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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Fiscal Year ended June 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________________ .
Commission File Number 0-14983
NUTRITION 21, INC.
------------------
(Exact Name of Registrant as Specified in its Charter)
New York 11-2653613
- -------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
4 Manhattanville Road, Purchase, New York 10577-2197
(914) 701-4500
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.005 per share)
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety (90) days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
---- -----
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $27,641,931 as of September 23, 2003.
The number of shares outstanding of Registrant's Common Stock as of September
23, 2003: 33,924,488.
1
FORM 10-K REPORT INDEX
10-K Part
and Item No. Page No.
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PART I
Item 1 Business 3
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market Price of Registrant's Common Equity and
Related Stockholder Matters 19
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk 29
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
Item 9A Controls and Procedures 29
PART III
Item 10 Directors and Executive Officers of the Registrant 30
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners40
and Management 40
Item 13 Certain Relationships and Related Transactions 42
Item 14 Principal Accounting Fees and Services 43
PART IV
Item 15 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 45
2
Disclosures in this Form 10-K contain certain forward-looking statements,
including without limitation, statements concerning the Company's operations,
economic performance and financial condition. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The words "believe," "expect," "anticipate" and
other similar expressions generally identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on the Company's current expectations and are subject to a number of
risks and uncertainties, including without limitation, changes in external
market factors, changes in the Company's business or growth strategy or an
inability to execute its strategy due to changes in its industry or the economy
generally, the emergence of new or growing competitors, various other
competitive factors and other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
Actual results could differ materially from the results referred to in the
forward-looking statements. In light of these risks and uncertainties, there can
be no assurance that the results referred to in the forward-looking statements
contained in this Form 10-K will in fact occur. The Company makes no commitment
to revise or update any forward looking statements in order to reflect events or
circumstances after the date any such statement is made.
PART I
ITEM 1. BUSINESS
The Company
The Company is a New York corporation that was incorporated on June 29,
1983 as Applied Microbiology, Inc.
The Company initially focused on the development and commercialization
of antibacterial technologies for new drugs and has since licensed those
technologies. Beginning in 1995, the Company shifted its focus to developing and
marketing nutrition products and ingredients. In 1997, as part of the purchase
of Nutrition 21 LLC, a San Diego based mineral ingredient business, the Company
acquired a comprehensive chromium-based patent portfolio based on a picolinate
form of chromium that was invented and researched by the United States
Department of Agriculture.
A USDA composition-of-matter patent, exclusively licensed to Nutrition 21
expired in August 2000, limiting the Company's royalties associated with the
manufacturing and distribution of chromium picolinate in the U.S. However, the
Company owns the exclusive rights to 24 U.S. chromium patents, and various
foreign patents, including composition of matter patents for novel chromium
picolinate complexes and their uses. Three U.S. patents for the accepted
3
essential nutritional uses of chromium picolinate for glucose control, for
managing cholesterol, and for increasing lean body mass and reducing body fat
are in force through 2009.Patents for improved chromium picolinate complexes
containing combinations of chromium and various nutrients for enhancing the
benefits of chromium picolinate, are in force into the year 2017. More recently,
the Company has secured the patent rights to the uses of all forms of chromium
in the treatment of depression and other mood disorders, rights that are in
force through 2018. Several patent applications are also in process. See
"Proprietary Rights."
The Company continues to derive royalties and revenues associated with
its three patents covering the basic nutritional uses of chromium picolinate in
the U.S. vitamin and mineral market, but is now transitioning to a new business
model as it prepares to commercialize its expanded patent estate. Through
strategic alliances, the Company plans to market and distribute distinct branded
therapeutic products for people with diabetes and other conditions associated
with insulin resistance. As many as one in four Americans are estimated to be
insulin resistant.
Chromium was first identified as a potential factor in improving
glucose control in animal studies conducted in the 1950's. In 1997, the FDA
established a Reference Daily Intake (RDI) for chromium, an essential mineral
required for the proper function of insulin, the body's master metabolic
hormone. Insulin regulates the body's ability to process carbohydrates, fats and
protein. Proper insulin function is therefore important to the healthy function
of virtually every cell in the body.
Beginning in 2001, the Company made a three-year research commitment to
a research program to explore the role of chromium in insulin function, expand
its patent portfolio and create a strong body of peer-reviewed supporting
clinical evidence supporting the use of chromium picolinate supplementation in
the management of diabetes. Diabetes is a debilitating and chronic disease
condition estimated to affect 150 million people globally
The Company's research program is designed to further 1) establish a
correlation between chromium deficiency and impaired glucose metabolism; 2)
build a body of peer-reviewed evidence demonstrating the clinical superiority of
the picolinate form of chromium in improving insulin function and glucose
metabolism in people with impaired insulin function, including diabetics 3)
develop a better understanding of chromium picolinate's mechanism of action; and
4) generate more data associated with long term use.
Today, there is a significant body of peer-reviewed research and yet to
be published data, which address these research objectives. The Company's growth
will depend upon its ability to successfully communicate chromium picolinate's
health benefits to the medical community, and then to expand that endorsement to
its new and improved portfolio of products. As the Company's research program
unfolds, Nutrition 21 should be in a position to participate in the burgeoning
healthcare markets associated with insulin resistance.
4
Therapeutic Branded Products
In September 2002, the Company adopted a business strategy to develop
and market therapeutic branded nutrition products by way of strategic alliances
and to use revenues from its ingredients business to fund research and
development for this program. In formulating its new business growth strategy,
the Company has built on its core competencies in conducting pharmaceutical-type
clinical research, patenting the results of the clinical research, and licensing
and co-marketing proprietary products.
The Company's first branded product, Diachrome(TM), will be positioned
to aid in the dietary management of diabetes and will be marketed with the
support of healthcare professionals. Diachrome(TM) is a patented combination of
Chromax chromium picolinate and biotin; these are nutritional ingredients that
work synergistically to enhance blood sugar control and improve blood
cholesterol profiles. Building on pre-clinical and early clinical research, the
Company has formed a strategic alliance with Diabetex, a leading diabetes
disease management company, to further validate Diachrome's ability to
significantly improve blood sugar control in people with type 2 diabetes.
Together, the companies are conducting a 600 patient double-blind placebo
controlled trial aimed at demonstrating the pharmacoeconomic benefits associated
with the use of Diachrome as a nutritional adjunct to current diabetes
management protocols. The Diachrome study is expected to be completed by the end
of fiscal year 2004 and, assuming positive results, Diachrome will be
aggressively marketed to the diabetes healthcare market under the Nutrition 21
label.
Through its alliance with Diabetex, the Company will also seek to
include the Diachrome product on the Medicare formulary, and demonstrate the
product's ability to improve patient outcomes and lower the cost of care. The
Company plans a targeted direct-to-consumer marketing program to managed
diabetic populations. The Company plans to build consumer awareness for its
products through a media campaign that leverages research outcomes, in
combination with consumer and physician testimonials. Communication of
scientific findings will be used to build consensus within the healthcare
community regarding the inherent value of the Company's products.
The Company intends to market its patented products as nutritional
supplements under the Dietary Supplement Health and Education Act ("DSHEA")
regulations and in certain instances will seek to secure a FDA approved health
claim. See "Governmental Regulation."
While the Company's initial entry into the therapeutic market is
focused on diabetes, the Company's research pipeline also includes products for
other closely related conditions in large and growing markets addressing
cardiovascular disease, depression and women's health. The Company has already
made a significant investment in clinical research to further validate the
findings of a Duke University study published in December 2002 that evaluated
the benefits of chromium supplementation in atypically depressed populations.
The Company will be required to raise additional capital to the extent that
internally generated
5
funds from the Company's other businesses are insufficient to finance its
development and marketing costs for its therapeutic branded products.
Ingredients
In parallel with its new business strategy, the Company aims to
strengthen its ingredients business through an expanded licensing effort, and by
offering current and prospective licensees access to new formulas and or
products developed with the Company's proprietary ingredients.
Since 1997, the Company's primary business has been to develop and
market proprietary ingredients to the vitamin and supplement market for both
human and animal applications. Today, Chromax(R) chromium picolinate is the
Company's flagship ingredients product. Early clinical evidence dating back to
the 1980's demonstrated potential efficacy for Chromax chromium picolinate as a
weight loss supplement, and it is still one of the most widely used ingredients
in supplements marketed for weight control.
The current US retail market for chromium mineral supplements is
estimated to be $87 million, only a 10th as large as the US retail calcium
market. More than 85% of US chromium mineral supplements are formulated with the
Company's proprietary Chromax chromium picolinate, while the rest are
manufactured using chloride, polynicotinate or other forms. The Company's
ingredient customers distribute Chromax either under the Chromax name under
license from the Company, or under their own private labels. A license from the
Company is required for all chromium picolinate products that are sold in the US
and formulated at an effective dose for glucose control and its derivative
benefits.. The royalties and ingredient sales associated with the use of Chromax
in the US chromium retail market constitute a significant share of the Company's
revenues.
