UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2004 Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(f/k/a Integrated Health Technologies, Inc.)
(Exact name of small business registrant in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (888) 319-6962
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.002 par value per share American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes |X| No | |
Registrant's revenues for the fiscal year ended June 30, 2004 were $25,282,790.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the trading price of the Registrant's Common Stock on August
27, 2004 was $20,808,898.
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at August 27, 2004
Common Stock, $.002 par value 12,505,990 Shares
DOCUMENTS INCORPORATED BY REFERENCE
The information required by part III will be incorporated by reference from
certain portions of a definitive Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-KSB ANNUAL REPORT
INDEX
Part I Page
Item 1. Description of Business 1
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 9
Item 6. Management's Discussion and Analysis or Plan of Operation 11
Item 7. Financial Statements 17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 17
Item 8A. Controls and Procedures 17
Item 8B. Other Information 19
Part III
Item 9. Directors and Executive Officers of the Registrant 20
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 20
Item 12. Certain Relationships and Related Transactions 20
Item 13. Exhibits, List and Reports on Form 8-K 20
Item 14. Principal Accountant Fees and Services 22
Signatures
PART I
Disclosure Regarding Forward-Looking Statements
All statements other than statements of historical fact, in this Form 10-KSB,
including without limitation, the statements under "Management's Discussion and
Analysis of Plan of Operation" and "Description of Business" are, or may be
deemed to be, forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of Integrated BioPharma, Inc. or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors including, among others, changes in general economic
and business conditions; loss of market share through competition; introduction
of competing products by other companies; the timing of regulatory approval and
the introduction of new products by Integrated BioPharma, Inc.; changes in
industry capacity; pressure on prices from competition or from purchasers of
Integrated BioPharma, Inc.'s products; regulatory changes in the pharmaceutical
manufacturing industry and nutraceutical industry; regulatory obstacles to the
introduction of new technologies or products that are important to Integrated
BioPharma, Inc.; availability of qualified personnel; the loss of any
significant customers or suppliers; and other factors both referenced and not
referenced in this Report. When used in this Report, the words "estimate",
"project", "anticipate", "except", "intend", "believe" and similar expressions
are intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.
Item 1. Description of Business
General
Integrated BioPharma, Inc., a Delaware corporation (together with its
subsidiaries, the "Company") is engaged primarily in manufacturing, marketing
and sales of vitamins, nutritional supplements and herbal products, including
vitamins sold as single entity supplements, in multi-vitamin combinations and in
varying potency levels and in different packaging sizes. The Company was
previously known as Integrated Health Technologies, Inc. and, prior to that, as
Chem International, Inc.
The Company's subsidiary, Manhattan Drug Company, Inc. ("Manhattan Drug"),
manufactures the vitamins and nutritional supplements for sale to distributors,
multilevel marketers and specialized health-care providers. The Company also
manufactures such products for sale under its own private brand, "Vitamin
Factory", through mail order. On August 31, 2000, the Company began the
distribution and sale of fine chemicals through its subsidiary IHT Health
Products, Inc.
On February 21, 2003, the Company completed a merger with NuCycle Acquisition
Corp. (together with its wholly-owned subsidiary NuCycle Therapy, Inc.,
"NuCycle") pursuant to which the Company acquired NuCycle in exchange for the
shareholders of NuCycle receiving from the Company 368,833 shares of its common
stock and 25% of the after-tax profits of NuCycle until the shareholders of
NuCycle have received, in the aggregate, an additional $5,000,000 commencing
with the first fiscal quarter following the date of the merger. As of June 30,
2004 the likelihood of such additional payments was not probable and
accordingly, no such amount was recorded or accrued. NuCycle is engaged in the
development and sale of nutritional formulations based on plant-derived minerals
through patented hyperaccumulation technology. The NuCycle transaction also
allows the Company to enter the field of genetically engineered human
therapeutics through NuCycle's expertise and a grant from the National Cancer
Institute.
On July 22, 2003, the Company acquired 97% of the shares of common stock of
Paxis Pharmaceuticals, Inc. ("Paxis"). Paxis manufactures and distributes
1
Paclitaxel, which is the primary chemotherapeutic agent in the treatment of
breast cancer, at its Boulder, Colorado manufacturing facility. Paxis acquired
from Hauser Inc. ("Hauser") its cGMP-(current good manufacturing practices)
compliant Paclitaxel production facilities, processing equipment, and
intellectual assets. Paxis also purchased intellectual property (the
"Technology") from Hauser. On October 8, 2003, the Company acquired the
remaining three (3%) percent of Paxis in exchange for 66,666 shares of its
common stock valued at $542,728. The stock was valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after.
Paxis has completed setting up its manufacturing facilities and operations and
has built up a raw material inventory of approximately $2,600,000 to support
manufacturing. Paxis has not had any revenues to date. Additional capital will
be needed by Paxis to begin selling bulk Paclitaxel. Paxis is subject to various
risks associated with a start-up operation, including, among others, setting up
and operating manufacturing facilities, complying with regulatory requirements
for manufacturing pharmaceutical products, manufacturing cGMP API Paclitaxel,
marketing and selling the cGMP API Paclitaxel to customers, and operating
profitably. The Company can give no assurance that Paxis can be operated
profitably.
Paxis has entered into a joint venture as of July 16, 2003 with Chatham Biotec,
Ltd. ("Chatham"), a Canadian company which harvests and dries biomass, to form a
Canadian-based joint venture to produce extract and intermediate precursor
Paclitaxel from Canadian Taxus biomass. Chatham supplies the Canadian biomass
and the joint venture processes it, using Paxis' extraction expertise in a
facility currently controlled by the joint venture. The joint venture supplies
Paxis' requirements for extract at cost, from which Paxis produces its
Paclitaxel and related products. The joint venture may sell extract and
intermediate products to third parties. The Company can give no assurance that
the joint venture can be operated successfully.
On October 22, 2003, the Company completed the acquisition of various assets
related to the Naturally Aloe(TM), Naturally Noni(TM) and Avera Sport(TM)
product lines from Aloe Commodities International, Inc. ("Aloe"). The assets
included trademarks, copyrights, art work, formula for the products, labels,
customer lists, goodwill, inventories and books and records. Pursuant to the
terms of a purchase agreement dated October 22, 2003 by and between the Company
and Aloe, the purchase price for the Transferred Assets was $2,597,880, with
$872,470 paid at closing and $1,725,410 paid in 203,085 shares of the Company's
common stock valued on the basis of the average closing price as reported on the
American Stock Exchange for the five (5) trading days immediately preceding the
closing date and five (5) trading days after. Such shares shall be held in
escrow for a period of one (1) year from the closing date and released pursuant
to the terms of and Escrow Agreement between and among the Company, Aloe and
Vial, Hamilton, Koch & Knox, L.L.P.
Listing of Common Stock on American Stock Exchange
On April 16, 2003, the common stock of the Company began trading on the American
Stock Exchange under the trading symbol, "INB".
Offering of Series B Redeemable Convertible Preferred Stock
On April 20, 2004, in connection with its private offering of its Series B
Convertible Preferred Stock, par value $0.002 per share (the "Series B"), the
Company issued 750 shares of the Series B, at a purchase price of $10,000 per
share of Series B, and warrants for 375,000 shares of its common stock with an
exercise price of $14.00 per share. The Series B are convertible at the option
2
of each Investor into shares of common stock at a conversion price of $10.00 per
share, subject to anti-dilution and other customary adjustments. To date, 50
shares of Series B have been converted into common stock. The Series B are
redeemable by the Company on the third anniversary of the issuance. The Company
also issued Additional Investment Rights to the Investors, entitling them over
the next 18 months to purchase an aggregate of 375 additional Series B Preferred
Shares and Warrants to purchase an additional 187,500 shares of common stock.
Offering of Common Stock and Warrant
On May 3, 2004, the Company completed a private placement of securities in
which the Company sold 500,000 shares of common stock and a warrant to purchase
50,000 shares of common stock with an exercise price of $14 for a purchase price
of $5,000,000.
Development and Supply Agreement
On March 13, 1998, the Company signed a development and supply agreement with
Herbalife International of America, Inc. ("Herbalife") whereby the Company will
develop, manufacture and supply certain nutritional products to Herbalife which,
agreement was renewed through December 31, 2006. The agreement provides that
Herbalife is required to purchase a minimum quantity of Supplied Products each
year of $18,000,000 for the term of the agreement. If Herbalife purchases the
minimum amount, then Herbalife will be entitled to certain rebates of an amount
not exceeding $300,000 per year. For the fiscal year ended June 30, 2004 there
were no rebates due.
Risk of Reduction of Significant Revenues from Major Customer
The Company derives a significant portion of its sales from Herbalife. Sales to
Herbalife expressed as a percentage of the Company's total sales, were
approximately 58% and 65%, respectively, for the fiscal years ended June 30,
2004 and 2003. The loss of this customer would have a material adverse effect on
the Company's operations.
Dependence on Key Personnel
The Company is highly dependent on the experience of its management in the
continuing development of its manufacturing and retail operations. The loss of
the services of certain individuals, particularly E. Gerald Kay, Chairman of the
Board, President and Director of the Company, would have a material adverse
effect on the Company's business. The Company has obtained key-man life
insurance in the amount of $1,000,000 on the life of Mr. Kay, with the Company
as the named beneficiary.
Raw Materials
The principal raw materials used in the manufacturing process are natural and
synthetic vitamins, minerals, herbs, and related nutritional supplements,
gelatin capsules and coating materials and the necessary components for
packaging the finished products. The raw materials are available from numerous
sources within the United States. The gelatin capsules and coating materials and
packaging materials are similarly widely available. Raw materials are generally
purchased by the Company without long-term commitments, on a purchase order
basis. The Company's principal suppliers are Chatham Biotec, Ltd, Roche Vitamins
Inc., and Triarco Industries, Inc.
Botanical materials derived from the Canadian yew tree, or Taxus canadensis, are
used to produce Paclitaxel. Canadian yew trees are in limited supply. Paxis has
entered into a joint venture with Chatham Biotec, Ltd. to produce extract and
intermediate precursor Paclitaxel from Canadian yew trees. The Company can give
no assurance that the joint venture will be successful in producing such
Paclitaxel extracts or intermediates, or that the Company can locate alternate
sources of yew trees.
3
Seasonality
The Company's results of operations are not significantly affected by seasonal
factors.
Intellectual Property
The Company is the registered owner of a patent granted for a method of
producing nutritional formulations based on plant-derived minerals. The Company
also has five patent applications pending before the USPTO for methods and
processes relating to nutritional supplements containing methylselenocysteine,
production of pharmaceutically active proteins in sprouted seedlings, a system
for transient express of genes in plants, improved plant transformation and
floral transformation. The Company can give no assurance that it will be granted
such patents.
Government Regulations
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by a number of federal
agencies, including the Food and Drug Administration (the "FDA"), the Federal
Trade Commission (the "FTC"), the United States Postal Service, the Consumer
Product Safety Commission and the United States Department of Agriculture. The
FDA is primarily responsible for the regulation of the manufacturing, labeling
and sale of the Company's products. The Company's activities are also regulated
by various state and local agencies in which the Company's products are sold.
The operation of the Company's vitamin manufacturing facility is subject to
regulation by the FDA as a food manufacturing facility. In addition, the United
States Postal Service and the FTC regulate advertising claims with respect to
the Company's products sold by solicitation through the mail.
The Dietary Supplement Health and Education Act of 1994 (the "Dietary Supplement
Act") was enacted on October 25, 1994. The Dietary Supplement Act amends the
Federal Food, Drug and Cosmetic Act by defining dietary supplements, which
include vitamins, minerals, nutritional supplements and herbs, and by providing
a regulatory framework to ensure safe, quality dietary supplements and the
dissemination of accurate information about such products. Dietary supplements
are regulated as foods under the Dietary Supplement Act and the FDA is generally
prohibited from regulating the active ingredients in dietary supplements as food
additives, or as drugs unless product claims trigger drug status.
