------------------------- ------- ------- ------- -----------
FISCAL YEAR 2002
----------------
Revenues $3,949 $2,912 $3,987 $3,820
Gross Profit 2,709 2,041 2,713 2,861
Income (loss) before Income Taxes 1,996 (627) (297) (7,083)
Net Income (loss) 1,277 (375) (197) (6,716)
Net Income (loss) per common share:
Basic $0.04 $(0.02) $(0.01) $(0.20)
Diluted $0.04 $(0.02) $(0.01) $(0.20)
FISCAL YEAR 2001
----------------
Revenues $ 6,903 $ 4,610 $ 6,409 $ 5,330
Gross Profit 5,189 3,483 4,496 3,868
Income (loss) before Income Taxes 9 (2,393) 2,820 964
Net Income (loss) 6 (1,914) 2,258 715
Net (loss) Income per common share:
Basic $(0.0) $(0.06) $0.07 $0.02
Diluted $(0.0) $(0.06) $0.07 $0.02
(a) The fourth quarter of fiscal year 2002 includes a $7.1 million non-cash
charge for impairment of goodwill.
F-23
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24: SUBSEQUENT EVENTS
A. ADOPTION OF SHAREHOLDERS RIGHTS PLAN
The Company adopted a Shareholder Rights Plan on September 12, 2002.
Under this plan, the Company will distribute, as a dividend, one
preferred share purchase right for each share of Common Stock of the
Company held by stockholders of record as of the close of business on
September 25, 2002. The Rights Plan is designed to deter coercive
takeover tactics, including the accumulation of shares in the open
market or through private transactions, and to prevent an acquiror from
gaining control of the Company without offering a fair price to all of
the Company's stockholders. The Rights will expire on September 11,
2012.
Each Right initially will entitle stockholders to buy one
one-thousandth of a share of newly created Series H Participating
Preferred Stock of the Company for $3.00. Each one one-thousandth of a
share of the Preferred Stock is designed to be the functional
equivalent of one share of Common Stock. The Rights will be exercisable
only if a person or group acquires beneficial ownership of 15% or more
of the Company's Common Stock (30% in the case of a person or group
that is currently a 15% holder) or commences a tender or exchange offer
upon consummation of which such person or group would beneficially own
15% or more the Company's Common Stock.
If any person or group (an "Acquiring Person") becomes the beneficial
owner of 15% or more of the Company's Common Stock (30% in the case of
a person that is currently a 15% holder), then (1) the rights become
exercisable for Common Stock instead of Preferred Stock, (2) the rights
held by the Acquiring Person and certain affiliated parties become
void, and (3) the rights held by others are converted into the right to
acquire, at the purchase price specified in the Right, shares of Common
Stock of the Company having a value equal to twice such purchase price.
The Company will generally be entitled to redeem the Rights, at $.001
per right, until 10 days (subject to extension) following a public
announcement that an Acquiring Person has acquired a 15% position.
B. EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a three-year employment agreement with
Gail Montgomery as President and Chief Executive Officer, effective as
of September 1, 2002. The agreement provides for an annual salary of
$275,000, $300,000, and $325,000 in the successive years under the
agreement, and for performance bonuses based on achieving defined
revenue targets. Ms. Montgomery is also entitled to additional payments
equal to one year's salary plus an additional month of salary for
defined years of service, if her employment is terminated without cause
before the agreement expires, or if the Company fails to offer to enter
into a new one-year agreement upon expiration. If Ms. Montgomery's
employment is terminated or she resigns within six months after a
change of control (as defined) the Company will pay to her 2.99 times
her annual salary and previous year's bonus plus certain gross-ups, but
these payments will be reduced to the extent necessary to prevent the
application of Section 280G of the Internal Revenue Code. The Company
in July 2002 granted to Ms. Montgomery options to purchase an aggregate
of 1,175,000 shares of common stock at $0.39 per share, of which
options to purchase 325,000 shares were granted subject to later
approval by shareholders. If prior to September 10, 2003 the
shareholders do not approve the grant to her of these 325,000 options,
these options will convert to a stock appreciation right ("SAR") on the
same general terms as would have applied to these options, except that
upon exercise the Company will pay to her the SAR's in-the-money value
in cash or common stock.
The Company has entered into a three-year employment agreement with
Andrew Wertheim as Chief Operating Officer, effective as of August 5,
2002. The agreement provides for an annual salary of $225,000,
$250,000, and $275,000 in the successive years under the agreement, and
for performance bonuses based on achieving defined revenue targets. Mr.
Wertheim is also entitled to additional payments equal to one year's
salary, if his employment is terminated without cause before the
agreement expires. If Mr. Wertheim's employment is terminated or he
resigns within six months after a change of control (as defined) the
Company will pay to him 2.99 times his annual salary and previous
year's bonus plus certain gross-ups, but these payments will be reduced
to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code. The Company in August 2002 granted to Mr.
Wertheim options to purchase an aggregate 675,000 shares of common
stock at $0.36 per share,
The Company entered into a four-year agreement with Benjamin Sporn
effective September 1, 2002 which provides for his services as Senior
Vice President, General Counsel, and Secretary as an employee during
the first two years of
F-24
the term and as General Counsel as a consultant during the balance of
the term. Mr. Sporn's salary and fees will be $207,500, $225,000,
$150,000 and $100,000 in successive years under the agreement, plus
performance bonuses based on achieving defined revenue targets. Mr.
Sporn is also entitled to additional payments equal to two years'
salary if his employment is terminated without cause before the
agreement expires. If Mr. Sporn's employment is terminated or he
resigns within six months after a change of control (as defined) the
Company will pay to him 2.99 times his annual salary and previous
year's bonus plus certain gross-ups, but these payments will be reduced
to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code. The Company in July 2002 granted to Mr.
Sporn options to purchase an aggregate of 225,000 shares of common
stock at $0.39 per share.
C. STOCK OPTION PLAN
The Company adopted a 2002 Inducement Stock Option Plan (the
"Inducement Plan"). The Inducement Plan provides for the grant of
options ("Options") to purchase shares of the Company's common stock
("Common Stock") to induce individuals to become employed by the
Company. The aggregate number of shares of Common Stock which may
become subject to Options, shall not exceed 2,500,000.
F-25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Nutrition 21, Inc.:
Under date of September 15, 2000, we reported on the consolidated statements of
operations, stockholder's equity, and cash flows of Nutrition 21, Inc. and
subsidiaries, formerly known as AMBI Inc., for the year ended June 30, 2000,
which are included in the annual report on Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule for the year ended June
30, 2000, which report appears in the June 30, 2002 annual report on Form 10-K.
The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
/s/ KPMG LLP
Stamford, CT
September 15, 2000
SCHEDULE II
NUTRITION 21, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance Charged to Charged to
Beginning of Cost and Other Balance End
Accounts Period Expense Accounts Deductions of Period
-------- ------ ------- -------- ---------- ---------
($ in thousands)
Year ended June 30, 2002
Allowance for Doubtful Accounts $ 45 -- -- $ (26) $ 19
Deferred Tax Valuation Allowance $1,360 -- 247 -- $1,607
Year ended June 30, 2001
Allowance for Doubtful Accounts $ 134 1 -- $ (90) $ 45
Deferred Tax Valuation Allowance $1,623 -- -- $ (263) $1,360
Year ended June 30, 2000
Allowance for Doubtful Accounts $ 242 -- -- $ (108) $ 134
Deferred Tax Valuation Allowance $4,638 -- -- $(3,015) $1,623