Additional revenues are derived from the sale and licensing of Chromax
to customers who incorporate it and other of the Company's ingredients into over
900 finished multi-ingredient products. These include vitamin/mineral formulas,
weight loss and sports nutrition supplements, baked goods, beverages and other
products. These products are sold by the Company's customers under a variety of
brands throughout the world through natural/health food stores, supermarkets,
drug stores, and mass merchandisers, and also through direct sales and catalogue
sales.
The Company has undertaken an independent research effort to identify
patentable ingredient combinations that build on its understanding of chromium's
wide ranging effects in human metabolism. In late fiscal 2003, the Company
launched a new chromium ingredient combination, Chromax chromium picolinate
combined with conjugated linoleic acid called Zenergen(R), which potentiates
glucose uptake in muscle cells in the absence of insulin stimulation. Promising
pre-clinical research indicates that this combination enhances the independent
benefits of each ingredient, and promotes healthy weight loss in people who are
insulin resistant.
6
Chromax chromium picolinate is also used for managing the health of
breeding sows and their offspring, where it has been shown to improve glucose
control in gestating swine. Research outcomes include improved fertility,
productivity and recovery for the sows and stronger more resilient offspring. In
fiscal year 2003, Prince Agri Products, the Company's exclusive distributor in
the animal health market accounted for approximately 18.9% of the Company's
consolidated revenues..
Pharmaceutical Products and Alliances
The Company has infectious disease drug technology for diseases in
humans, centered around the compound nisin, a member of the lanthocin class of
peptides, as a potential treatment for infections of the colon, and lysostaphin,
an enzyme, as a potential treatment for endocarditis, and lysostaphin and
antibiotic compositions to treat infections while suppressing the formation of
staphylococcal and antibiotic resistance. The Company determined that it did not
have the resources necessary to take these pharmaceutical products for the
treatment of infectious diseases from the development stage through regulatory
filings and ultimately to the marketplace, should a product be proven to be safe
and efficacious. In March 1996, the Company entered into an exclusive Agreement
with AZWELL, Inc. (formerly Nippon Shoji Kaisha, Ltd. of Osaka, Japan), under
which AZWELL received exclusive rights to develop and market certain nisin-based
drug products as a treatment of infections of the colon and nosocomial
infections in Japan, certain Asian countries, Australia and New Zealand.
In August 2000, the Company exclusively licensed to Biosynexus the
Company's remaining rights to nisin and lysostaphin antibacterial technologies
for development and marketing of new drugs for human uses. The Company received
a payment of $1.4 million, and the license provides for milestone payments of up
to $14 million, and royalties. The Company also received warrants to acquire
common stock of Biosynexus, currently a privately held company.
The Company also has infectious disease technology centered on nisin
and lysostaphin for the treatment of diseases in animals, including a moistened
towel using a nisin-based formulation for mastitis prevention that is used for
preparing dairy cows for milking. The Company launched the product under its
trademark Wipe Out(R) Dairy Wipes in April 1996. On December 30, 1999, the
Company sold its Wipe Out Dairy Wipes business to ImmuCell Corporation
("ImmuCell"). On April 12, 2000, the Company exclusively licensed to ImmuCell
worldwide rights to develop and market new antibacterial drugs for animals using
the Company's technologies.
Consumer Products
In 1999, the Company acquired the Lite Bites family of brands from
Optimum Lifestyles, Inc. In August of 2003, the Company discontinued its
investment in the Lite Bites product line and recorded a $4.4 million charge
relating to the discontinuance.
Research and Development
7
The Company's chromium-based research and development program aims to
discover and substantiate the efficacy and safety of ingredients and products
that have a significant nutritional therapeutic value to consumers. The primary
research focus over the past few years has been in the area of diabetes and
cardiovascular health. Discovering the mechanism of action of chromium
picolinate and further confirming the beneficial effects of chromium picolinate
in people with diabetes have been critical objectives. Other therapeutic areas
currently being researched include: obesity, depression, bone and joint health,
and women's health.
Publications and presentations communicating the results of the
research have involved an intensified effort to achieve more widespread support
from major research, academic and government groups. These efforts are conducted
in cooperation with leading clinicians and academic institutions including
Harvard School of Public Health, Penn State University, University of Alberta,
Northern General Hospital, UK, Warneford Hospital at Oxford University,
University of Miami, Purdue University, University of Pennsylvania, Jefferson
University, Duke University, Oakland Children's Hospital, SUNY Stony Brook
University, UCLA, University of Connecticut, Baylor College of Medicine,
University of Massachusetts, Pennington Biomedical Research Center, Sansum
Medical Research Foundation and University of Vermont. During the fiscal years
ended June 30, 2003, 2002 and 2001, approximately $2.2 million, $1.0 million,
and $1.9 million, respectively, were spent on research and development by the
Company. This research is in support of marketing opportunities that can be
captured through the existing DSHEA regulatory channels to enhance the speed and
reduce the costs associated with new product introductions.
In addition, in the past year the National Institutes of Health (NIH)
has granted two human clinical grants to support additional research in
evaluating the beneficial effects of chromium picolinate in people with diabetes
or a pre-diabetic condition called the Metabolic Syndrome. NIH research grants
were awarded to the Pennington Biomedical Research Institute and to the
University of Pennsylvania for this research. Nutrition 21 is providing Chromax
chromium picolinate for use in these studies.
This research effort has enabled the Company to identify patentable new
combinations of chromium and new uses for chromium, and new food systems that
can be enhanced by the inclusion of its ingredient systems.
The Company is also applying its model of developing uniquely
patentable nutritional products supported by peer-reviewed research to other
mineral technologies within its intellectual property portfolio, including
arginine- silicate- inositol and calcium- taurate.
8
ONGOING CLINICAL RESEARCH STUDIES - 2003
Chromax: Evaluation of the Effect of Chromium Picolinate in People with Type 2
Diabetes. - Investigator: William Cefalu, MD, University of Vermont (Study
funded in part by the American Diabetes Association and by N21).
Chromax: Chromium and Insulin Action. - Investigator: William Cefalu, MD,
Pennington Biomedical Research Institute (Study funded by the NIH-NIDDK).
Chromax: A Double Blind, Randomized Controlled Clinical Trial of Chromium
Picolinate on Clinical and Biochemical Features of the Metabolic Syndrome. -
Investigator: Philippe Szapary, MD, University of Pennsylvania (Study funded by
the NIH)
Chromax: A Double Blind, Placebo Controlled Trial of Chromium Picolinate in
Atypical Depression. - Investigator: Dr. David Sack, Comprehensive Neuroscience,
Inc. (Study funded by N21).
Chromax: Chromium in the Treatment of Schizophrenia. - Investigator: Phil Cowen,
MD, Oxford University (Study product provided by N21).
Chromax based multi-ingredient weight loss product: A Double Blind Placebo
Controlled Clinical Trial Evaluating The Effects Of A Weight Loss Supplement In
Healthy Overweight/Moderately Obese Volunteers - Investigator: Jeff Geohas, MD.
Radiant Research (Study funded by N21).
Diachrome: A Randomized, Double Blinded, Placebo Controlled, Parallel Arm,
Multicenter Study to Evaluate the Improvement in Glycemic Control, Lipid Levels,
Quality of Life and Healthcare Costs After Daily Administration of Chromium
Picolinate and Biotin in Patients With Type 2 Diabetes Mellitus. -
Investigators: Burch Fuqua, MD; Cesar Albarracin, MD. Diabetex Corporation
(Study funded by N21)
Diachrome: Chromium Picolinate And Biotin Supplementation To Diminish Glycation
In Children And Adults With Type 2 Diabetes. - Investigator: Paul Harmatz, MD.
Children's Hospital Oakland (Study funded by N21).
STUDIES COMPLETED IN 2003
Chromax: Primary Screening of Enzyme or Receptor Binding Assays Relating to
Depression and Alzheimer's Disease with Chromium Picolinate. - Investigators:
Juturu V, Komorowski JR and Chiu P (Study funded by N21).
Chromium Picolinate: Effects of Chromium Treatment in Patients with Poorly
Controlled, Insulin-Treated Type 2 Diabetes Mellitus. A Randomized, Double
Blind, Placebo-Controlled-Trial. -
9
Investigators: Houweling, ST, Kleefstra N, Jansman FGA, Bakker SJL, Groenier,
KH, Meyboom-de Jong, B and Bilo HJG, Department of Internal Medicine, Isala
Clinics, The Netherlands.
Chromium: Toenail Chromium Levels and Risk of Coronary Heart Disease Among
Normal and Overweight Men Eric B. Rimm, Eliseo Guallar, Edward Giovannucci,
Alberto Ascherio, Meir J. Stampfer, Walter C. Willett, & Frank B. Hu. Department
of Nutrition, Harvard School of Public Health, and Johns Hopkins Medical
Institutions. (Funded in part by research grant from N21). Chromium: Toenail
Chromium Status and Cardiovascular Disease Risk in Europe. - Investigator:
Eliseo Guallar, MD, DrPh. Johns Hopkins University.