The Dietary Supplement Act provides for specific nutritional labeling
requirements for dietary supplements effective January 1, 1997. The Dietary
Supplement Act permits substantiated, truthful and non-misleading statements of
nutritional support to be made in labeling, such as statements describing
general well being from consumption of a dietary ingredient or the role of a
nutrient or dietary ingredient in affecting or maintaining structure or function
of the body. In addition, the Dietary Supplement Act also authorizes the FDA to
promulgate Current Good Manufacturing Practices ("cGMP") specific to the
manufacture of dietary supplements, to be modeled after food cGMP. The Company
currently manufactures its dietary supplement products pursuant to food cGMP.
The Company believes that it is currently in compliance with all applicable
government regulations. The FDA will be proposing and promulgating regulations
to implement the Dietary Supplement Act. The Company cannot determine what
effect such regulations, when promulgated, will have on its business in the
future or what cost it will add to manufacturing the product. Such regulations
could, among other things, require expanded or different labeling, the recall,
reformulation or discontinuance of certain products, additional record keeping
and expanded documentation of the properties of certain products and scientific
substantiation regarding ingredients, product claims and safety of efficacy.
4
Competition
The business of manufacturing, distributing and marketing vitamins and
nutritional supplements is highly competitive. Many of the Company's competitors
are substantially larger and have greater financial resources with which to
manufacture and market their products. In particular, the retail segment is
highly competitive. Many direct marketers not only focus on selling their own
branded products, but offer national brands at discounts as well. Many
competitors have established brand names recognizable to consumers. In addition,
major pharmaceutical companies offer nationally advertised multivitamin
products.
Many of the Company's competitors in the retailing segment have the financial
resources to advertise freely to promote sales and to produce sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail purchasers and offer participation in frequent buyers programs. Some
retail competitors also manufacture their own products whereby they have the
ability and financial incentive to sell their own product.
The Company intends to compete by stressing the quality of its manufacturing
product, providing prompt service, competitive pricing of products in its
marketing segment and by focusing on niche products in the international retail
markets.
Product Liability Insurance
The Company, like other manufacturers, wholesalers and distributors of vitamin
and nutritional supplement products, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its products result
in injury. Accordingly, the Company currently maintains product liability
insurance policies which provide a total of $5 million of coverage per
occurrence and $5 million of coverage in the aggregate. There can be no
assurance that the Company's current level of product liability insurance will
continue to be available or, if available, will be adequate to cover potential
liabilities.
Research and Development Activities
The Company currently conducts research and development activities at its
manufacturing facility and at universities and privately owned research
facilities. Its research and development activities are primarily involved in
the research, development and commercialization of nutraceuticals, or naturally
derived substances with nutritional or pharmacological properties. In the fiscal
years ended June 30, 2004, and 2003, the Company spent approximately $37,700 and
$50,000 respectively on research and development activities.
Environmental Compliance
The Company is subject to regulation under Federal, state and local
environmental laws.
During the fiscal year ended June 30, 2003, the Company engaged an environmental
consultant to assist in obtaining a no further action letter from the New Jersey
Department of Environmental Protection ("NJDEP") with respect to its facility
located at 201 Route 22, Hillside, New Jersey. The facility is used to blend
vitamins and nutritional supplements for human consumption. The site contained
two underground heating oil tanks ("USTs") which were abandoned and closed prior
to 1986. The consultant has investigated the site and on February 4, 2004 filed
a Preliminary Assessment/Site Investigation (PA/ST) Report. On July 29, 2004 the
State of New Jersey's Department of Environmental Protection made the
determination that no further action is necessary for the remediation of the
site, and issued a NFA/CNS letter. As of June 30, 2004 the Company has spent
approximately $28,000 in remediation costs.
While the Company believes that it is in material compliance with applicable
environmental laws, continued compliance may require substantial capital
expenditures.
5
Employees
As of June 30, 2004, the Company had approximately 120 full time employees of
whom 54 belong to the local unit of the Teamsters Union and are covered by a
collective bargaining agreement which expires August 31, 2006. Approximately 35
employees are administrative and professional personnel, 18 are laboratory
personnel and 67 employees are production and shipping personnel. Among the
professional personnel, 2 employees are engaged in research and development. The
Company considers its relations with its employees to be good.
Subsidiaries
The Company has the following subsidiaries which are currently active:
(i) Manhattan Drug Company, Inc., a New York corporation; (ii) IHT Health
Products, Inc., a Delaware corporation; (iii) AgroLabs, Inc., a New Jersey
corporation (f/k/a Ideas, Inc.); (iv) IHT Properties Corp., a Delaware
corporation; (v) NuCycle Therapy, Inc., a New Jersey corporation; (vii) Vitamin
Factory, Inc., a Delaware corporation and (viii) Paxis Pharmaceuticals, Inc., a
Delaware corporation.
Available Information
The Company files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). These
filings are available to the public via the Internet at the SEC's website
located at http://www.sec.gov. You may also read and copy any document the
Company files with the SEC at the SEC's public reference room located at 450
Fifth Street, N.W., Washington, D.C. 20549. For more information, please call
the SEC at 1-800-SEC-0330.
The Company's website is located at www.ibiopharma.com. You may request a copy
of the Company's filings with the SEC (excluding exhibits) at no cost by writing
or telephoning us at the following address or telephone number:
Integrated BioPharma, Inc.
225 Long Avenue
Hillside, New Jersey 07205
Tel: 888-319-6962
Attn: Investor Relations
6
Item 2. Description of Property
On January 10, 1997, the Company entered into a lease agreement for
approximately 75,000 square feet of factory, warehouse and office facilities in
Hillside, New Jersey. The facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company, which is 90% owned by the Company's
Chairman of the Board, and principal stockholder and certain family members and
10% owned by the Company's Chief Financial Officer. The lease expires May 31,
2015 and provides for a base annual rental of $323,559 plus increases in real
estate taxes and building expenses. At its option, the Company has the right to
renew the lease for an additional five year period.
The Company owns a 40,000 square foot manufacturing facility in Hillside, New
Jersey. The space is utilized for Manhattan Drug's tablet manufacturing
operations.
Paxis presently leases a manufacturing facility in Boulder, Colorado from Yew
Tree Investments Ltd., LLP. The facility is comprised of 22,483 square feet
located at 5555 Airport Blvd., Suite 200, Boulder, Colorado 80301.
On March 6, 2004 the Company entered into a two year lease agreement for
approximately 10,000 square feet of warehouse space in Grapevine, Texas. In June
2004 the Company modified the lease to increase the warehouse space to 16,000
square feet. The space is used for the storage of inventory for the Company's
AgroLabs, Inc. subsidiary.
In May 2004 the Company leased approximately 350 square feet of office space in
Kennett Square, Pennsylvania for a one year period. The space is used to house
the Company's NuCycle Therapy, Inc. offices.
Item 3. Legal Proceedings
NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay,
Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and
Integrated BioPharma, Inc., pending in the United States District Court for the
Southern District of New York. Plaintiffs NatEx Georgia LLC and Vasili
Patarkalishvili commenced this action on July 19, 2004, alleging claims for
breach of contact, fraud and breach of the implied duty of good faith and fair
dealing arising out of an alleged failure by Paxis to provide information
necessary for NatEx to perform under the parties' agreements by which NatEx had
agreed to supply Paclitaxel extract. The complaint seeks damages of more than $5
million. On August 18, 2004, the Company removed this action to federal court.
The plaintiffs have moved to have the matter remanded to state court, and the
Company plans to oppose this motion. The Company plans to file a motion to
dismiss and to defend vigorously the claims in this lawsuit.
Wolfe Axelrod Weinberger Associates, LLC v. Integrated BioPharma, Inc., pending
before the American Arbitration Association. On July 2, 2004, Wolfe Axelrod
Weinberger Associates, LLC, a company which had provided investor relations
services to the Company in 2000 and 2001, served a Demand for Arbitration and a
Statement of Claim alleging that the Company had failed to include Company
securities held by Wolfe in the Company's Registration Statement filed with the
United States Securities and Exchange Commission in May 2004 and that the
Company was required to register such shares based on an agreement between the
parties. The complaint seeks the registration of the securities and damages of
more than $1.2 million. The Company is preparing a response to the allegations
and intends to defend vigorously the claims in this arbitration.
7
Body Systems Technology, Inc. v. Dynamic Health Laboratories, Inc.,
Discount Natural Foods, Inc., Aloe Commodities International, Inc., Integrated
BioPharma, Inc., and Vitacost.Com, Inc.; pending in the United States
District Court for the Middle District of Florida, Civil Action No.
6:04-CV-474-Orl-22 (JGG). Plaintiff commenced this action on or about April
26, 2004, alleging trademark infringement of its "Polynesian Noni Juice"
trademark by the Company's use of its "Naturally Noni" trademark. The Company
has moved to dismiss the complaint based on plaintiff's failure to plead
sufficient facts to establish a likelihood of confusion with the alleged
trademark and secondary meaning of the alleged trademark. The motion to dismiss
is still pending.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2004.
8
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
Market Information
On April 16, 2003 the Company began trading on the American Stock Exchange using
the symbol INB for its common stock.
Set forth below are the high and low closing prices of the Common Stock as
reported on the Electronic Bulletin Board for the period July 1, 2002 through
April 15, 2003 and on the American Stock Exchange for the period April 16, 2003
through June 30, 2004:
HIGH LOW
COMMON STOCK [IHTC/INB]
FISCAL YEAR ENDED JUNE 30, 2003
First Quarter $ 0.60 $ 0.42
Second Quarter $ 0.51 $ 0.32
Third Quarter $ 3.47 $ 0.42
Fourth Quarter $ 7.48 $ 3.11
FISCAL YEAR ENDED JUNE 30, 2004
First Quarter $ 9.10 $ 6.65
Second Quarter $12.28 $ 7.84
Third Quarter $13.15 $10.25
Fourth Quarter $15.12 $ 7.91
Holders
As of June 30, 2004, there were approximately 900 holders of record of the
Company's Common Stock.
Dividends
The Company has not declared or paid a dividend with respect to its Common Stock
during fiscal year ended June 30, 2004 or June 30, 2003 nor does the Company
anticipate paying dividends in the foreseeable future.
The Company has paid dividends of $101,692 with respect to its Series B
Redeemable Convertible Preferred Stock during the fiscal year ended June 30,
2004.
The following table provides information as of June 30, 2004 about the Company's
equity compensation plans.
9
Equity Compensation Plan Information
Number of securities to Weighted-average exercise Number of securities remaining
be issued upon exercise price of outstanding available for future issuance
of outstanding options, options, warrants and under equity compensation plans
warrants and rights rights (excluding securities reflected
(a) (b) in column (a))
Equity compensation plans
approved by security
holders 5,683,261 $2.41 1,869,739
Equity compensation plans
not approved by security
holders -- -- --
--------- ----- ---------
Total 5,683,261 $2.41 1,869,739
========= ===== =========
Recent Sales of Unregistered Securities
During the past fiscal year ended June 30, 2004, the Company sold the following
securities which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
On May 3, 2004, the Company issued 500,000 shares of its common stock, par value
$.002 per share, to Damon DeSantis, in exchange for $5,000,000. Mr. DeSantis
also received a warrant to purchase 50,000 shares of common stock at an exercise
price of $14 per share.
The above investor is an accredited investor as defined under Rule 506 of
Regulation D promulgated under the Securities Act. The above security was issued
by the Company without registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
10
Item 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements set forth under this caption constitute "forward-looking
statements". See "Disclosure Regarding Forward-Looking Statements" on page 1 of
this Report for additional factors relating to such statements.
Critical Accounting Estimates
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains allowances for doubtful accounts for estimated losses in
the period they become known.
The Company's sales policy is to require customers to provide purchase orders
establishing selling prices and shipping terms. Shipping terms are F.O.B.
shipping point with title and risk of loss passing to the customer at point of
shipment.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect outstanding
receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected. In recording any
additional allowances, a respective charge against income is reflected in the
general and administrative expenses, and would reduce the operating results in
the period in which the increase is recorded.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The Company is a contract
manufacturer and distributor, and only produces finished goods or purchases raw
materials on a purchase order basis. Consequently, the Company has minimal risk
for slow-moving or obsolete inventory. Raw materials are ordered from suppliers
when needed to complete customers' orders. Detail inventory levels and
composition are reviewed and evaluated for potential overstock or obsolescence
in light of current operations and sales. Any appropriate reserve is recorded on
a current basis.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
Intangible Assets
Purchased intangibles consisting of patents and unpatented technological
expertise, intellectual property, license fees and trade names purchased as part
of business acquisitions are presented net of related accumulated amortization
and are being amortized on a straight-line basis over the remaining useful
lives.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Critical Accounting Estimates [Continued]
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company reviews the value of its long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of these assets
are no longer appropriate. Conditions that would necessitate an impairment
assessment include material adverse changes in operations, significant adverse
differences in actual results in comparison with initial valuation forecasts
prepared at the time of acquisition, a decision to abandon certain acquired
products, services or marketplaces, or other significant adverse changes that
would indicate the carrying amount of the recorded asset might not be
recoverable.
Results of Operations
Year ended June 30, 2004 Compared to the Year ended June 30, 2003
The Company's net loss for the year ended June 30, 2004 was $(5,340,147) as
compared to net income of $894,117 for the year ended June 30, 2003. This
decrease in net income of approximately $6,200,000 is primarily the result of an
increase in gross profit of approximately $760,000, offset by an increase in
selling and administrative expenses of approximately $7,700,000 of which
approximately $6,200,000 are made up of Paxis Pharmaceuticals, Inc. start up
costs, and a decrease in Federal and State income taxes of approximately
$680,000. The Company's net loss applicable to common stockholders was
$(6,401,839) for the year ended June 30, 2004 as compared to net income
applicable to common stockholders of $894,117 for the year ended June 30, 2003.
The additional decrease in net loss applicable to common stockholders from net
loss is attributable to the deemed dividend from the beneficial conversion
feature of Series B preferred stock of $960,000 and Series B preferred stock
dividends of $101,692.
Sales for the years ended June 30, 2004 and 2003 were $25,282,790 and
$22,235,306, respectively, an increase of approximately 14%. Gross profit for
the year ended June 30, 2004 was $762,952 higher than gross profit for the year
ended June 30, 2003. Both the increase in sales and gross profit can be
attributed the change in the product mix. For the year ended June 30, 2004 the
Company had sales to one customer, who accounted for 58% of net sales in 2004
and 65% in 2003. The loss of this customer would have an adverse affect on the
Company's operations.
Manufacturing sales for the year ended June 30, 2004 and 2003 were $21,461,700
and $18,595,476, respectively, an increase of $2,866,224 or 15%. The increase in
sales can be primarily attributed to the acquisition in fiscal 2004 of new
product lines from Aloe Commodities International, Inc. ("Aloe").
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $2,333,529 for the year
ended June 30, 2004 as compared to $2,283,457 for the year ended June 30, 2003,
an increase of 2%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the twelve months ended June 30, 2004
totaled $1,470,628 as compared to $2,139,828 for the twelve months ended June
30, 2003, a decrease of $669,200 or 31%.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
On February 21, 2003 the Company acquired NuCycle Therapy, Inc. ("NuCycle").
NuCycle is engaged in the development and sale of nutritional formulations based
on plant-derived minerals through patented hyperaccumulation technology. Sales
for the twelve months ended June 30, 2004 were $16,933 and grant proceeds for
the twelve months ended June 30, 2004 totaled $146,091. Sales for the four
months ended June 30, 2003 were $8,918 and grant proceeds received for the four
months ended June 30 2003, totaled $67,813.
Cost of sales increased to $19,390,657 in fiscal 2004 as compared to $17,106,125
for fiscal 2003. Consistent with the year ended June 30, 2003, cost of sales
taken as a percentage of sales for the twelve months ended June 30, 2004 was
77%.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Year Ended June 30,
-------------------
2004 2003 Change
---- ---- ------
Advertising Expense $ 175,728 $ 9,395 $ 166,333
Bad Debt Expense 5,858 7,683 (1,825)
Royalty & Commission Expense 141,132 55,757 85,375
Officers Salaries 455,609 482,572 (26,963)
Auto, Travel & Entertainment 808,979 588,165 220,814
Office Salaries 995,681 766,579 229,102
Freight Out 41,977 95,859 (53,882)
Depreciation & Amortization 306,426 174,132 132,294
Consulting Fees 287,055 311,564 (24,509)
Regulatory Fees 65,762 67,500 (1,738)
Professional Fees 679,200 303,683 375,517
Research & Development Expense 37,672 50,000 (12,328)
Other 1,303,155 919,996 383,159
Paxis Pharmaceuticals, Inc. 6,197,244 -- 6,197,244
------------ ----------- -----------
Total $ 11,501,478 $ 3,832,885 $ 7,668,593
============ =========== ===========
The increase in advertising expense is due to an increase in print advertising
relating to the sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera
Sport(TM) lines. Royalty and commission expense increased as a result of the
sales of the Naturally Noni(TM), Naturally Aloe(TM) and Avera Sport(TM) lines.
Auto, travel and entertainment expenses have increased because of substantially
increased travel in connection with its acquisition of Paxis and its facility
located in Boulder, Colorado, and the formation of its Canadian-based joint
venture. Office salaries have increased due to the addition of two new sales and
marketing employees. Freight out has decreased due to a reduction of sales in
the Company's IHT Health Products, Inc. subsidiary. The increase in depreciation
and amortization expenses can be primarily attributed to the acquisition of
Paxis Pharmaceuticals Inc. The decrease in consulting fees is due to the hiring
of a consulting firm for a new water monitoring system during the period ending
June 30, 2003. The increase in Professional fees is largely due to increased
legal fees related to recent acquisitions and to increased auditing and
accounting fees related to SEC filings. The Paxis selling and administrative
expenses represent expenditures made by Paxis for the eleven months ended June
30, 2004 relating to start-up costs.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
Other income (expense) was $356,886 for the year ended June 30, 2004 as compared
to $363,391 for the same period a year ago, a decrease of $6,505. The decrease
is due to an increase in interest expense of $89,575 due to the Bank of America
loan offset by an increase in interest income of $47,097 due to an increase in
cash as a result of the private placements and an increase in other income.
Inventories
The inventory at June 30, 2004 increased by $2,776,105 from fiscal 2003. The
Company produces products on a purchase order basis. The increase in inventory
is attributable to an increase in raw material inventory of approximately
$3,200,000. The increase in raw material inventory is a direct result of Paxis
Pharmaceuticals, Inc. completing its manufacturing facility which has resulted
in a build up of raw materials of approximately $2.6 million to support
production as well as the introduction of new product lines, including the
acquisition of Aloe during fiscal 2004 which accounted for approximately $1.2
million of the increase, and a decrease of work-in-process inventory of
approximately $383,000.
Prepaid Expenses
Prepaid expenses and other current assets increased by $452,492 from June 30,
2003. The increase is primarily attributable to an increase in prepaid expenses
in its Paxis subsidiary of approximately $100,000 due to the fact that Paxis was
not included in the consolidated 2003 figures. Additionally there was an
increase in prepaid insurance of $45,000, prepaid commissions of approximately
$100,000 and an increase in prepaid grant costs of $64,000.
Year ended June 30, 2003 Compared to the Year ended June 30, 2002
The Company's net income for the year ended June 30, 2003 was $894,117 as
compared to net income of $1,393,045 for the year ended June 30, 2002. This
decrease in net income of approximately $500,000 is primarily the result of a
decrease in other income of approximately $1,100,000 due to an additional
payment received from the settlement of a class action lawsuit that was received
in the year ended June 30, 2002, a $500,000 increase in operating income
resulting from a corresponding increase in gross profit of approximately
$425,000, and a decrease in Federal and state income taxes of approximately
$125,000.
Sales for the years ended June 30, 2003 and 2002 were $22,235,306 and
$23,546,630, respectively, a decrease of approximately 5%. Contract
manufacturing sales increased by 7% while distribution sales decreased 9% and
other sales decreased by 2%. For the year ending June 30, 2003 the Company had
sales to one customer, who accounted for 65% of net sales in 2003 and 43% in
2002. The loss of this customer would have a material affect on the Company's
operations.
Contract manufacturing sales for the year ended June 30, 2003 and 2002 were
$18,595,476 and $17,328,443, respectively, an increase of $1,267,033 or 7%. The
increase in sales is due to a change in the product mix. The Company is selling
higher priced separately packaged products in 2003 in contrast to bulk sales.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
The Company has an agreement with Roche Vitamins, Inc. to distribute Roche
products. Sales under this agreement were $2,283,457 for the year ended June 30,
2003 as compared to $2,455,623 for the year ended June 30, 2002, a decrease of
7%. This decrease is due to a reduction in the Company's customer base.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the year ended June 30, 2003 totaled
$2,139,828 as compared to sales for the year ended June 30, 2002 of $3,678,382,
a decrease of $1,538,554 or 42%. The decrease in sales is due to the Company's
desire to pursue greater gross profit at the risk of lower sales.
On February 21, 2003 the Company acquired NuCycle Therapy, Inc. ("NuCycle").
NuCycle is engaged in the development and sale of nutritional formulations based
on plant-derived minerals through patented hyperaccumulation technology. Sales
for the four months ended June 30, 2003 were $8,918 and grant proceeds received
for the four months ended June 30, 2003 totaled $67,813.
Cost of sales decreased to $17,106,125 in 2003 as compared to $18,842,688 for
2002. Cost of sales decreased as a percentage of sales to 77% as compared to 80%
for 2002. The decrease in cost of sales of 3% is due to greater manufacturing
efficiencies because sales increased by 7% and fixed overhead remained constant.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Year Ended June 30,
-------------------
2003 2002 Change
---- ---- ------
Advertising Expense $ 9,395 $ 94,688 $ (85,293)
Bad Debt Expense 7,683 81,159 (73,476)
Royalty & Commission Expense 55,757 104,842 (49,085)
Officers Salaries 482,572 323,881 158,691
Auto, Travel & Entertainment 588,165 501,346 86,819
Office Salaries 766,579 1,080,766 (314,187)
Freight Out 95,859 219,818 (123,959)
Depreciation & Amortization 174,132 175,806 (1,674)
Consulting Fees 311,564 206,809 104,755
Regulatory Fees 67,500 0 67,500
Professional Fees 303,683 163,821 139,862
Research & Development Expense 50,000 0 50,000
Other 919,996 952,957 (32,961)
----------- ----------- ----------
Total $ 3,832,885 $ 3,905,893 $ (73,008)
=========== =========== ==========
Selling and administrative expenses decreased by approximately $73,000 from
fiscal 2002 to fiscal 2003. The decrease is primarily attributable to the
decrease in advertising expenses because the Company had decided to spend less
on advertising and place a greater emphasis on its contract manufacturing
business. The decrease in bad debt expense is due to greater emphasis on the
Company's credit policies. Royalty and commission expense
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OR OPERATION
Results of Operations [Continued]
has decreased because the sales of raw materials that incur royalty and
commission expense has decreased by $1,538,554. Officers' salaries increased
because of the addition of a new corporate Vice President. Auto, travel and
entertainment expenses have increased because of increased travel. Office
salaries have decreased because of the elimination of four positions, two in the
IHT Ideas, Inc. subsidiary and two in the IHT Health Products, Inc. subsidiary.
Freight out has decreased due to a reduction of sales in the Company's IHT
Health Products, Inc. subsidiary of $1,538,554. The increase in consulting fees
is due to the hiring of a consulting firm for a new water monitoring system.
Regulatory fees have increased due to the Company's listing on the American
Stock Exchange in April of 2003. Research and development expenses have
increased due to the acquisition of NuCycle Therapy, Inc. in February 2003.