Zenergen: Effects of chromium picolinate, conjugated linoleic acid and CLA
isomers on 3T3-L1 adipocyte differentiation and PPARs activation (alpha, beta
and gamma) - Investigators: Dr. Jack Vanden Heuvel, Penn State University &
Exygen, Inc. (Study funded by N21).
Arginine-Silicate-Inositol: Effect of Arginine silicate inositol complex on
vascular function and bone health markers. - Investigator: James C Russell,
University of Alberta (Study funded by N21).
Arginine-Silicate-Inositol: Evaluation of Arginine inositol potassium silicate
in the Ames bacterial reverse mutation test. Investigators: Juturu V, Komorowski
JR and Rao KS (Study funded by N21).
Arginine-Silicate-Inositol: Evaluation of Arginine Inositol Silicate tested for
LD50 Investigators: Juturu V, Komorowski JR and Devine J (Study funded by N21).
PRESENTATIONS AND PUBLICATIONS IN 2003
Juturu V, Komorowski JR. Chromium supplements, glucose and insulin responses. Am
J Clin Nutr. 77 :1, 2003
Juturu V, Komorowski JR. Chromium compounds: cytotoxicity and carcinogenesis.
Toxicology. Apr 15; 186(1-2): 171-3, 2003
Davidson JR, Abraham K, Connor KM, McLeod. Effectiveness of Chromium in Atypical
Depression: A Placebo- Controlled Trial. Biol Psychiatry. 53, 261-264, 2003
Juturu V. and Komorowski JR. Chromium and Cardiovascular Disease. Advances in
Heart Failure. [Intern. Acad. Cardiology]. Ed. Asher Kimchi. 279-282, 2003
Juturu V., Komorowski JR, Devine J et al. Absorption and Excretion of Chromium
from orally administered: Chromium Chloride, Chromium Acetate and Chromium Oxide
in rats. Intern J Trace Elements and Electrolytes.20 (1), 23- 28, 2003
Juturu V. and Komorowski, JR. Fatty Acids And Insulin Resistance. AOCS, 2003
10
Juturu V. and Komorowski, JR. Different Forms of Chromium: A Critical Evaluation
of Absorption and Excretion. FASEB, 2003
Juturu V., Komorowski JR, Greenberg D, Maki KC, Rosenblatt S. Chromium with
Biotin Decreases coronary risk lipids and lipoproteins in people with Type 2
Diabetes ingesting moderate carbohydrate nutritional beverages. FASEB 2003
Komorowski JR., Juturu V, Wang zQ., Zhang XH., and. Cefalu WT. Glucose uptake of
Chromium Picolinate, Chromium Polynicotinate and Niacin. FASEB, 2003
Juturu V. and Komorowski JR. Consumption of selected food sources of chromium in
the diets of American Adults: Based on the CSFII database 1994-1996. FASEB, 2003
Wang ZQ, Zhang XH, Baldor LC, and Cefalu WT. Chromium picolinate increases
skeletal muscle PI-3 Kinase activity in obese, hyperinsulinemic JCR:LA-Corpulent
(JCR:LA-Cp) Rats63rd Annual Meetings &Scientific Sessions, ADA, 2003
Wang Z, Zhang X, Komorowski JR, Juturu V and Cefalu WT. Enhancement of Glycogen
accumulation in human skeletal muscle culture: Conjugated linoleic acid, CLA
isomer t10c12 and chromium picolinate, 63rd Annual meetings and scientific
sessions, ADA 2003
Ghosh D, Bhattacharya B, Mukherjee B, Manna B, Sinha M, Chowdhury J, Chowdhury
S. Role of chromium supplementation in Indians with type 2 diabetes mellitus. J
Nutr Biochem. Nov;13(11):690-697, 2002.
Juturu, V and Komorowski, JR. Chromium And Cardiovascular Disease. 8th World
Congress on Heart Failure. Washington DC, July 13-16, 2002
Juturu, V, and Komorowski, JR. Antimutagenic Activity of Chromium Picolinate in
the Salmonella Assay. XIV World Congress of Pharmacology. July 7-12, 2002.
STUDIES COMPLETED IN 2002
Diachrome: Chromium with Biotin Decreases coronary risk lipids and lipoproteins
in people with Type 2 Diabetes ingesting moderate carbohydrate nutritional
beverages. Investigator: Kevin Maki, PhD Chicago Center for Clinical Research
(Study funded by N21).
Zeramax: Effectiveness of Chromium Picolinate in Atypical Depression: A
Placebo-Controlled Clinical Trial. Investigator: Jonathan Davidson, MD, Duke
University (Study funded by N21).
11
PRESENTATIONS AND PUBLICATIONS IN 2002
Cefalu WT, Wang ZQ, Zhang XH, Baldor LC and Russell JC. Oral Chromium Picolinate
Improves Carbohydrate and Lipid Metabolism and Enhances Skeletal Muscle Glut-4
Translocation in Obese, Hyperinsulinemic (JCR-LA Corpulent) Rats. The Journal of
Nutrition 132(6):1107-14. June 2002
Davidson J, Abraham K, Connor K and McLeod MN. Effectiveness of Chromium
Picolinate in Atypical Depression: A Placebo-Controlled Clinical Trial. Journal
of Biology Psychiatry (In Press) 2002
Feng J, Lin D, Zheng A, Cheng N. 2002. Chromium picolinate reduces insulin
requirements in people with type 2 diabetes mellitus. Diabetes 51(S2):A469
Juturu V, Komorowski JR, and Devine J et al. Absorption and Excretion of
Chromium from Orally Administered Chromium Chloride, Chromium Acetate and
Chromium Oxide in Rats. Intern Journal Trace Elements and Electrolytes. (In
Press) 2002
Juturu V. Lite Bites case study: A Total Lifestyle System for Weight Management.
Weight loss Foods and Supplements Conference, Chicago, Il Feb 2002
Juturu V and J Komorowski JR. Is Chromium Needed for Individuals with
Cardiovascular Disease? FASEB, Experimental Biology 16(4)2002
Rimm EB, Guallar E, Giovannucci E, AshcerioA, Stampfer MJ,. Willet WC and Hu F.
Toenail Chromium Levels and Risk of Coronary Heart Disease Among Normal and
Overweight Weight Men. 42nd Annual Conference on the Epidemiology and Prevention
of Cardiovascular Disease and Obesity. American Heart Association, April 2002
Juturu, V, and Komorowski, J.R. Chromium In the Management of Improving Insulin
Sensitivity. TEMA II June 2-6, CA., 2002. The Journal of Nutrition (suppl). 2002
Juturu V and Komorowski JR. Chromium: A Systematic Overview and Meta Analysis.
62nd Annual Meeting & Conferences. American Diabetes Association, June 2002
Juturu V and Komorowski JR. Conjugated Linoleic Acid and Metabolic Syndrome: An
overview. ISSFAL, Quebec, Canada May 2002
Juturu V and Komorowski JR. Antimutagenic Activity of Chromium Picolinate in the
Salmonella Assay. XIV World Congress of Pharmacology, July 2002.
Juturu V and Komorowski JR. Reply to Althuis MD. Glucose and Insulin responses
to dietary chromium supplements: A Meta-Analysis. (In Press) The American
Journal Clinical Nutrition 2002.
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STUDIES COMPLETED IN 2001
Diachrome: Chromium Picolinate with Biotin Attenuates Elevation in Blood Glucose
Levels in People with Type 2 Diabetes Ingesting Medium Carbohydrate Nutritional
Beverages. Investigators: Greenberg D, Komorowski JR and Maki KC (CRO)
Lite Bites: Effect Of A Dietary Supplement Added to a Low Calorie Diet and
Exercise Program on Bone Mass. Investigators: Greenberg D, Komorowski JR (CRO)
Zenergen: Enhancement of Glucose Uptake In Human Skeletal Muscle Culture:
Conjugated Linoleic Acid, CLA Isomer t10 cis12, and Chromium Picolinate.
Investigators : Juturu V, Komorowski JR, Cefalu WT et al., University of Vermont
2001
Chromium: Absorption and Excretion of Chromium from Orally Administered Chromium
Chloride, Chromium Acetate and Chromium Oxide in Rats. Investigators: Juturu V,
Komorowski JR, Devine J (CRO).
PRESENTATIONS AND PUBLICATION IN 2001
Komorowski JR, Greenberg D, Wang ZQ, Cefalu WT et al. Chromium Picolinate and
Alpha Lipoic Acid act Synergistically to Enhance 2 DG Uptake in Human Skeletal
muscle culture. FASEB, Orlando, FL April 2001
de la Harpe J, Greenberg D, Komorowski JR, Wang ZQ, Cefalu WT et al. Chromium
Picolinate and CLA Act Synergistically to Enhance Glucose Uptake in Human
Skeletal Muscle Culture. FASEB, Orlando, FL April 2001
Sherman W, Zhang XH, Man Kim DD and Wang ZQ. Chromium Picolinate Improves Fatty
Acid -Induced Inhibition of Glucose Transport in Human Skeletal Muscle culture.
ADA, 61st Scientific Session. Philadelphia, PA June 2001
Komorowski JR, de la Harpe J, Cefalu WT et al. JCR:LA-cp Rats show Improved
Lipid Profiles in Response to Diets Containing Chromium Picolinate and Biotin.