Other income (expense) was $363,391 for the year ended June 30, 2003 as compared
to $1,486,422 for the same period a year ago. This decrease in other income of
$1,123,031 is primarily the result of the proceeds received of $1,157,960 from
an additional payment for the settlement of a class action lawsuit for the year
ended June 30, 2002. The class action lawsuit was with a major supplier in
connection with a multidistrict consolidated class action brought on behalf of
direct purchasers of vitamin products. The plaintiffs, including the Company,
had alleged, inter alia, anti-competitive conduct in violation of federal and
state antitrust laws. The proceeds received represented an additional payment by
one of the defendants. The Company had agreed to opt out of the class action
lawsuit and settle the case on its own. In fiscal 2000 the Company received a
settlement payment of $6,143,849 with the provision that if the class received a
larger percentage, the Company would be entitled to share in the larger
percentage. The amount received in fiscal 2002 of $1,157,960 was this additional
payment. There are no additional payments anticipated.
Liquidity and Capital Resources
At June 30, 2004 the Company's working capital was $12,913,661, a decrease of
$1,890,885 over working capital at June 30, 2003. Cash and cash equivalents were
$9,548,046 at June 30, 2004, a decrease of $858,344 from June 30, 2003. The
Company utilized $7,216,690 and $173,784 of cash for operations for the years
ended June 30, 2004 and 2003, respectively. The primary reasons for the decrease
in cash generated from operations are net loss of approximately $5,000,000,
depreciation and amortization expense of approximately $950,000, an increase in
accounts receivable of approximately $500,000, an increase in inventory of
approximately $2,400,000 and a decrease in prepaid expenses of approximately
$260,000. The Company believes that anticipated sales for next year and current
cash balances will meet cash needs for operations.
The Company utilized $5,811,334 and $754,040 of cash in investing activities for
the years ended June 30, 2004 and 2003, respectively. The Company generated
$12,169,680 and utilized $9,270,891 of cash from financing activities for the
years ended June 30, 2004 and 2003, respectively. The increase in cash generated
from financing activities is primarily due to the issuance of Series B
Redeemable Convertible Preferred Stock and the issuance of the Company's common
stock, offset by cash used in investing activities for the purchase of property
and equipment.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
The Company's total annual commitments at June 30, 2004 for long term
non-cancelable leases of $740,500 consists of obligations under operating
leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
Capital Expenditures
The Company's capital expenditures during the fiscal year ended 2004 and 2003
were $3,519,586 and $397,604, respectively. The capital expenditures during
these periods are primarily attributable to the purchase of machinery and
equipment in its Paxis subsidiary.
The Company has budgeted approximately $900,000 for capital expenditures for
fiscal 2005. The total amount will be funded from the current cash balances.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Accounting Pronouncement - refer to footnote 2.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
Item 7. Financial Statements
For a list of financial statements filed as part of this report, see the index
to financial statements at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 8 A. Controls and Procedures
Evaluation of Our Disclosure Controls and Internal Controls
As of the end of the period covered by this Annual Report, the Company evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures ("Disclosure Controls") and its internal controls and procedures for
financial reporting ("Internal Controls"). This evaluation (the "Controls
Evaluation") was done under the supervision and with the participation of the
Company's management, including its Chief Executive Officer ("CEO") and
Controller/Principal Financial Officer ("PFO"). Rules adopted by the SEC require
that in this section of the Annual Report, the Company present the conclusions
of its CEO and the PFO about the effectiveness of its Disclosure Controls and
Internal Controls based on and as of the date of the Controls Evaluation.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
CEO and PFO Certifications
Appearing as exhibits to this Annual Report are "Certifications" of the CEO and
the PFO. The Certifications are required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This section of
the Annual Report contains information concerning the Controls Evaluation
referred to in the Section 302 Certifications and this information should be
read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 ("Exchange Act"), such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure Controls are also designed
with the objective of ensuring that such information is accumulated and
communicated to the Company's management, including the CEO and PFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
Controls are procedures which are designed with the objective of providing
reasonable assurance that (1) the Company's transactions are properly
authorized, recorded and reported; and (2) the Company's assets are safeguarded
against unauthorized or improper use, to permit the preparation of the Company's
financial statements in conformity with generally accepted accounting
principles.
Limitations on the Effectiveness of Controls
The Company's management, including the CEO and PFO, does not expect that our
Disclosure Controls or its Internal Controls will prevent all errors and fraud.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
Scope of the Controls Evaluation
The CEO/PFO evaluation of our Disclosure Controls and Internal Controls included
a review of the controls' objectives and design, the controls' implementation by
the Company and the effect of the controls on the information generated for use
in this Annual Report. In the course of the Controls Evaluation, management
sought to identify data errors, controls problems or acts of fraud and to
confirm that appropriate corrective action, including process improvements, were
being undertaken. This type of evaluation will be done on a quarterly basis so
that the conclusions concerning controls effectiveness can be reported in the
Company's Quarterly Reports on Form 10-QSB and Annual Report on Form 10-KSB. The
overall goals of these various review and evaluation activities are to monitor
the Company's Disclosure Controls and Internal Controls and to make
modifications as necessary; the Company's intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations [Continued]
Among other matters, management sought in its evaluation to determine whether
there were any "significant deficiencies" or "material weaknesses" in the
Company's Internal Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in its Internal Controls.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions"; these are control issues that could have a
significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions.
In accordance with SEC requirements, the CEO and PFO note that, during the
fiscal year covered by this Annual Report, there has been no change in Internal
Controls that could significantly affect Internal Controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Conclusions
Based upon the Controls Evaluation, the Company's CEO and PFO have concluded
that, as of the end of the period covered by this Annual Report, the Company's
Disclosure Controls are effective to ensure that material information relating
to its company is made known to management, including the CEO and PFO,
particularly during the period when its periodic reports are being prepared, and
that its Internal Controls are effective to provide reasonable assurance that
its financial statements are fairly presented in conformity with generally
accepted accounting principles.
Item 8 B. Other Information
None.
19
PART III
Item 9. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2004.
Item 10. Executive Compensation
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2004.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2004.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2004.
Item 13. Exhibits, List and Reports on Form 8-K
(a) Exhibits and Index
(1) A list of the financial statements filed as part of this report is
set forth in the index to financial statements at Page F-1 and is
incorporated herein by reference.
(2) An index of exhibits incorporated by reference or filed with this
Report is provided below.
Number Description
2.1 Purchase Agreement dated as of February 1, 2003 by and between Integrated
Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.) and Trade
Investment Services, L.L.C. re: Natex Georgia, LLC. (1)
2.2 Purchase Agreement dated as of February 1, 2003 by and between Integrated
Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.) and Trade
Investment Services, L.L.C. re: TisorEx, Inc. (n/k/a Paxis
Pharmaceuticals, Inc.). (1)
2.3 Assignment Agreement dated as of July 1, 2003 by and between Integrated
BioPharma, Inc., Trade Investment Services L.L.C., Vasili Patarkalishvili,
VAP LLC, The James S. Friedlander Revocable Trust, Aqela LLC and Natela
Patarkalishvili (2)
2.4 Assignment and Assumption Agreement dated as of July 1, 2003 by and among
Integrated BioPharma, Inc., Trade Investment Services L.L.C., and Paxis
Pharmaceuticals, Inc. (2)
2.5 Agreement and Plan of Merger dated as of February 21, 2003 between and
among Integrated BioPharma, Inc. (f/k/a Integrated Health Technologies,
Inc.), NAC-NJ Acquisition Corp. and NuCycle Acquisition Corp. (3)
3.1 Certificate of Incorporation of Integrated BioPharma, Inc., as amended (4)
3.2 By-Laws of Registrant (5)
20
4.1 Certificate of Designation of Series and Determination of Rights and
Preferences of Series A Convertible Preferred Stock of Integrated
BioPharma, Inc. dated June 25, 2003 (4)
4.2 Certificate of Designations, Preferences and Rights of Series B Redeemable
Convertible Preferred Stock of Integrated BioPharma, Inc. dated April 20,
2004 (6)
4.3 Form of Warrant for Series B Redeemable Convertible Preferred Stock
investors (6)
4.4 Form of Additional Investment Right for Series B Redeemable Convertible
Preferred Stock investors (6)
10.1 Lease Agreement, dated August 3, 1994, between the Company and Hillside 22
Realty Associates, L.L.C. (7)
10.2 Lease Agreement between the Company and Vitamin Realty Associates, dated
January 10, 1997 (8)
10.3 Manufacturing Agreement between Chem International, Inc. and Herbalife
International of America, Inc. dated April 9, 1998 (9)
10.4 Integrated Health Technologies, Inc. 2001 Stock Option Plan (10)
10.5 Subscription Agreement dated June 25, 2003 by and between Integrated
BioPharma, Inc. and Carl DeSantis re: Series A Convertible Preferred Stock
Offering (4)
10.6 Investor Rights Agreement dated as of June 25, 2003 by and between
Integrated BioPharma, Inc. and Carl DeSantis re: Series A Convertible
Preferred Stock Offering (4)
10.7 Warrant Agreement by and between Integrated BioPharma, Inc. and Carl
DeSantis dated June 30, 2003 (4)
10.8 Promissory Note dated August 6, 2003 by and between Integrated BioPharma,
Inc. and Bank of America (4)
10.9 Securities Purchase Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6)
10.10 Registration Rights Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6)
21 Subsidiaries of the Registrant (11)
31.1 Certification of Periodic Report by Chief Executive Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (11)
31.2 Certification of Periodic Report by Chief Financial Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (11)
32.1 Certification of Periodic Report by Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (11)
32.2 Certification of Periodic Report by Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (11)
- --------------------------
(1) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on February 26, 2003.
(2) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on August 6, 2003.
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on February 24, 2003.
(4) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 2003, filed with the SEC on
September 29, 2003.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form SB-2, Registration No. 333-5240-NY.
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K filed with the SEC on April 21, 2004.
21
(7) Incorporated herein by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, Registration No. 333-5240-NY.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997, filed with the SEC on
September 29, 1997.
(9) Incorporated herein by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1998, filed with the SEC on
September 24, 1998.
(10) Incorporated herein by reference to the Company's Registration Statement
on Form S-8, filed with the SEC on May 1, 2002.
(11) Filed herewith.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K/A filed October 2, 2003 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits).
(2) Current Report on Form 8-K filed on September 30, 2003 pursuant to, Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 (Regulation FD Disclosure).
(3) Current Report on Form 8-K filed November 6, 2003 pursuant to Item 2
(Acquisition or Disposition of Assets), Item 5 (Other Events) and Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits).
(4) Current Report on Form 8-K filed on November 17, 2003 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 (Regulation FD Disclosure).
(5) Current Report on Form 8-K filed on February 17, 2004 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 (Regulation FD Disclosure).
(6) Current Report on Form 8-K filed April 20, 2004 pursuant to Item 5 (Other
Events and Regulation FD Disclosure).
(7) Current Report on Form 8-K filed May 4, 2004 pursuant to Item 5 (Other
Events and Regulation FD Disclosure and Item 7 (Financial Statements, Pro
Forma Financial Statements and Exhibits).
(8) Current Report on Form 8-K filed May 17, 2004 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 Regulation FD Disclosure).
(9) Current Report on Form 8-K filed June 25, 2004 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 Regulation FD Disclosure).
(10) Current Report on Form 8-K filed June 28, 2004 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 Regulation FD Disclosure).
(11) Current Report on Form 8-K filed June 29, 2004 pursuant to Item 7
(Financial Statements, Pro Forma Financial Statements and Exhibits), and
Item 9 Regulation FD Disclosure).
Item 14. Principal Accountant Fees and Services
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2004.
22
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
INDEX
Item 7: Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm..........F-2
Consolidated Balance Sheet as of June 30, 2004...................F-3 ... F-4
Consolidated Statements of Operations for the years
ended June 30, 2004 and 2003 ....................................F-5
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2004 and 2003 ....................................F-6 ... F-7
Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003 ..........................................F-8 ... F-9
Notes to Consolidated Financial Statements ......................F-10 .. F-26
. . . . . . . .
F-1
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Integrated
BioPharma, Inc. and Subsidiaries as of June 30, 2004, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended June 30, 2004 and 2003. 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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 30, 2004, and the results of its operations and its cash flows for the
years ended June 30, 2004 and 2003, in conformity with U.S. generally accepted
accounting principles.
/s/ Amper, Politziner & Mattia P.C.
September 10, 2004 except for Note 15 which is dated September 16, 2004.
Edison, New Jersey
F-2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2004
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 9,548,046
Accounts Receivable - Net 2,425,354
Inventories-Net 7,076,130
Prepaid Expenses and Other Current Assets 1,201,519
Deferred Income Taxes 79,000
------------
Total Current Assets 20,330,049
------------
Property and Equipment - Net 6,856,982
------------
Other Assets:
Goodwill 688,138
Intangible Assets, net 3,559,255
Investment in Joint Venture 96,022
Deferred Tax Asset 50,000
Security Deposits and Other Assets 232,980
------------
Total Other Assets 4,626,395
------------
Total Assets $ 31,813,426
============
See accompanying notes to consolidated financial statements.
F-3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2004 (Continued)
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable - Bank $ 4,500,000
Accounts Payable 1,937,033
Accrued Expenses and Other Current Liabilities 731,570
Federal and State Income Taxes Payable 75,525
Loan Payable - Trade Investment Services, LLC, related party 172,260
-------------
Total Current Liabilities 7,416,388
-------------
Commitments and Contingencies (See Note 11)
Series B 7% Redeemable Convertible Preferred Stock net of beneficial
conversion feature, warrants issued and issuance costs - $.002 Par value;
1,250 shares authorized; 700 shares
issued and outstanding - Liquidation Preference of $7,000,000
460,000
-------------
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued --
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 12,510,690 Shares Issued and Outstanding
25,021
Additional Paid-in-Capital 27,961,003
Accumulated Deficit (4,020,155)
Less: Treasury Stock at cost, 25,800 shares (28,831)
-------------
Total Stockholders' Equity 23,937,038
-------------
Total Liabilities and Stockholders' Equity $ 31,813,426
=============
See accompanying notes to consolidated financial statements.
F-4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years ended June 30,
--------------------
2004 2003
---- ----
Sales $ 25,282,790 $ 22,235,306
Cost of Sales 19,390,657 17,106,125
------------ ------------
Gross Profit 5,892,133 5,129,181
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs 6,197,244 --
Selling and Administrative Expenses 5,304,234 3,832,885
------------ ------------
Total Selling & Administrative Expenses 11,501,478 3,832,885
------------ ------------
Operating [Loss] Income (5,609,345) 1,296,296
------------ ------------
Other Income [Expense]:
Gain on Sale of Equipment -- 24,346
Other Income 376,120 315,801
Interest Expense (94,632) (5,057)
Interest and Investment Income 75,398 28,301
------------ ------------
Total Other Income [Expense] 356,886 363,391
------------ ------------
[Loss] Income Before Income Taxes (5,252,459) 1,659,687
Income Tax Expense 87,688 765,570
------------ ------------
Net [Loss] Income (5,340,147) 894,117
Deemed dividend from beneficial conversion feature
of SeriesB Preferred Stock (960,000) --
Series B Preferred Stock Dividend (101,692) --
------------ ------------
Net [Loss] Income applicable to common shareholders $ 6,401,839) $ 894,117
============ ============
Net [Loss] Income Per Common Share:
Basic $ (.58) $ .12
============ ============
Diluted $ (.58) $ .09
============ ============
Weighted Average Common Shares Outstanding 11,107,520 7,765,051
Dilutive Potential Common Shares:
Warrants and Options -- 2,636,392
Convertible Preferred Stock -- 19,521
------------ ------------
Weighted Average Common Shares
Outstanding-assuming dilution 11,107,520 10,420,964
============ ============
See accompanying notes to consolidated financial statements.
F-5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
JUNE 30, 2004 AND 2003
- --------------------------------------------------------------------------------
Series A Retained
Convertible Additional Earnings Total
Common Stock Preferred Paid-In (Accumulated) Treasury Stock Stockholders'
Shares Par Value Stock Capital deficit) Shares Cost Equity
------ --------- ----- ------- -------- ------ ---- ------
Balance-
July 1, 2002 6,228,720 $12,457 $ -- $6,113,582 $1,487,567 25,800 $(28,831) $ 7,584,775
Exercise of Stock
Options for cash 1,185,000 2,370 -- 141,255 -- -- -- 143,625
Issuance of
Series A non-
redeemable
Convertible
Preferred Stock for
Cash -- -- 19 8,899,981 -- -- -- 8,900,000
Warrants issued in
connection with
issuance of Series
A non-redeemable
Convertible
Preferred Stock -- -- -- 600,000 -- -- -- 600,000
Acquisition of
NuCycle Therapy,
Inc. (related party)
for Common
Shares 368,833 738 -- (115,820) -- -- -- (115,082)
Acquisition of 50%
of Natex LLC, for
Common Shares 2,458,886 4,918 -- 1,593,358 -- -- -- 1,598,276
Reduction of paid
in capital due to
common control
accounting related
to common stock
issued in
acquisition of 50%
of Natex, LLC. -- -- -- (1,598,276) -- -- -- (1,598,276)
Income Tax Benefit
From Exercise of
Stock Options -- -- -- 248,000 -- -- -- 248,000
Net Income -- -- -- -- 894,117 -- -- 894,117
---------- ------- ---- ---------- ---------- ------ --------- ------------
Balance -
June 30, 2003 10,241,439 20,483 19 15,882,080 2,381,684 25,800 (28,831) 18,255,435
---------- ------- ---- ---------- ---------- ------ --------- ------------
See accompanying notes to consolidated financial statements.
F-6
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
JUNE 30, 2004 AND 2003 (Continued)
- --------------------------------------------------------------------------------
Series A Retained
Convertible Addt'l Earnings Total
Common Stock Preferred Paid-In (Accumulated) Treasury Stock Stockholders'
Shares Par Value Stock Capital Deficit) Shares Cost Equity
------ --------- ----- ------- -------- ------ ---- ------
Balance-
June 30, 2003 10,241,439 $20,483 $ 19 $15,882,080 $ 2,381,684 25,800 $(28,831) $ 18,255,435
Exercise of Stock
Options for Cash 262,000 524 -- 363,796 -- -- -- 364,320
Reduction of paid in
capital due to common
control accounting
related to acquisition of
47% of Paxis, Inc. -- -- -- (2,956,068) -- -- -- (2,956,068)
Acquisition of 3% of
Paxis, Inc. 66,666 133 -- 542,595 -- -- -- 542,728
Acquisition of new
product lines 203,085 406 -- 1,725,004 -- -- -- 1,725,410
Beneficial conversion,
warrants and additional
investment rights in
connection of issuance
of series B Redeemable
Convertible Preferred
Stock net of issuance
costs of $581,948 -- -- -- 6,918,052 -- -- -- 6,918,052
Issuance of Common
Stock for Cash 500,000 1,000 -- 4,988,000 -- -- -- 4,989,000
Conversion of Series A
Preferred Stock to
Common Stock 1,187,500 2,375 (19) (2,356) -- -- -- --
Conversion of Series B
Preferred Stock to
Common Stock 50,000 100 -- 499,900 -- -- -- 500,000
Dividends Paid on
Series B Preferred
Stock -- -- -- -- (101,692) -- -- (101,692)
Deemed dividend from
beneficial conversion
feature of Series B
Preferred stock -- -- -- -- (960,000) -- -- (960,000)
Net Loss -- -- -- -- (5,340,147) -- -- (5,340,147)
---------- ------- ----- ----------- ------------ ------ --------- ------------
Balance-
June 30, 2004 12,510,690 $25,021 $ -- $27,961,003 $(4,020,155) 25,800 $(28,831) $ 23,937,038
========== ======= ===== =========== ============ ====== ========= ============
See accompanying notes to consolidated financial statements.
F-7
INTEGRATED BIOPHARMA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years ended June 30,
--------------------
2004 2003
---- ----
Operating Activities:
Net [Loss] Income $ (5,340,147) $ 894,117
------------- -----------
Adjustments to Reconcile Net [Loss] Income to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 952,531 455,616
Deferred Income Taxes 8,000 27,000
Allowance for Inventory 10,000 10,000
Bad Debt Expense 10,000 7,683
Write off of deposit of inventory 1,348,507 --
Gain on Sale of Fixed Assets -- (24,346)
Changes in Assets and Liabilities (excludes impact of acquisitions)
[Increase] Decrease in:
Accounts Receivable (485,112) 403,557
Inventories (2,376,112) 1,604,364)
Due from Paxis Pharmaceuticals, Inc. related party (908,000) --
Due to NuCycle Therapy, Inc. related party -- 92,646
Prepaid Expenses and Other Current Assets 260,907 (490,968)
Security Deposits and Other Assets 6,548 (109,807)
[Decrease] Increase in:
Accounts Payable (756,153) 145,755
Income Taxes Payable 21,756 195,507
Accrued Expenses and Other Liabilities 30,585 (176,180)
------------- -----------
Total Adjustments (1,876,543) (1,067,901)
------------- -----------
Net Cash - Operating Activities (7,216,690) (173,784)
------------- -----------
Investing Activities:
Proceeds from Sale of Fixed Assets -- 40,000
Loans to Stockholders -- 3,564
Investment in Joint Venture (96,022) --
Note Receivable -- (400,000)
Acquisition of product line (872,470) --
Purchase of Intangibles (750,000) --
Acquisition of Paxis, less cash received (483,256) --
License Fee (90,000) --
Purchase of Property and Equipment (3,519,586) (397,604)
------------- -----------
Net Cash-Investing Activities (5,811,334) (754,040)
------------- -----------
See accompanying notes to consolidated financial statements.
F-8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
Years ended June 30,
--------------------
2004 2003
---- ----
Financing Activities:
Exercise of Stock Options $ 364,320 $ 143,625
Patents -- (355,000)
Proceeds from Notes Payable 2,255,954
Repayment of Notes Payable (2,273,688)
Dividends Paid (101,692) --
Issuance of Series B Redeemable Preferred Stock 6,918,052 --
Issuance of Common Stock 4,989,000 --
Issuance of non-redeemable Convertible Preferred Stock and Warrants -- 9,500,000
------------ ------------
Net Cash-Financing Activities 12,169,680 9,270,891
------------ ------------
Net [Decrease] Increase in Cash and Cash Equivalents (858,344) 8,343,067
Cash and Cash Equivalents - Beginning of Periods 10,406,390 2,063,323
------------ ------------
Cash and Cash Equivalents - End of Periods $ 9,548,046 $ 10,406,390
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 85,241 $ 5,057
Income Taxes 98,625 524,836
Supplemental Schedule of Non-cash transactions:
Common stock issued for acquisition of NuCycle Therapy, Inc. $ 175,196
Common stock issued for acquisition of Natex, LLC $ 1,598,276
Common stock issued for acquisition of 3% Paxis Pharmaceutical, Inc. $ 542,728
Common stock issued for acquisition of new product line $ 1,725,410
Deemed dividend from beneficial conversion feature of Series B
Preferred stock $ 960,000
See accompanying notes to consolidated financial statements.
F-9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] Business
As of February 13, 2003, the Company amended its corporate charter and changed
its name to "Integrated BioPharma, Inc."(formerly Integrated Health
Technologies, Inc.). Effective April 16, 2003, the Company began trading on the
American Stock Exchange using the symbol INB for its common stock.
Integrated BioPharma, Inc. (the "Company") is engaged primarily in the
manufacturing, distributing, marketing and sales of vitamins, nutritional
supplements and herbal products. Its customers are located primarily throughout
the United States.
[2] Summary of Significant Accounting Policies
Principles of Consolidation- The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned. Intercompany transactions and balances have been eliminated in
consolidation.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued expenses, it was estimated that the carrying amount approximated fair
value because of the short maturities of these instruments. All debt is based on
current rates at which the Company could borrow funds with similar remaining
maturities and approximates fair value.
Cash and Cash Equivalents- Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories- Inventory is valued by the first-in, first-out method, at the lower
of cost or market. Allowances for obsolete and overstock inventories are
estimated based on "expiration dating" of inventory and projection of sales.
Depreciation- The Company follows the general policy of depreciating the cost of
property and equipment over the following estimated useful lives:
Building 15 Years
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
F-10
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense, including capital leases, was $753,389 and $395,616 for the years ended
June 30, 2004 and 2003, respectively.