Society for the Study of Ingestive Behavior, Philadelphia, PA June 2001
Greenberg D, Komorowski JR, Maki K. Chromium Picolinate with Biotin Attenuates
Elevation in Blood Glucose Levels in People with Type 2 Diabetes Ingesting
Medium Carbohydrate Nutritional Beverages. Journal of the American College of
Nutrition Orlando, FL Sep 2001
Greenberg D and Komorowski JR. Effect Of A Dietary Supplement Added To A Low
Calorie Diet And Exercise Program On Bone Mass. NAASO, Montreal, Canada Oct 2001
Juturu V and Komorowski JR. Is Chromium Supplementation needed in People With
Diabetes Mellitus? Diabetes Workshop. West Virginia, Oct 2001
13
GOVERNMENTAL REGULATION
DIETARY SUPPLEMENTS AND PHARMACEUTICALS
Depending upon the ingredients of a specific product, some nutrition
products can be marketed in the U.S. under DSHEA or the Orphan Drug Act. The
Company's human nutrition products fall in regulatory categories that, in some
circumstances, may require FDA approval for marketing. In addition to FDA
regulations, the Federal Trade Commission ("FTC") regulates product-advertising
claims. Prior to the Company's acquisition of Nutrition 21, Nutrition 21 and the
FTC entered into a consent agreement, which culminated in an FTC order that,
among other things, requires that claims for dietary supplements be supported by
competent and reliable scientific evidence. Independent of this order, the
Company maintains a commitment to validating its product claims through
double-blind placebo controlled clinical trials.
In 2002, chromium picolinate was certified as generally recognized as
safe for use in foods (GRAS) by an expert panel, which reviewed a substantial
dossier of clinical evidence confirming the safety of chromium picolinate. In
addition to sales for human consumption, the Company sells chromium picolinate
for use in certain animal feed applications, having been approved by the FDA for
use as a supplement in animal feed for swine in 1996.
The Company currently markets its products as dietary supplements.
Going forward, Nutrition 21 intends to continue to market its products as
nutritional supplements. The existing product portfolio will continue to be
marketed as Dietary Supplements under the DSHEA regulations, and in certain
circumstances, the Company will seek to secure a FDA approved health claim. The
new product marketing strategy will focus on the clinical value of proprietary
formulations, like Diachrome, which are expected to be marketed as a
physician-recommended nutrition therapy for people with diabetes and/or impaired
insulin function.
Diachrome has been clinically shown to improve various diabetes
endpoints including glycated hemoglobin as well as fasting and postprandial
glucose levels. However, the current regulatory environment for dietary
supplements does not allow reference to diabetes or the health parameters
defining this condition (e.g. healthy blood glucose metabolism). As such, the
Company initially plans to market Diachrome within the regulatory context of a
dietary supplement while relying in part on the support of third party experts
and the promotion of peer-reviewed research to quantify product benefits. Upon
completion of its large-scale clinical trial with Diabetex, a leading diabetes
disease management company, the Company plans to secure a FDA approved health
claim.
PROPRIETARY RIGHTS
TRADEMARKS
Chromax, Diachrome, Selenomax, SelenoPure, Zinmax, Zenergen and
Magnemax are among the more well known trademarks owned by Nutrition 21: Chromax
for chromium picolinate; Diachrome for chromium picolinate and biotin; Selenomax
for high selenium yeast,
14
SelenoPure for yeast-free selenium; Zinmax for zinc picolinate; Magnemax for
manganese picolinate, and Zenergen for chromium picolinate and conjugated
linoleic acid. Brite Bites, Cardia, Lite Bites, Lite Bites Fat-Fighting System
Chewies, and Metabolic Makeover are trademarks for its consumer products in the
US, while Brite Bites is a UK trademark.
NUTRITION PATENTS
The Company invests a substantial amount of time, effort, and resources
in developing and validating novel nutritional technologies. To prevent others
from copying and/or taking advantage of the Company's extensive investment in
research and innovation, the Company has incorporated the strategic use of
intellectual property ("IP"), principally patents, into its overall business
plan.
The Company enforces its patent rights to exclude others from copying
the Company's patented technology. The Company also licenses its patent rights
to others in exchange for royalties or access to complementary technology. The
strategic use of patents protects the Company's initial investment in innovation
as well as generates additional monies, which can be used to fund additional
research and development of new products.
The nutritional supplement industry had traditionally viewed patent
protection as a marketing tool, not as a strategic tool providing a competitive
advantage. Patent rights were rarely, if ever, enforced. In this environment,
smaller companies were less likely to invest in innovation, knowing that larger
companies with greater manufacturing and marketing capacity could freely copy
its products. However, the Company has used its IP strategically to protect its
investment and the investments of its customers.
The Company has demonstrated its ability to both monitor and enforce
its patent portfolio, having settled several cases whereby the Company's patents
were being infringed. Settlements of these suits have made a significant
financial contribution to Company operations and have helped reinforce industry
compliance with respect to the Company's proprietary rights.
In 2003, the Company settled a patent dispute with Lonza Inc., in which
Lonza agreed to license the Company's glucose control patents for marketing
Lonza's proprietary combination of carnitine and chromium picolinate for swine
feed applications. No other rights were granted to Lonza to sell chromium
picolinate, alone or in other combinations, for human or other animal
applications.
The Company presently has 36 issued US patents and 13 pending US patent
applications with foreign equivalents covering novel compositions and therapies
directed towards significant health conditions such as cardiovascular disease,
depression, polycystic ovary syndrome, both type 1 and type 2 diabetes, and
sports nutrition.
The pending applications build upon the Company's expertise in
technology areas such as nutritional mineral supplements and demonstrate the
Company's commitment to expand into complementary technologies. As a leader in
therapeutic chromium research, the Company enjoys
15
a prominent patent position in the area of nutritional supplementation with
chromium picolinate. The Company's research has further enhanced this position
by generating discoveries directed towards the synergistic effects of combining
chromium with compounds such as biotin, alpha lipoic acid, conjugated linoleic
acid (CLA), and CLA isomers. Most notable among these are issued patents and
pending patent applications covering the positive effects of chromium and biotin
on type 2 diabetes and which further protect unauthorized copying of the
Diachrome product. Outside of the chromium arena, the Company continues to
develop the area of arginine silicate, a patented compound that has shown great
promise in therapies for bone and joint health, cardiovascular disease, and
glucose metabolism. In addition to holding patents covering the compound,
methods for making the compound, and various therapeutic uses, the recent
discovery of a novel method for producing commercial quantities of arginine
silicate may facilitate bringing the benefits of arginine silicate closer to
market.
The Company maintains non-disclosure safeguards, including
confidentiality agreements, with employees and certain consultants. There can be
no assurance, however, that others may not independently develop similar
technology or that secrecy will not be breached despite any agreements that
exist.
Pharmaceutical Patents
The Company owns more than 200 patents relating to, among other things,
the expression and production of proteins by recombinant Bacillus strains;
plasmid vectors and methods of construction; expression and production of
recombinant lysostaphin; novel bacteriocin compositions and their use as broad
spectrum bactericides; the use of bacteriocin compositions to treat bovine
mastitis; the use of bacteriocin compositions in oral healthcare; the use of
bacteriocin compositions on skin for healthcare and hygiene; and the use of
bacteriocin compositions in gastrointestinal healthcare. These patents are
licensed to AZWELL Inc, Biosynexus Incorporated, and ImmuCell Corporation.
The Company maintains trade secret protection for bacterial strains,
technical know-how, and other information it considers proprietary and
beneficial for the manufacture, use, regulatory approval, and marketing of the
Company's products.
Competition
The nutritional products industry is intensely competitive.
Competitors include major companies with raw materials and finished product
divisions that also engage in the development and sale of dietary supplements.
Many of these competitors have financial and technical resources as well as
production and marketing capabilities substantially greater than those of the
Company. In addition, many of the Company's competitors have experience
significantly greater than that of the Company in the development and testing of
new or improved products.
The Company believes that its success in competing with others will
in part be based on enforcing its patent portfolio and on using its clinical
research for competitive advantage.
16
Although the Company holds exclusive rights to basic patents
covering the nutritional uses of chromium picolinate and its other
chromium-based supplements, the industry does not always recognize the value of
a patented position. The industry is fragmented, and both foreign and domestic
companies appear willing at times to disregard patent rights.
MANUFACTURING
Contractors manufacture the Company's products to Company
specifications, sometimes using the Company's proprietary technology. The
Company believes that it has adequate inventory of products to accommodate a
suspension in the manufacture of any of its products. There are numerous sources
of supply for all of the raw materials used in the manufacture of the Company's
products.
The Company plans to continue to outsource its manufacturing and
packaging needs as it expands its business to include the marketing and
distribution of branded therapeutic supplements, utilizing best of class vendors
who can satisfy the Company's strict quality standards.
EMPLOYEES
As of June 30, 2003, the Company had 27 full-time employees, of whom 3
were executive employees, 8 were administrative, 11 were engaged in marketing
and sales, and 5 were involved in research, process and product development, and
manufacturing. The Company does not have a collective bargaining agreement with
any of its personnel and considers its relationship with its employees to be
satisfactory.