Estimates- The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition- The Company recognizes revenue upon shipment of the
product. The Company's Paxis subsidiary has completed its renovation of the
manufacturing facilities and has not recognized any income to date. The Company
believes that recognizing revenue at shipment is appropriate because the
Company's sales policies meet the four criteria of SAB 101 which are: (i)
persuasive evidence that an arrangement exists, (ii) delivery has occurred,
(iii) the seller's price to the buyer is fixed and determinable and (iv)
collectability is reasonably assured. The Company's sales policy is to require
customers to provide purchase orders establishing selling prices and shipping
terms, which are F.O.B shipping point with the title and risk of loss passing to
the customer at point of shipment. The Company evaluates the credit risk of each
customer and establishes an allowance of doubtful accounts for any credit risk.
Sales returns and allowances are estimated upon shipment. The Company evaluates
the credit risk of each customer and establishes an allowance of doubtful
accounts for any credit risk. Sales returns and allowances are estimated upon
shipment.
The Company realized fee income from managing warehouse and office operations
for an unrelated company of $240,000 and $315,801 for the years ended June 30,
2004 and 2003 respectively. Such is included in "Other income."
Investment in Joint Venture - Paxis has entered into a joint venture as of July
16, 2003 with Chatham Biotec, Ltd. ("Chatham"), a Canadian company which
harvests and dries biomass, to form a Canadian-based joint venture to produce
extract and intermediate precursor Paclitaxel from Canadian Taxus biomass.
Chatham supplies the Canadian bio-mass and the joint venture processes it, using
Paxis' extraction expertise in a facility currently controlled by the joint
venture. The joint venture supplies Paxis' requirements for extract at cost,
from which Paxis produces its Paclitaxel and related products. The joint venture
may sell extract and intermediate products to third parties. The Company has a
50% interest in this joint-venture. The management agreement provides for
profits and losses to be allocated based on the Company's 50% interest. As of
June 30, 2004, the $96,022 represents the Company's investment. The Company can
give no assurance that the joint venture can be operated successfully. The
investment in the joint venture is reflected using the equity method.
Goodwill and Other Intangible Assets - The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill
and intangible assets with indefinite lives no longer be amortized against
earnings, but instead tested for impairment at least annually based on a
fair-value approach as described in SFAS 142. The Company performed the annual
test as of May 13, 2004, and determined that there were no indications of
goodwill impairment.
Intangible assets with finite lives are amortized over their estimated useful
lives. The useful life of an intangible asset is the period over which the asset
is expected to contribute directly or indirectly to future cash flows. The
carrying value of intangible assets with finite lives is evaluated whenever
events or circumstances indicate that the carrying value may not be recoverable.
The carrying value is not recoverable when the projected undiscounted future
cash flows are less than the carrying value. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses.
F-11
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Other Intangible assets consist of intellectual property, trademarks, license
fees, and unpatented technology. Amortization is being recorded on the straight
line basis over periods ranging from 10 years to 20 years based on contractual
or estimated lives.
Long-Lived Assets - The Company reviews the carrying values of its long-lived
assets for possible impairment whenever circumstances indicate the carrying
amount of an asset may not be recoverable.
Research and Development Costs - Research and Development costs are expensed as
incurred. The Company incurred $37,672 in 2004 and $50,000 in 2003 in research
and development expenses due to the acquisition of NuCycle Therapy, Inc. in
February of 2003.
Advertising- Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $175,728 and $9,395 for the
years ended June 30, 2004 and 2003.
Stock-Based Compensation- The Company has elected to account for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB
No. 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock.
At June 30, 2004, the Company has one stock-based compensation plan, which is
described more fully in Note 14A. No stock-based employee compensation cost is
reflected in net income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
In accordance with FASB Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation is as follows:
Year Ended June 30,
-------------------
2004 2003
---- ----
Net (loss) income available to common stockholders,
as reported $ (6,401,839) $ 894,117
Add: Stock-based employee compensation
expense included in net income (loss), net of related
tax effects
-- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (4,075,449) (262,535)
------------- ---------
Pro forma net (loss) income available to common
stockholders
$(10,477,288) $ 631,582
============= =========
Earnings per share:
Basic - as reported $ (0.58) $ .12
============= =========
F-12
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Basic - pro forma $ (0.94) $ .08
============ ==========
Diluted - as reported $ (0.58) $ .09
============ ==========
Diluted - pro forma $ (0.94) $ .06
============ ==========
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee's stock options
under the fair-value method. The fair value for these options was estimated at
the date of each grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for June 30:
2004 2003
---- ----
Risk-free interest rate 4.0% 4.0%
Expected volatility 110% 116.7%
Dividend yield -- --
Expected life 10 years 9.1 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Earnings Per Share - In accordance with FASB Statement No. 128, "Earnings Per
Share,", basic earnings per common share are based on weighted average number of
common shares outstanding. Diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, plus the incremental
shares that would have been outstanding upon the assumed exercise of all
potentially dilutive stock options, warrants and convertible preferred stock,
subject to antidilution limitations.
As of June 30, 2004, options and warrants with exercise prices below average
market price in the amount of 4,962,621 shares and Convertible Series B
Preferred Stock in the amount of 7,000,000 shares were not included in the
computation of diluted earnings per share as they are antidilutive as a result
of net losses during the periods presented.
As of June 30, 2004 and 2003, options and warrants to purchase 1,321,000 shares
and 707,597 shares of common stock, respectively, were outstanding but were not
included in the computation of diluted earnings per share because their exercise
price was greater that the average market price of the common shares.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," as revised in December 2003 (FIN 46R) which is effective for the
first reporting period that ends after December 15, 2004. This interpretation
changes the method of determining whether certain entities should be included in
the Company's consolidated financial statements. An entity is subject to FIN 46
and is called a variable interest entity ("VIE") if it has (1) equity that is
insufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) equity investors that
cannot make significant decisions about the entity's operations or that do not
absorb the expected losses or receive the expected returns of the entity. All
other entities are evaluated for consolidation under
F-13
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." A VIE is
consolidated by its primary beneficiary, which is the party involved with the
VIE that has a majority of the expected losses or a majority of the expected
residual returns or both. The Company has determined that there is no impact
from the adoption of this statement.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. The Company considered this statement in connection
with the Preferred Stock issued during fiscal 2004. See Note 13F - Equity
Transactions.
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
In June 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-01,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("EITF 03-01"). EITF 03-01 includes new guidance for evaluating and
recording impairment losses on debt and equity investments, as well as new
disclosure requirements for investments that are deemed to be temporarily
impaired. The accounting guidance of EITF 03-01 is effective for reporting
periods beginning after June 15, 2004, while the disclosure requirements for
debt and equity securities accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, are effective for annual periods
ending after December 15, 2003. Adoption of EITF 03-01 will not have a material
impact on the Company's consolidated financial position or results of
operations.
[3] Goodwill and other Intangible Assets
In accordance with SFAS No. 142, goodwill is not amortized. The Company
completed its annual impairment test prescribed by SFAS 142 at May 13, 2004 and
concluded that no impairment of goodwill existed.
At June 30, 2004, goodwill consisted of:
Goodwill - Paxis acquisition $ 542,728
Goodwill - Aloe acquisition 145,410
---------
Total $ 688,138
- ----- =========
F-14
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[3] Goodwill and other Intangible Assets [Continued]
At June 30, 2004 intangible assets are made up of the following:
Gross Carrying Accumulated
Amount Amortization Net
------ ------------ ---
Intellectual Property $ 1,327,455 $ 86,913 $ 1,240,542
License Fee $ 90,000 $ 9,000 $ 81,000
Trade Names $ 1,508,000 $ 50,267 $ 1,457,733
Unpatented Technology $ 547,000 $ 100,000 $ 447,000
License Agreement - Aloe $ 347,000 $ 14,020 $ 332,980
----------- --------- -----------
Total $ 3,819,455 $ 260,200 $ 3,559,255
=========== ========= ===========
Amortization expense recorded on the intangible assets for the years ended June
30, 2004 and 2003 was $200,200 and $60,000 respectively. Amortization expense is
recorded on the straight line method of periods ranging from 10 years to 20
years.
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Amortization
June 30, Expense
- -------- -----------
2005 $ 278,176
2006 278,176
2007 278,176
2008 278,176
2009 278,176
Thereafter 2,168,375
-----------
Total $ 3,559,255
===========
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with SFAS No
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
Company reviews the value of its long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of these assets
are no longer appropriate. Conditions that would necessitate an impairment
assessment include material adverse changes in operations, significant adverse
differences in actual results in comparison with initial valuation forecasts
prepared at the time of acquisition, a decision to abandon certain acquired
products, services or marketplaces, or other significant adverse changes that
would indicate the carrying amount of the recorded asset might not be
recoverable.
F-15
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[4] Inventories
Raw Materials $ 5,033,297
Work-in-Process 550,177
Finished Goods 1,492,656
------------
Total $ 7,076,130
- ----- ============
[5] Property and Equipment
Land and Building $ 1,250,000
Leasehold Improvements 2,239,384
Machinery and Equipment 7,040,511
Machinery and Equipment Under Capital Leases 193,086
Transportation Equipment 37,714
------------
Total 10,760,695
Less: Accumulated Depreciation and Amortization 3,903,713
------------
Total $ 6,856,982
- ----- ============
[6] Notes Payable
Notes Payable are summarized as follows at June 30, 2004:
Commerce Bank (a) $ --
Bank of America (b) 4,500,000
-----------
Total 4,500,000
Less: Current Portion 4,500,000
-----------
Non-current Portion $ --
- ------------------- ===========
(a) Under the terms of a revolving credit note which expires on June 10, 2005,
the Company may borrow up to $1,000,000 at the prime lending rate. The loan is
collateralized by the inventory, receivables and equipment of Integrated
BioPharma, Inc. and its operating subsidiaries, and by the personal guarantee of
E. Gerald Kay, the chairman of the board of the Company. On April 20, 2004 the
Company terminated the revolving credit note.
On November 14, 2003 the Company signed a letter of credit agreement in the
amount of three hundred thousand dollars ($300,000) in favor of the Royal Bank
of Canada. The principal amount of the letter of credit agreement has been
carved out of the revolving credit note of $1,000,000. On April 20, 2004 the
Company terminated the letter of credit.
(b) Revolving line of credit loan provided by Bank of America dated August 6,
2003 in the amount of $4,500,000 with interest at a variable rate. The loan was
due on September 4, 2004 and subsequently has been renewed through September
2005. The loan is guaranteed by Mr. Carl DeSantis, a shareholder and director of
the Company. At June 30, 2004 the interest rate was 2.59%.
F-16
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[7] Loan Payable-Trade Investment Services, related party
Demand loan in the amount of $172,260 provided by Trade Investment Services, LLC
("TIS"), a related party. The members of TIS are all shareholders and members of
the board of directors of the Company. The loan is dated July 1, 2002 with
interest at 9%. Interest for the twelve months ended June 30, 2004 has been
waived.
[8] Income Taxes
Deferred tax attributes resulting from differences between financial accounting
amounts and tax basis of assets and liabilities at June 30, 2004 follow:
Current assets and liabilities
Net operating loss $ 1,025,000
Allowance for doubtful account 17,000
Allowance for obsolete inventory 8,000
Inventory overhead capitalization 54,000
Valuation allowance (1,025,000)
------------
Net current deferred tax asset $ 79,000
============
Long-Term assets and liabilities
Start-up expenses $ 1,043,000
Depreciation 50,000
Less valuation allowance (1,043,000)
------------
Net long-term deferred tax asset $ 50,000
============
Certain tax benefits for option exercises totaling $367,906 are deferred and
will be credited to additional-paid-in-capital when existing net operating
losses are used. Net operating losses of approximately $3,013,000 will expire in
2024 for federal purposes and 2011 for state purposes. Until sufficient taxable
income to offset the temporary timing differences attributable to operations and
the tax deductions attributable to options are assured, a valuation allowance
equaling the net operating loss is being provided.