ITEM 2. PROPERTIES
Since September 1998, the Company maintains its headquarters pursuant
to a seven and one-half year lease at 4 Manhattanville Road, Purchase, New York
10577-2197 (Tel: 914-701-4500). In fiscal 2002, the Company's surrendered a
portion of its leased premises, and received a reduction in its annual rental
for its headquarters location from $589,420 to $370,443 which sum is due in
monthly installments. The rent is subject to annual increases over the term of
the lease based on increases in certain building operating expenses.
ITEM 3. LEGAL PROCEEDINGS
Andrew Wertheim (a former Executive Officer) has demanded arbitration
of whether he is entitled to severance benefits under the terms of his
employment agreement. The Company believes that Mr. Wertheim has no entitlement,
and has not provided any severance benefits. The Company in the ordinary course
of its business has brought patent infringement actions against companies that
are selling chromium picolinate in violation of the Company's patent rights. As
of this date, no actions are ongoing, and the Company, which intends to
vigorously protect its proprietary rights, is evaluating bringing other patent
infringement actions. Various actions have been terminated on terms that the
Company believes will protect its rights. In addition, the Company has brought
an action against a competitor for false and misleading advertising.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fiscal quarter ended June 30, 2003.
18
PART II
ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Matters Relating to Common Stock
The Company's Common Stock trades on the Nasdaq SmallCap Market System
under the symbol "NXXI".
The Company has not paid a cash dividend to its public shareholders on
its Common Stock. The Company intends to retain all earnings, if any, for the
foreseeable future for use in the operation and expansion of its business and,
accordingly, the Company does not contemplate paying any cash dividends on its
Common Stock in the foreseeable future.
The following table sets forth the high and low sales prices as
reported by the Nasdaq Market for the Common Stock.
Common Stock
Fiscal Quarter Ended High Low
- --------------------------------------------------------------------------------
September 30, 2001 $ 1.70 $ 0.74
December 31, 2001 $ 0.96 $ 0.60
March 31, 2002 $ 0.98 $ 0.63
June 30, 2002 $ 0.74 $ 0.54
September 30, 2002 $ 0.40 $ 0.37
December 31, 2002 $ 0.64 $ 0.48
March 31, 2003 $ 0.38 $ 0.35
June 30, 2003 $ 0.48 $ 0.44
As of September 23, 2003, there were approximately 470 holders of
record of the Common Stock. The Company believes that the number of beneficial
owners is substantially greater than the number of record holders, because a
large portion of its Common Stock is held of record in broker "street names."
19
Adoption of Shareholders Rights Plan
The Company adopted a Shareholder Rights Plan on September 12,
2002. Under this plan, the Company distributed, as a dividend, one preferred
share purchase right for each share of Common Stock of the Company held by
stockholders of record as of the close of business on September 25, 2002. The
Rights Plan is designed to deter coercive takeover tactics, including the
accumulation of shares in the open market or through private transactions, and
to prevent an acquiror from gaining control of the Company without offering a
fair price to all of the Company's stockholders. The Rights will expire on
September 11, 2012.
Each Right entitles stockholders to buy one one-thousandth of a share
of newly created Series H Participating Preferred Stock of the Company for $3.00
per share. Each one one-thousandth of a share of the Preferred Stock is designed
to be the functional equivalent of one share of Common Stock. The Rights will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's Common Stock (30% in the case of a person or group that is
currently a 15% holder) or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more
the Company's Common Stock.
If any person or group (an "Acquiring Person") becomes the beneficial
owner of 15% or more of the Company's Common Stock (30% in the case of a person
that is currently a 15% holder), then (1) the Rights become exercisable for
Common Stock instead of Preferred Stock, (2) the Rights held by the Acquiring
Person and certain affiliated parties become void, and (3) the Rights held by
others are converted into the right to acquire, at the purchase price specified
in the Right, shares of Common Stock of the Company having a value equal to
twice such purchase price. The Company will generally be entitled to redeem the
Rights, at $.001 per Right, until 10 days (subject to extension) following a
public announcement that an Acquiring Person has acquired a 15% position.
20
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize selected consolidated financial data
that should be read in conjunction the more detailed financial statements and
related footnotes and management's discussion and analysis of financial
condition and results of operations included herein. Figures are stated in
thousands of dollars, except per share amounts.
SELECTED STATEMENT OF YEAR ENDED JUNE 30,
OPERATIONS DATA: 2003(3) 2002(2) 2001 2000 1999(1)
- -------------------------------------------------------------------------------------------------------
Total Revenues $ 10,615 $ 14,668 $ 23,252 $ 32,814 $ 28,301
Gross Profit 6,486 10,324 17,036 27,034 23,519
Operating (Loss) Income (11,081) (7,789) (955) 7,041 6,469
(Loss) Income Before Taxes (11,050) (6,011) 1,400 7,004 6,347
Income Taxes (544) -- 335 523 482
Net (Loss) Income (10,506) (6,011) 1,065 6,490 5,865
Diluted (Loss) Earnings per Share (0.32) (0.19) 0.03 0.20 0.19
AT JUNE 30,
SELECTED BALANCE SHEET DATA: 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Working Capital $ 4,146 $ 8,002 $ 6,392 $ 6,486 $ 1,879
Total Assets 18,920 28,100 38,887 41,085 34,541
Total Liabilities 3,484 2,151 6,495 10,430 12,950
Long-Term Obligations -- -- 122 1,278 3,807
Redeemable Preferred Stock -- -- 418 676 921
Stockholders' Equity 15,436 25,949 31,974 29,979 20,670
- ----------
(1) Consolidated Statements of Operations include the operations of the
Lite Bites business from January 1, 1999, the effective date of
acquisition.
(2) Consolidated Statements of Operations include a $7.1 million non-cash
charge for the impairment of goodwill.
(3) Consolidated Statements of Operations include a $4.4 million non-cash
charge for the impairment of intangibles.
21
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto of the Company
included elsewhere herein.
OVERVIEW
The following table sets forth items in the Consolidated Statements of
Operations as a percent of revenues:
Fiscal Year
Percent of Revenues
2003 2002 2001
------ ------ ------
Total Revenues 100.0% 100.0% 100.0%
Gross profit* 59.8 69.7 70.1
Selling, general and administrative expense 77.3 50.1 44.4
Research and development expense 21.0 6.9 8.4
Operating (loss) (104.4) (53.1) (4.1)
Net (loss) income (99.0) (41.0) 4.6
*Based upon percent of net sales
Results of Operations
1. Year ended June 30, 2003 vs. Year ended June 30, 2002.
REVENUES
Net sales of $10.3 million for fiscal year 2003 declined $4.0 million when
compared to net sales of $14.3 million for fiscal year 2002.
The decline in revenues primarily reflects unsatisfactory results in the
marketing of the Company's Lite Bites product line. Lower sales to the QVC
channel can be partially attributable to increased competition in the nutrition
bar category and a general decline in the weight-loss supplement market related
to negative press associated with the ephedra controversy. Softer sales resulted
in more limited airtime driving the Lite Bites business on QVC into further
decline. In parallel during fiscal year 2003, the Company continued to explore
alternative cost-effective channels of distribution for the Lite Bites brand
that, prior to this year, was by agreement sold exclusively through QVC, Inc.
The Company tested the proposition of taking Lite Bites into retail distribution
22
though an alliance with Leiner Health Products, one of the largest and most
reputable supplement distributors in the U.S. The resulting feedback indicated
that the brand would require a much larger investment in marketing than the
Company believed was justified. Therefore, the Company has made the decision to
no longer invest in the Lite Bites product line. As a result, the Company
determined that a $4.4 million non-cash charge associated with the long-lived
assets related to the Lite Bites product line was warranted. The Company will
consider a sale of the Lite Bites assets. Any returns realized will be
reinvested in the expansion of the Company's chromium-derived business
opportunities.
Lower weight-loss and sports nutrition supplement sales have led to commensurate
reductions in revenues from ingredient sales.
Other revenue from license fees for fiscal year 2003 and fiscal year 2002 was
$0.4 million.
COST OF GOODS SOLD
Cost of goods sold in fiscal year 2003 of $4.1 million declined $0.2 million
when compared to $4.3 million in fiscal year 2002. A reduction in cost of goods
sold, which is directly related to lower sales in fiscal year 2003, was
partially offset by a charge of $0.2 million for slow-moving inventory of the
Lite Bites product line. Gross margin on product sales was 59.8% in fiscal year
2003, compared to 69.7% in fiscal year 2002. The decline was due primarily to
product mix and charges to cost of goods sold for slow-moving inventory.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for fiscal year 2003 of $8.2 million
increased $0.9 million when compared to $7.3 million for fiscal year 2002.
Charges for marketing, as well as personnel and personnel-related costs
associated with organizational expansion to support the Company's planned launch
of new chromium based therapeutic products were the primary reasons for the
increase.