The provision for income taxes consists of the following:
June 30,
--------
2004 2003
---- ----
Deferred tax $ 8,000 $ 27,000
Current tax expense 79,688 738,570
-------- ---------
$ 87,688 $ 765,570
======== =========
A reconciliation of the statutory tax rate to the effective tax rate for the
year ended June 30 is as follows:
F-17
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[8] Income Taxes [Continued]
2004 2003
---- ----
Computed provision at the statutory tax 0% 34%
State tax rate, net of federal benefit 0 6
Non-deductible expenses 2 5
Other 0 1
--- ---
2% 46%
=== ===
[9] Profit-Sharing Plan
The Company maintains a profit-sharing plan, which qualifies under Section
401(k) of the Internal Revenue Code, covering all nonunion employees meeting age
and service requirements. Contributions are determined by matching a percentage
of employee contributions. The total expense for the years ended June 30, 2004
and 2003 was $99,858 and $77,747 respectively.
[10] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk-Cash- The Company maintains balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At June 30, 2004, the
Company's uninsured cash balances totaled approximately $8,950,000.
[B] Concentrations of Credit Risk-Receivables- The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts and other allowances at June 30,
2004 is $80,601. The Company's bad debt expense for the years ended June 30,
2004 and 2003 respectively were $5,858 and $7,683.
[C] Major Customer - For the years ended June 30, 2004 and 2003 approximately
58% or $14,700,000 and 65% or $14,500,000 of revenues were derived from one
customer. The loss of this customer would have an adverse affect on the
Company's operations. In addition, for the years ended June 30, 2004 and 2003,
an aggregate of approximately 13% and 10%, respectively, of revenues were
derived from one other customer; no other customers accounted for more than 10%
of consolidated sales for the years ended June 30, 2004 and 2003. Accounts
receivable from these customers comprised approximately 57% and 60% of total
accounts receivable at June 30, 2004 and 2003, respectively.
[D] Major Supplier - All of the Biomass used by Paxis Pharmaceuticals, Inc. in
the production of Paclitaxel is acquired from one supplier. The loss of this
supplier would have an adverse effect on the Company. For the eleven months
ended June 30, 2004, this supplier accounted for approximately $2,200,000 of
Biomass purchased.
[11] Commitments and Contingencies
[A] Leases
Related Party Leases- Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's chairman, president and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease
provides for minimum annual rental of $323,559 through May 31, 2015 plus
increases in real estate taxes and building operating expenses. Rent expense for
the years ended June 30, 2004 and 2003 on this lease was $490,000 and $474,000
respectively.
F-18
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[11] Commitments and Contingencies [Continued]
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five year period. On August 27,
2002 the lease was amended reducing the square footage from approximately 32,500
to 22,500 and reducing the monthly rent to $22,483 per month for the balance of
the lease. Rent expense for the eleven months ended June 30, 2004 was $318,513.
There were no corresponding expenses in 2003 because the manufacturing and
office facility was not a part of the consolidated group.
The Company leases warehouse and office facilities through March 31, 2006. The
lease was effective on March 6, 2004 and provides for a minimum monthly rental
of $5,925 in year one and $6,133 in year two.
The Company leases office space through September 30, 2005. The lease was
effective on June 1, 2004, and provides for a minimum monthly rental of $2,248.
The Company leases warehouse equipment expiring through 2007 providing for an
annual rental of $15,847 and office equipment expiring through 2006 providing
for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2006.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Year Ending Lease Party Lease
June 30, Commitment Commitment Total
-------- ---------- ---------- -----
2005 $ 416,886 $ 323,559 $ 740,445
2006 309,137 323,559 632,696
2007 15,310 323,559 338,869
2008 -- 323,559 323,559
2009 -- 323,559 323,559
Thereafter -- 1,914,391 1,914,391
--------- ----------- -----------
Total $ 741,333 $ 3,532,186 $ 4,273,519
- ----- ========= =========== ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $955,868 and $570,000 for the years ended June 30, 2004 and 2003,
respectively. Rent expense is stated net of sublease income of approximately
$9,500 and $11,000 for the years ended June 30, 2004 and 2003, respectively.
[B] Consulting Agreement - On February 10, 2004, the Company entered into a one
year consultant agreement with an investor relation's consultant. The Company is
obligated to pay $10,000 per month for the length of the agreement. In addition,
the Company will issue to the consultant 36,000 shares of Common Stock. On July
13, 2004 the Company terminated the agreement. Under the terms of the
termination agreement the Company will not be obligated to pay the $10,000 per
month fee after July 15, 2004. Additionally the Company will issue to the
consultant 27,000 shares of common stock in lieu of the original 36,000 shares.
[C] Development and Supply Agreement- On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
("Herbalife") whereby the Company will develop, manufacture
F-19
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[11] Commitments and Contingencies [Continued]
and supply certain nutritional products to Herbalife which, agreement was
renewed through December 31, 2006. The agreement provides that Herbalife is
required to purchase a minimum quantity of Supplied Products each year of
$18,000,000 for the term of the agreement. If Herbalife purchases the minimum
amount, then Herbalife will be entitled to certain rebates of an amount not
exceeding $300,000 per year. For the fiscal year ended June 30,2004, there were
no rebates due.
[D] Collaboration Agreement-Effective December 23, 2003 the Company entered into
a collaboration agreement with the Institute For Cancer Prevention, Inc. (the
"Institute"). The Company and the Institute will jointly research, develop and
test compounds for anti-carcinogenic activity. Under the agreement, the Company
has the exclusive rights to commercialize the compounds resulting from the
research and development collaboration. The Institute will receive a fee payment
of one percent (1%) of net sales for any products developed pursuant to this
agreement.
[E] Intellectual Property Agreement - In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for services to be performed by Fraunhofer USA, Inc. over a five year
period.
[F] Legal Proceedings -NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B.
Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc.,
Dean P. Stull and Integrated BioPharma, Inc., pending in the United States
District Court for the Southern District of New York. Plaintiffs NatEx Georgia
LLC and Vasili Patarkalishvili commenced this action on July 19, 2004, alleging
claims for breach of contact, fraud and breach of the implied duty of good faith
and fair dealing arising out of an alleged failure by Paxis to provide
information necessary for NatEx to perform under the parties' agreements by
which NatEx had agreed to supply Paclitaxel extract. The complaint seeks damages
of more than $5 million. On August 18, 2004, the Company removed this action to
federal court. The plaintiffs have moved to have the matter remanded to state
court. The Company plans to file a motion to dismiss and to defend vigorously
the claims in this lawsuit.
Wolfe Axelrod Weinberger Associates, LLC v. Integrated BioPharma, Inc., pending
before the American Arbitration Association. On July 2, 2004, Wolfe Axelrod
Weinberger Associates, LLC, a company which had provided investor relations
services to the Company in 2000 and 2001, served a Demand for Arbitration and a
Statement of Claim alleging that the Company had failed to include Company
securities held by Wolfe in the Company's Registration Statement filed with the
United States Securities and Exchange Commission in May 2004 and that the
Company was required to register such shares based on an agreement between the
parties. The complaint seeks the registration of the securities and damages of
more than $1.2 million. The Company is preparing a response to the allegations
and intends to defend vigorously the claims in this arbitration.
Body Systems Technology, Inc. v. Dynamic Health Laboratories, Inc., Discount
Natural Foods, Inc., Aloe Commodities International, Inc., Integrated
BioPharma, Inc., and Vitacost.Com, Inc.; pending in the United States
District Court for the Middle District of Florida, Civil Action No.
6:04-CV-474-Orl-22 (JGG). Plaintiff commenced this action on or about April
26, 2004, alleging trademark infringement of its "Polynesian Noni Juice"
trademark by the Company's use of its "Naturally Noni" trademark. The Company
has moved to dismiss the complaint based on plaintiff's failure to plead
sufficient facts to establish a likelihood of confusion with the alleged
trademark and secondary meaning of the alleged trademark. The motion to dismiss
is still pending.
[12] Related Party Transactions
The Company has two consulting agreements with the brothers of the Company's
Chairman of the Board. One agreement is on a month to month basis for $1,100 per
month. The total consulting expense recorded per this verbal agreement for the
years ended June 30, 2004, and June 30, 2003 was $13,200 for each year.
F-20
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[12] Related Party Transactions [Continued]
The second agreement is with EVJ, LLC a limited liability company controlled by
Robert Kay, an employee of the Company. The total consulting expense under this
agreement was $165,000 for the year ended June 30 2004.
See Note 11 - Leases for related party lease transactions. See Note 7 - Note
Payable related party.
[13] Equity Transaction
[A] Stock Option Plan and Warrants - The Company has adopted a stock option plan
for the granting of options to employees, officers, directors and consultants of
the Company that originally provided to purchase up to 7,000,000 shares of
common stock, at the discretion of the Board of Directors. During fiscal year
2004, the Board of Directors and stockholders approved an additional 2,000,000
common stock shares available for grant, for a total of 9,000,000 shares of
common stock available for grant. Stock option grants may not be priced less
than the fair market value of the Company's common stock at the date of grant.
Options granted are generally for ten year periods, except that options granted
to a 10% stockholder (as defined) are limited to five year terms.
On October 6, 2003, the Company granted 41,666 incentive stock options for a
term of ten years at an exercise price equal to the market price of $7.90 on the
date of grant.
On December 4, 2003, the Company granted 103,500 incentive stock options and
682,500 non-statutory stock options for a period of ten years at an exercise
price equal to the market price of $9.90 and 9,182 incentive stock options for a
term of five years at $10.89 representing 110% of the market price and 90,818
non-statutory stock options for a period of ten years at $10.89 representing
110% of the market price.
On May 3, 2004, the Company granted 10,000 non-statutory stock options for a
period of ten years at an exercise price equal to the market price of $14.90 on
the date of grant.
All of the above options vest twelve months from the date of issuance.
F-21
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[13] Equity Transactions [Continued]
A summary of the Company's stock option activity, and related information for
the years ended June 30, follows:
Weighted Weighted Stock
Average Average Options
Exercise Number of Exercise Available
Options Price Exercisable Price for Grant
------- ----- ----------- ----- ---------
Outstanding
June 30, 2002 4,845,201 $ 0.92 3,715,201 $ 1.18 2,154,799
Granted 1,693,000 0.59 (1,693,000)
Exercised (1,185,000) 0.12
Terminated (235,000) 1.27 235,000
----------- -----------
Outstanding
June 30, 2003 5,118,201 0.99 3,425,201 1.18 696,799
Additional shares reserved 2,000,000
Granted 937,666 9.97 (937,666)
Exercised (262,000) 1.40
Terminated (110,606) 1.70 110,606
----------- -----------
Outstanding
June 30, 2004 5,683,261 $ 2.41 4,745,595 $ 0.91 1,869,739
=========== ====== ========= ====== ===========
Weighted-average fair value of options granted during the year 2004 2003
---- ----
Where exercise price equals stock price 9.86 .36
Where exercise price exceeds stock price 10.89 .68
Where stock price exceeds exercise price -- --
Following is a summary of the status of stock options outstanding at June 30,
2004:
Outstanding Options Exercisable Options
------------------- -------------------
Weighted Average Weighted Average
Exercise Remaining Exercise Weighted Average
Price Range Number Contractual Life Price Number Exercise Price
----------- ------ ---------------- ----- ------ --------------
$ 0.08 25,000 7.3 0.08 25,000 0.08
$ 0.33 - 0.36 1,060,000 8.1 0.34 1,060,000 0.34
$ 0.50 - 0.55 1,495,000 4.8 0.53 1,495,000 0.53
$ 0.75 - 0.85 1,333,000 6.8 0.80 1,333,000 0.80
$ 1.10 75,000 1.0 1.10 75,000 1.10
$ 1.50 - 1.65 219,998 4.3 1.50 219,998 1.50
$ 1.75 25,000 1.0 1.75 25,000 1.75
$ 3.50 - 3.85 512,597 2.3 3.55 512,597 3.55
$ 7.90 41,666 9.3 7.90 0 0
$ 9.90 - 10.89 886,000 9.4 10.01 0 0
$ 14.90 10,000 9.8 14.90 0 0
- --------------- --------- --- ----- --------- ---
$ 0.05 - 14.90 5,683,261 6.1 2.41 4,745,595 .91
F-22
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[13] Equity Transactions [Continued]
As of June 30, 2004, the Company has 600,000 warrants outstanding to purchase
shares of common stock at prices ranging from $5.40 to $14.00. All outstanding
warrants are currently exercisable.
[B] Paxis Acquisition - On July 22, 2003 the Company completed its acquisition
of ninety-seven (97%) percent of the shares of common stock of Paxis
Pharmaceuticals, Inc. a Delaware corporation ("Paxis") based in Boulder,
Colorado. Paxis was organized to manufacture and distribute cGMP API Paclitaxel,
a leading cancer therapy drug. The Company acquired 47% of the shares of Paxis
in exchange for its 50% interest in Natex Georgia LLC, a company organized in
the Republic of Georgia to harvest from Georgian government lands organic
biomass from which Paclitaxel is made. The Company acquired 50% of the shares of
Paxis from Trade Investment Services, LLC, which funded Paxis' and Natex's
development pursuant to the terms of a certain Purchase Agreement dated as of
February 1, 2003 (the "Purchase Agreement"), in consideration for TIS receiving
from the Company $500,000 and twenty-five (25%) of the after-tax profits of
Paxis until TIS has received an additional $49,500,000.
In addition, TIS assigned to the Company a loan receivable from Paxis, and the
Company assumed Paxis' loan payable in the principal amount of $4,500,000 to the
Bank of America, pursuant to an Assignment and Assumption Agreement dated as of
July 1, 2003 by and among the Company, TIS and Paxis. The Company also assumed
an obligation of $172,260 advanced by TIS to Paxis.
The accounting for the Paxis acquisition followed controlled related party
carryover basis accounting. The excess of the debt of $4,500,000 assumed plus
the $500,000 cash paid plus the $172,260 obligation assumed totaling
($5,172,260) over the net assets acquired of $2,216,171 was recorded as a
reduction of additional paid-in capital of $2,956,068. At this time, the Company
is unable to estimate the amount or timing of any potential contingent payments.
On October 8, 2003, the Company acquired the remaining three (3%) percent of
Paxis Pharmaceuticals, Inc. ("Paxis") in exchange for 66,666 shares of its
common stock valued at $542,728. The stock was valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after.
E. Gerald Kay, the Chief Executive Officer of INB and beneficial owner of
approximately fifty percent (50%) of the stock of INB (or, approximately
sixty-two percent (62%) if family trusts of which he is a trustee are attributed
to him), is the owner of one-third (1/3) of the equity of TIS. Robert Kay, the
brother of E. Gerald Kay a director of INB, is also the owner of one-third (1/3)
of the equity of TIS. Carl DeSantis who is a director of INB, is the owner of
one-third (1/3) of the equity of TIS.
[C] Acquisitions-Agrolabs, Inc. Transaction - On October 22, 2003, the Company
completed the acquisition of various assets related to the Naturally Aloe(TM),
Naturally Noni(TM) and Avera Sport(TM) product lines from Aloe Commodities
International, Inc. ("Aloe"). The assets included trademarks, copyrights, art
work, formula for the products, labels, customer lists, goodwill, inventories
and books and records. Pursuant to the terms of a purchase agreement dated
October 22, 2003 by and between the Company and Aloe, the purchase price for the
Transferred Assets was $2,597,880, with $872,470 paid at closing and $1,725,410
paid in 203,085 shares of the Company's common stock valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after. Such shares shall be held in escrow for a period of one (1) year
from the closing date and released pursuant to the terms of and Escrow Agreement
between and among the Company, Aloe and Vial, Hamilton, Koch & Knox, L.L.P. The
allocation of the purchase price was as follows:
F-23
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[13] Equity Transactions [Continued]
Inventory, Trade Receivables and Prepaid Items $ 597,470
Trade Names 1,508,000
Goodwill 145,410
License Agreement 347,000
-----------
Total $ 2,597,880
===========
[D] Series A Non-redeemable Convertible Preferred Stock and Private Placement
On June 25, 2003, the Company raised $9,500,000 in net proceeds from the sale of
9,500 shares of the Company's Series A Preferred Stock and warrants to purchase
175,000 shares of the Company's common stock, in a private placement. The
warrants have an exercise price of $5.40 per share and expire on June 25, 2007.
As of June 30, 2004, all of the warrants were vested and none were exercised.
The fair value of the warrants, as determined using a Black-Scholes option
pricing model, was approximately $600,000 and was allocated from the gross
proceeds and recorded as additional paid-in capital on the balance sheet.
Investor Rights Agreement - In connection with the sale of the aforementioned
Series A Preferred Stock, the Company entered into an investors rights agreement
which provides for certain "Piggyback Registration" rights and "Demand
Registration" rights after January 1, 2004.
On June 25, 2003, the Company established a new series of Preferred Stock
consisting of 20,000 shares of Series A non-redeemable Convertible Preferred
Stock (the "Series A Preferred Stock") as part of the above private placement.
Rights, preferences and privileges of the Series A Preferred Stock are as
follows:
Dividends - On each of July 1, 2004, July 1, 2005, and July 1, 2006, the holders
of the Series A Preferred Stock are entitled to receive in preference to the
payment of dividends to any holders of Common Stock, a dividend, payable in cash
or in kind at the option of the Company, equal to $40 per share of Series A
Preferred Stock, when and as declared by the Board of Directors. After June 30,
2006, dividends will no longer accrue.
Conversion -The Series A Preferred Stock shall be convertible into Common Stock,
as follows:
Each share of Series A Preferred Stock shall be convertible, at the option of
the holder at any time after the date of issuance of such shares through June
30, 2006. Each share shall be convertible into the number of shares of Common
Stock which results from dividing $1,000 by the conversion price per share in
effect at the time of conversion. The conversion price per share of Series A
Preferred Stock ("Conversion Price") shall be $8 through June 30, 2004, $12 from
July 1, 2004 through June 30, 2005 and $16 from and after July 1, 2005.
Each share of Series A Preferred Stock shall automatically be converted into
shares of Common Stock at the then effective Conversion Price immediately prior
to the closing of (i) a public offering pursuant to an effective registration
statement under the Securities Act of 1933 with an aggregate gross proceeds to
the Company, at the offering price, of at least $5 million, and a price per
share not less than the then effective Conversion Price; or (ii) upon the
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock to convert all of the outstanding shares of Series A
Preferred Stock into Common Stock of the Company.
On June 28, 2004, all of the shares of the Series A Preferred Stock were
converted at the election of the Investor into 1,187,500 shares of common stock.
At June 30, 2004, no shares of the Series A Preferred Stock were outstanding and
F-24
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[13] Equity Transactions [Continued]
since all shares had been converted, no dividend payment is required at July 1,
2004. Therefore, the Company reversed the $285,000 of Series A Preferred Stock
accretion of dividends that was recorded as of March 31, 2004.
[E] Series B Redeemable Convertible Preferred Stock and Private Placement
On April 20, 2004, the Company raised $7,500,000 in gross proceeds from the sale
of 750 shares of the Company's Series B Redeemable Convertible Preferred Stock,
par value $.002 per share (`the "Series B Preferred Shares'), at a purchase
price of $10,000 per share.
Dividends of the Series B Preferred Shares are 7% per annum, payable by the
Company in cash or, in certain instances, in shares of the Company's Common
Stock, par value $.002 per share (the "Common Stock"). Accordingly, the Company
paid $101,692 in dividends for fiscal 2004. The Series B Preferred Shares are
convertible at the option of each Investor into shares of Common Stock at a
conversion price of $10.00 per share, subject to anti-dilution and other
customary adjustments. Upon conversion, the Investors would receive an aggregate
of 750,000 shares of Common Stock. The Company also has the option to force such
conversion in the event that it meets certain performance milestones. The Series
B Preferred Shares are redeemable by the Company on the third anniversary of
issuance. The Investors can also force redemption upon the occurrence of certain
events of default.
The Company also issued to the Investors warrants (the "Warrants") to purchase
an aggregate of 375,000 shares of Common Stock, exercisable over a five-year
period. The exercise price is $14.00 per share, subject to anti-dilution and
other customary adjustments. Assuming no such adjustments, the exercise of all
Warrants could result in additional gross proceeds to the Company of $5,250,000.
The Warrants are callable by the Company in the event that it meets certain
performance milestones.
Finally, the Company issued Additional Investment Rights to the Investors,
entitling them over the next 18 months to purchase an aggregate of 375
additional Series B Preferred Shares (convertible into 375,000 shares of Common
Stock) and Warrants to purchase an additional 187,500 shares of Common Stock.
The Series B Preferred Shares and Warrants issuable upon exercise of the
Additional Investment Rights have the same terms as the securities issued at
closing. Assuming no anti-dilution or other adjustments, the exercise of all
Additional Investment Rights followed by the exercise of all Warrants issuable
upon exercise of the Additional Investment Rights could result in additional
gross proceeds to the Company of $6,375,000.
The Company recorded the relative fair value of all of the warrants and
Additional Investment Rights in connection with this transaction of $2,904,400
against the amount of the redeemable convertible preferred stock as of April 20,
2004, which was calculated using the Black-Scholes valuation method, as well as
$4,595,600 of a beneficial conversion feature in accordance with EITF 00-27 and
such amounts are being accreted over the three year period until the mandatory
redemption date of the Preferred Stock, the third anniversary of closing. The
Company recorded accretion of $960,000 in fiscal 2004.
The Company has agreed to register the Common Stock underlying the Series B
Preferred Shares and the Warrants, including the Series B Preferred Shares and
the Warrants issuable upon exercise of the Additional Investment Rights, for
resale under the Securities Act of 1933 and applicable state securities laws.
[F] Common Stock Private Placement
On May 3, 2004, the Company raised $5,000,000 in net proceeds from the sale of
500,000 shares of the Company's common stock, par value $.002 per share, to one
Investor, at a purchase price of $10.00 per share. The Company also issued to
the Investor a warrant to purchase 50,000 shares of common stock , exercisable
over the next five-year period with an exercise price of $14.00 per share.
F-25
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[13] Equity Transactions [Continued]
[G] Treasury Stock Purchases - On June 25, 2004 Integrated BioPharma, Inc.
adopted a stock repurchase plan giving management authority to purchase up to $3
million worth of the Company's stock in open market transactions or privately
negotiated transactions at the Company's discretion. As of June 30, 2004 no
purchases were made.
[14] Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments. All consolidated items are included in Other.
The Company has divided its operations into two reportable segments as follows:
Sales of vitamins and nutritional supplements and sales of its pharmaceutical
drug Paclitaxel. Because Paxis Pharmaceuticals, Inc. was not acquired until
fiscal 2004, the Company operated one business segment in fiscal 2003. The
international sales for fiscal 2003 were $1,616,049.
Financial information relating to fiscal 2004 operations by business segment
follows:
Nutraceutical Pharmaceutical
Revenues
U.S. Customers $20,860,038 $ --
International 4,422,752 --
----------- ------------
Total Revenues 25,282,790 --
Segment operating profit/(loss) 587,899 (6,197,244)
Depreciation 448,787 304,602
Capital Expenditures 754,167 2,765,419
Total assets 23,815,154 7,998,272
[15] Subsequent Event
Treasury Stock Purchases - On June 25, 2004 Integrated BioPharma, Inc. adopted a
stock repurchase plan giving management authority to purchase up to $3 million
worth of the Company's stock in open market transactions or privately negotiated
transactions at the Company's discretion. As of September 2004, the Company has
purchased an aggregate of 9,100 shares of its common stock at a total price of
$75,509 during fiscal 2005.
Hauser Contract Research Organization - On September 16, 2004 the Company
completed the purchase of substantially all of the assets of Hauser Technical
Services, Inc. (dba Hauser CRO), including substantially all of its
laboratories, development and manufacturing facilities and equipment. The total
purchase price was approximately $1,600,000.
F-26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
Date: September 28, 2004 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay,
Chief Executive Officer
Date: September 28, 2004 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Chief Financial Officer