RESEARCH AND DEVELOPMENT
Research costs of $2.2 million for fiscal year 2003 increased $1.2 million when
compared to $1.0 million in fiscal year 2002. The increase is due primarily to
spending to validate new chromium product applications in diabetes and
depression.
The Company's therapeutic strategy for the past year includes a larger
commitment to spending on research and development and is targeted at further
validating earlier findings focused on disease specific conditions in the areas
of diabetes and depression.
The Company entered into an agreement with Diabetex, Inc., a diabetes disease
management company, and is funding a large-scale trial in managed patient
populations to evaluate Diachrome's effect as a nutritional adjunct to standard
care for people with diabetes. The clinical trial is planned to complete by the
close of fiscal year 2004.
23
The Company also entered into an agreement with Comprehensive NeuroSciences,
Inc., a contract research organization in the neurosciences field, to perform
studies related to the Company's anti-depressant technology. The Company expects
that the first phase of its study will be completed during fiscal year 2004.
The Company expects to launch these products under the Dietary Supplement Health
and Education Act (DSHEA) regulatory pathway that is less costly and less time
consuming than that required for drug development. These large-scale studies are
being conducted to secure medical acceptance and adoption for the Company's
products as standard treatment protocols. The Company's spending in these areas
of new technology is discretionary and is subject to the availability of funds.
There can be no assurances that the Company's disease specific product
development efforts will be successfully completed or that the products will be
successfully manufactured or marketed.
IMPAIRMENT OF INTANGIBLES
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supercedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement requires the Company to review its
long-lived assets whenever events or changes in circumstances indicate that an
impairment might exist. During fiscal year 2003, the Company decided to
discontinue investing in its Lite Bites product line. As a result of a review of
current and forecasted operating cash flows and the profitability of this line,
the Company determined that a $4.4 million non-cash impairment charge was
warranted. The Company used a discounted cash flow analysis for purposes of
estimating the fair value of its reporting unit.
INCOME TAXES
The effective tax rate for fiscal year 2003 was a benefit of 5% compared to 0%
for fiscal year 2002. For fiscal year 2003, the benefit was recorded up to the
extent of the Company's net operating loss carryback. The difference between the
federal statutory rate of 34% and the actual rate is primarily due to changes in
the deferred tax asset valuation allowance.
RESULTS OF OPERATIONS
2. Year ended June 30, 2002 vs. Year ended June 30, 2001
REVENUES
Net sales of $14.3 million for fiscal year 2002 declined $6.5 million when
compared to net sales of $20.8 million for fiscal year 2001. The decline is
primarily due to softness in retail sales of vitamin and mineral supplements,
industry consolidation, and a shortfall in sales of consumer products as a
result of a short-term quality control issue at the Company's supplier of Lite
Bites products.
Other revenues for fiscal year 2002 of $0.4 million declined $2.0 million when
compared to $2.4 million of other revenues for fiscal year 2001. Fiscal year
2001 included $1.9 million of license fees earned from Biosynexus Incorporated
in accordance with a License Agreement entered into
24
on August 2, 2000 and ImmuCell Corporation in accordance with a License
Agreement entered into on April 12, 2000.
COST OF GOODS SOLD
Cost of goods sold in fiscal year 2002 of $4.3 million declined $1.9 million
when compared to $6.2 million in fiscal year 2001. The reduction in cost of
goods is directly related to lower sales in fiscal year 2002. Gross margin on
product sales of 69.7% in fiscal year 2002 declined 0.4% when compared to 70.1%
in fiscal year 2001. The decline is due primarily to product mix, with lower
margin consumer products accounting for a greater proportion of the Company's
revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for fiscal year 2002 of $7.3 million
decreased $3.0 million when compared to $10.3 million for fiscal year 2001. The
decrease is due primarily to cost savings attributable to a restructuring
undertaken by the Company during the second quarter of fiscal year 2001,
reductions in advertising and consulting expenditures, and containment of
non-strategic expenditures.
RESEARCH AND DEVELOPMENT
Research costs of $1.0 million for fiscal year 2002 decreased $0.9 million when
compared to $1.9 million for fiscal year 2001. The decrease principally reflects
cost savings attributable to the restructuring undertaken by the Company in the
second quarter of fiscal 2001 and the Company's decision to terminate its
Internet business at that time.
GOODWILL IMPAIRMENT
The Company adopted SFAS No. 142 effective July 1, 2001. Under SFAS No. 142,
goodwill is no longer amortized but reviewed for impairment annually, or more
frequently if certain indicators arise. The Company is required to complete the
initial step of a transitional impairment test within six months of adoption of
SFAS No. 142 and to complete the final step of the transitional impairment test
by the end of the fiscal year. The initial step was completed in the first
quarter of fiscal 2002. In addition, the Company assesses the impairment of
identifiable intangible assets and goodwill whenever events or changes in
circumstances indicate that the carrying value of the relevant assets may not be
recoverable. Management's judgment regarding the existence of impairment is
based on factors such as significant changes in the manner or the use of
acquired assets or the Company's overall business strategy; significant negative
industry or economic trends; significant declines in the Company's stock price
for a sustained period and the Company's market capitalization relative to book
value. Upon adoption, goodwill in the amount of $4.1 million included in patents
and trademarks since acquisition (although accounted for separately by the
Company and included therein because of its estimated economic life) has been
reclassified in the accompanying balance sheets in accordance with the
requirements of SFAS No. 142. Due to declining market conditions, as well as a
change in business strategy, it was determined that a $7.1 million impairment
charge was warranted. The Company used a discounted cash flow analysis for
purposes of estimating the fair value of its reporting unit.
OTHER INCOME
25
Other income of $1.8 million in fiscal year 2002 and $2.3 million in fiscal year
2001, was due primarily to amounts earned on the settlement of patent
infringement lawsuits.
INCOME TAXES
The effective tax rate for fiscal year 2002 was 0.0% compared to 24.0% in fiscal
year 2001. The difference between the effective rate and the federal statutory
rate of 34% is due primarily to changes in the deferred tax valuation allowance,
non-deductible amortization and impairment charges.
NUTRITIONAL PRODUCTS
1. Year ended June 30, 2003 vs. Year ended June 30, 2002
Nutritional products revenues of $10.2 million for fiscal year 2003 declined
$4.0 million when compared to $14.2 million in fiscal year 2002. The decline is
primarily due to a softness in sales of Lite Bites nutrition bars and related
dietary supplements sold through QVC, as noted above.
Nutritional products operating loss for fiscal year 2003 was $11.3 million,
including a $4.4 million non-cash charge for impairment of long-lived assets,
compared to an operating loss of $8.0 million in fiscal year 2002, which
included a $7.1 million non-cash charge for impairment of goodwill.
2. Year ended June 30, 2002 vs. Year ended June 30, 2001
Nutritional products revenues of $14.2 million for fiscal 2002 decreased $6.9
million, when compared to nutritional products revenues of $21.1 million for
fiscal year 2001. The decrease in revenues is primarily due a royalty reduction
associated with the expiration of the Company's chromium picolinate composition
of matter patent in August of 2000, softness in retail sales of vitamin and
mineral supplements, and continuing industry consolidation..
Nutritional products operating loss for fiscal year 2002 was $8.0 million, which
included a $7.1 million non-cash charge for impairment of goodwill, compared to
$2.9 million in fiscal year 2001.
PHARMACEUTICAL PRODUCTS
1. Year ended June 30, 2003 vs. Year ended June 30, 2002
Pharmaceutical products revenues for fiscal years 2003 and 2002 were $0.4
million. License fee income accounted for the revenue in both years.
Pharmaceutical products operating income for fiscal years 2003 and 2002 was $0.3
million, respectively.
2. Year ended June 30, 2002 vs. Year ended June 30, 2001.
26
Pharmaceutical products revenues for fiscal year 2002 of $0.4 million decreased
$1.7 million when compared to $2.1 million for fiscal year 2001. License fees
earned from users of the Company's patented technologies in fiscal year 2001 did
not recur in fiscal 2002.
Pharmaceutical products operating income of $0.2 million for fiscal year 2002
decreased $1.7 million when compared to $1.9 million in fiscal year 2001. The
primary reason for the decline was no significant license fees were earned in
fiscal year 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2003 of $4.1 million declined $0.9 million
when compared to $5.0 million at June 30, 2002. As of June 30, 2003, the Company
had a working capital surplus of $4.1 million, compared to a working capital
surplus of $8.0 million as of June 30, 2002.
Net cash used in operating activities for fiscal 2003 was $0.3 million compared
to cash provided by operating activities of $4.5 million in fiscal year 2002.
Operating losses in fiscal year 2003 account for the majority of the difference.
Net cash provided by investing activities for fiscal year 2003 was $0.5 million
compared to cash used in investing activities of $4.2 million in fiscal year
2002. A lower contingent payment for acquisitions was the primary reason for the
change. In addition, $1.0 million invested in short-term instruments in fiscal
year 2002 matured in fiscal year 2003.
Net cash used in financing activities was $58 thousand compared to $1.7 million
in fiscal year 2002. Debt repayments in fiscal year 2003 were eliminated, as
well as the lack of redemption of preferred stock account for the change.
The Company's primary source of financing is cash generated from continuing
operations. The Company believes that cash on hand and cash generated from
operations will provide sufficient liquidity to fund continuing operations for
the next twelve months.
Future increases in marketing and research and development expenses over the
present levels and any acquisition activities will require additional funds. The
Company intends to seek any necessary additional funding through arrangements
with corporate collaborators, through public or private sales of its securities,
including equity securities, or through bank financing arrangements. The Company
does not currently have any specific arrangements for additional financing and
there can be no assurance that additional funding will be available at all or on
terms acceptable to the Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses. On an on-going basis, the Company evaluates its
estimates, including those related to uncollectible accounts receivable,
inventories, goodwill, intangibles and other long-lived assets. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be
27
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
o The Company maintains allowances for uncollectible accounts
receivable for estimated losses resulting from the inability
of its customers to make required payments. If the financial
condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
o The Company carries inventories at the lower of cost or
estimated net realizable value. If actual market conditions
are less favorable than those projected by management
write-downs may be required.
o Property, plant and equipment, patents, trademarks and other
intangible assets owned by the Company are amortized, over
their estimated useful lives. Useful lives are based on
management's estimates over the period that such assets will
generate revenue. Intangible assets with definite lives are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may
not be recoverable. Future adverse changes in market
conditions or poor operating results of underlying capital
investments or intangible assets could result in losses or an
inability to recover the carrying value of such assets,
thereby possibly requiring an impairment charge in the future.
SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141 "Business Combinations", and No. 142
"Goodwill and other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill is no longer amortized
but is subject to annual impairment tests in accordance with the Statement
No. 142. Other intangible assets will continue to be amortized over their useful
lives. See Note 18 for further discussion on the impact of SFAS No. 142 on
Nutrition 21's 2002 financial position and results of operations for the year
ended June 30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and is effective for the Company's
fiscal year beginning July 1, 2002. (see Note 9 for impairment discussion).
28
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. The Company has no financial instruments that
give it exposure to foreign exchange rates or equity prices.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are included herein commencing on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
At a meeting held on July 29, 2003, the Audit Committee of the Board of
Directors of the Company approved the engagement of J. H. Cohn LLP as its public
accountants for the fiscal year ending June 30, 2003 to replace the firm of
Ernst & Young LLP, who were dismissed as auditors of the Company effective July
31, 2003.
The audit reports of Ernst & Young LLP on the consolidated financial statements
of Nutrition 21, Inc. and subsidiaries as of and for the years ended June 30,
2002 and 2001, did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting
principles. There were no disagreements between the Company and Ernst & Young
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to Ernst &
Young LLP's satisfaction, would have caused Ernst & Young LLP to make reference
to the subject matter of such disagreements in connection with its report.
ITEM 9A CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this Annual Report on Form 10-K, the Company's Chief Executive Officer and
Chief Financial Officer evaluated, with the participation of the Company's
management, the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on
the evaluation, which disclosed no significant deficiencies or material
weaknesses, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There were no significant changes in the Company's internal controls over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected or are reasonably likely to materially
affect the Company's internal control over financial reporting.
29
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICERS AND DIRECTORS
The officers and directors of the Company are as follows:
Year Joined
Name and Age Company Position
- --------------------------------------------------------------------------------
Gail Montgomery (50) 1999 President, Chief
Executive Officer,
and Director
John H. Gutfreund (73) 2000 Chairman of the Board
P. George Benson, PhD (57) 1998 Director
Warren D. Cooper, MD (50) 2002 Director
Audrey T. Cross, PhD (58) 1995 Director
Paul Intlekofer (35) 2002 Chief Financial Officer and Senior
Vice President, Corporate Development
Marvin Moser, MD (79) 1997 Director
Robert E. Pollack, PhD (63) 1995 Director
Benjamin T. Sporn (65) 1986 Senior Vice President,
General Counsel, and
Secretary
Gail Montgomery has been President, Chief Executive Officer and a
Director of the Company since September 29, 2000, when she succeeded Fredrick D.
Price. From July 1999 to September 2000, she served the Company's Nutrition 21
subsidiary in various capacities, most recently as Vice President and General
Manager. From November 1998 to July 1999, Ms. Montgomery was President of Health
Advantage Consulting, a consulting firm, which provided strategic planning, new
product introduction, and market development services to the nutrition industry.
From 1992 to 1998 she worked for Diet Workshop, a diet franchise network, most
recently as President and CEO. From 1979 to 1992, Ms. Montgomery has served in
various capacities in the health and fitness sector. She received a BA from
Douglas College of Rutgers University in communications.
30
P. George Benson, PhD, was elected a Director of the Company in July
1998. Dr. Benson is Dean of the Terry College of Business and holds the Simon S.
Selig, Jr. Chair for Economic Growth at the University of Georgia. Dr. Benson
was previously the Dean of the Faculty of Management at Rutgers University and a
professor of decision sciences at the Carlson School of Management of the
University of Minnesota. In 1997, he was appointed by the U.S. Secretary of
Commerce to a three-year term as one of the nine judges for the Malcolm Baldrige
National Quality Award. In 1996, Business News New Jersey named Dr. Benson one
of New Jersey's "Top 100 Business People". He received a BS from Bucknell
University and a PhD in business from the University of Florida.
Warren D. Cooper, MD was elected a Director of the Company in April
2002. Dr. Cooper is president and founder of Coalesence, Inc., a consultancy
focused on business and product development for the pharmaceutical and
healthcare industries. From 1995 to 1999, Dr. Cooper was the business unit
leader of Cardiovascular Business Operations at AstraZeneca Pharmaceuticals LP.
For three years before that he was executive director of the Medical Affairs &
Drug Development Operations in the Astra/Merck Group of Merck & Co. Over a
five-year period from 1987 to 1992, Dr. Cooper served as executive director for
Worldwide Clinical Research Operations and as senior director for Clinical
Research Operations (Europe) at Merck Research Laboratories. He was with Merck,
Sharp & Dohme, U.K., from 1980 to 1987, first as a clinical research physician
and later as director of medical affairs. Dr. Cooper is a member of the Medical
Advisory Board of Zargis Medical Corp. (a Siemens joint venture). He also holds
memberships in the American Association of Pharmaceutical Physicians, the
American Society of Hypertension and the International Society of Hypertension.
He received a B. Sc. in physiology and an M.B. B.S. (U.K. equivalent to U.S. MD)
form The London Hospital Medical College, University of London.
Audrey T. Cross, PhD, was elected a Director of the Company in January
1995. Dr. Cross has been Associate Clinical Professor at the Institute of Human
Nutrition at the School of Public Health of Columbia University since 1988. She
also works as a consultant in the areas of nutrition and health policy. She has
served as a special assistant to the United States Secretary of Agriculture as
Coordinator for Human Nutrition Policy and has worked with both the United
States Senate and the California State Senate on nutrition policy matters. Dr.
Cross received a BS in dietetics, a Master of Public Health in nutrition and a
PhD from the University of California at Berkeley, and a JD from the Hastings
College of Law at the University of California at San Francisco.
John H. Gutfreund was elected a Director of the Company in February
2000 and Chairman of the Board in September 2001. Mr. Gutfreund is Senior
Managing Director and Executive Committee Member of C. E. Unterberg, Towbin,
investment bankers, and President of Gutfreund & Company, Inc., a New York-based
financial consulting firm that specializes in advising select corporations and
financial institutions in the United States, Europe and Asia. He is the former
chairman and chief executive officer of Salomon Inc., and past vice chairman of
the New York Stock Exchange and a past board member of the Securities Industry
Association. Mr. Gutfreund is active in the management of various civic,
charitable, and philanthropic organizations,
31
including the New York Public Library, Montefiore Medical Center, The Brookings
Institution, Council on Foreign Relations, Honorary Trustee, Oberlin (Ohio)
College, and Chairman of the Aperture Foundation. Mr. Gutfreund is also a
director of AccuWeather, Inc., Ascent Assurance, Inc., Evercel Inc., LCA-Vision,
Inc., Maxicare Health Plans, Inc., The LongChamp Core Plus Fund Ltd., and The
Universal Bond Fund. He received a BA from Oberlin College.
Paul Intlekofer was elected Chief Financial Officer and Senior Vice
President, Corporate Development, on January 17, 2003. From June 2002 to January
2003, he served the Company in varying capacities. From September 2001 to June
2002, Mr. Intlekofer was Senior Vice President of Planit, Inc., which provided
strategic planning, capital formation, M&A, marketing and new product
development services to the healthcare and financial industries. From 1998 to
2001 he was Senior Vice President of Corporate Development for Rdental LLC, the
exclusive technology alliance of the American Dental Association and oral health
content provider of WebMD. From 1995 to 1997 he was Director of Strategic
Operations/Business Development for Doctors Health, a practice management and
health insurance company. Early in his career, he practiced corporate and
securities law for Venable, Baetjer & Howard. Mr. Intlekofer received his MBA
and Juris Doctor from the University of Maryland and BA from the Johns Hopkins
University.
Marvin Moser, MD was elected to the Board of Directors in October 1997.
He is clinical professor of medicine at Yale and senior medical consultant at
the National High Blood Pressure Education Program of the National Heart, Lung
and Blood Institute. Dr. Moser's work has focused on various approaches to the
prevention and treatment of hypertension and heart disease. He has published
extensively on this subject with over 400 publications. He has authored or
contributed to more than 30 books and numerous physician and patient education
programs. He is editor-in chief of the Journal of Clinical Hypertension. Dr.
Moser is also a member of the Board of The Third Avenue Value Funds and the
Trudeau Institute. Dr. Moser holds a BA from Cornell University and an MD from
Downstate University College of Medicine.
Robert E. Pollack, PhD, was elected a Director of the Company in
January 1995. Dr. Pollack has been a Professor of Biological Sciences at
Columbia University since 1978. In addition, from 1982 to 1989 he was Dean of
Columbia College. Prior thereto he was Professor of Microbiology at the State
University of New York School of Medicine at Stony Brook, Senior Scientist at
Cold Spring Harbor Laboratory, Special NIH fellow at the Weizmann Institute in
Israel, and NIH Fellow in the Department of Pathology at New York University
School of Medicine. He is the author of more than one hundred research papers on
the molecular biology of viral oncogenesis, a dozen articles in the popular
press, and three books. He received a BA in physics from Columbia University and
a PhD in biology from Brandeis University.
32
Benjamin T. Sporn has been legal counsel to the Company since 1990 and
has served as Secretary of the Company since 1986, and was appointed Senior Vice
President and General Counsel in February 1998. He was an attorney with AT&T
from 1964 until December 1989 when he retired from AT&T as a General Attorney
for Intellectual Property Matters. Mr. Sporn was a director of the Company from
1986 until 1994. He received a BSE degree from Rensselaer Polytechnic Institute
and a JD degree from American University.
The directors' serve for a term of one year and until their successors
are duly elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to the provisions of the employment agreements described
below. Except for Mr. Paul Intlekofer, who is first cousin to Ms Gail
Montgomery, there are no family relationships among directors or executive
officers.
ARRANGEMENTS REGARDING THE ELECTION OF DIRECTORS
So long as Burns Philp & Company Limited (an owner of 22.89% of the
Company's outstanding common shares) owns at least 20% of the Company's
outstanding common stock, BP is entitled to nominate one member for election to
the Company's Board. Currently, BP has not nominated a member for election to
the Company's Board. See Item 13. Certain Relationships and Related
Transactions.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an audit committee consisting of Dr. Benson, Dr.
Cooper, and Mr. Gutfreund. In addition, the Company has a compensation committee
consisting of Dr. Cross, Mr. Gutfreund, and Dr. Pollack. During the year ended
June 30, 2003, the audit committee met four times, and the compensation
committee met four times.
33
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued by the Company
during the periods indicated for (i) the chief executive officer during fiscal
year 2003 and (ii) certain other persons that served as executive officers in
fiscal year 2003 whose total annual salary and bonus was in excess of $100,000.
SUMMARY COMPENSATION TABLE (1)(2)
====================================== ===================================================== ================= ===============
LONG-TERM ALL OTHER
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION COMPENSATION COMPENSATION
------------------ ---------------- ------------- ----------------- ---------------
PERIOD SALARY BONUS SECURITIES ($)
($) ($) UNDERLYING
OPTIONS/SARS
(#)
- -------------------------------------- ------------------ ---------------- ------------- ----------------- ---------------
Gail Montgomery, President,
Chief Executive Officer and Director 7/1/00 - 6/30/01 257,307 275,000 200,000
------------------ ---------------- ------------- ----------------- ---------------
7/1/01 - 6/30/02 275,000 500,000
------------------ ---------------- ------------- ----------------- ---------------
7/1/02 - 6/30/03 275,000 1,175,000
- -------------------------------------- ------------------ ---------------- ------------- ----------------- ---------------
Paul Intlekofer, Chief Financial
Officer and Senior Vice President, 7/1/02 - 6/30/03 190,731 1,050,000 37,500(3)
Corporate Development
- -------------------------------------- ------------------ ---------------- ------------- ----------------- ---------------
Alan J. Kirschbaum, Vice President,
Finance and Treasury 7/1/00 - 6/30/01 150,000 30,000 75,000
------------------ ---------------- ------------- ----------------- ---------------
7/1/01 - 6/30/02 150,000
------------------ ---------------- ------------- ----------------- ---------------
7/1/02 - 6/30/03 150,000 30,000
- -------------------------------------- ------------------ ---------------- ------------- ----------------- ---------------
Benjamin T. Sporn, Senior Vice
President, General Counsel and 7/1/00 - 6/30/01 207,500 66,688 165,000
Secretary
------------------ ---------------- ------------- ----------------- ---------------
7/1/01 - 6/30/02 207,500
------------------ ---------------- ------------- ----------------- ---------------
7/1/02 - 6/30/03 207,500 225,000
- -------------------------------------- ------------------ ---------------- ------------- ----------------- ---------------
Andrew Wertheim, Chief operating
Officer (4) 7/1/02 - 6/30/03 162,211 675,000
====================================== ================== ================ ============= ================= ===============
(1) The above compensation does not include the use of an automobile and other
personal benefits, the total value of which do not exceed as to any named
officer or director, the lesser of $50,000 or 10% of such person's annual salary
and bonus.
34
(2) Pursuant to the regulations promulgated by the Securities and Exchange
Commission (the "Commission"), the table omits a number of columns reserved for
types of compensation not applicable to the Company.
(3) Fees earned in a consulting capacity during fiscal year 2003.
(4) Employment terminated February 14, 2003.
None of the individuals listed above received any long-term incentive plan
awards during the fiscal year.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a three-year employment agreement with
Gail Montgomery as President and Chief Executive Officer, effective as of
September 1, 2002. The agreement provides for an annual salary of $275,000,
$300,000, and $325,000 in the successive years under the agreement, and for
performance bonuses based on achieving defined revenue targets. Ms. Montgomery
is also entitled to additional payments equal to one year's salary plus an
additional month of salary for defined years of service, if her employment is
terminated without cause before the agreement expires, or if the Company fails
to offer to enter into a new one-year agreement upon expiration. If Ms.
Montgomery's employment is terminated or she resigns within six months after a
change of control (as defined) the Company will pay to her 2.99 times her annual
salary and previous year's bonus plus certain gross-ups, but these payments will
be reduced to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code.
Effective as of September 16, 2002 the Company entered into a
three-year employment agreement with Paul Intlekofer, who has served as Chief
Financial Officer and Senior Vice President, Corporate Development since January
17, 2003. The agreement provides for an annual salary of $200,000, $225,000, and
$250,000 in the successive years under the agreement, and for performance
bonuses based on achieving defined revenue targets. Mr. Intlekofer is also
entitled to additional payments equal to one year's salary, if his employment is
terminated without cause before the agreement expires. If Mr. Intlekofer's
employment is terminated or he resigns within six months after a change of
control (as defined) the Company will pay to him 2.99 times his annual salary
and previous year's bonus plus certain gross-ups, but these payments will be
reduced to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code.
The Company entered into a four-year agreement with Benjamin Sporn
effective, September 1, 2002, which provides for his services as Senior Vice
President, General Counsel, and Secretary as an employee during the first two
years of the term, and as General Counsel as a consultant during the balance of
the term. Mr. Sporn's salary and fees will be $207,500, $225,000, $150,000 and
$100,000 in successive years under the agreement, plus performance bonuses based
on achieving defined revenue targets. Mr. Sporn is also entitled to additional
payments equal to two years' salary if his employment is terminated without
cause before the agreement expires. If Mr. Sporn's employment is terminated or
he resigns within six months after
35
a change of control (as defined) the Company will pay to him 2.99 times his
annual salary and previous year's bonus plus certain gross-ups, but these
payments will be reduced to the extent necessary to prevent the application of
Section 280G of the Internal Revenue Code.
The following tables set forth information with regard to options
granted during the fiscal year (i) to the Company's Chief Executive Officer, and
(ii) to other officers of the Company named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value At
Individual Grants Assumed Annual Rates Of Stock
Price Appreciation For Option
Term
- ---------------------------------------------------------------------------------------------------------------------------------
Number Of Percent Of Total
Securities Options/SARs Exercise
Underlying Granted To Of Base
Name Options/SARs Employees In Price Expiration
Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
A. Paul Intlekofer 30.3% 550,000 $0.40 9/16/12 $138,537 $350,623
500,000 $0.31 10/18/12 $ 97,749 $247,030
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
B. Alan J. Kirschbaum 30,000 0.89% $0.38 5/22/13 $ 7,169 $ 18,169
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
C. Gail Montgomery 850,000 24.5% $0.39 7/31/12 $208,478 $528,326
325,000 SAR's 100% $ 79,712 $202,007
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
D. Benjamin T. Sporn 225,000 6.5% $0.39 7/31/12 $ 55,186 $139,850
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
E. Andrew Wertheim 675,000 19.5% $0.36 (2) $152,281 $387,279
- --------------------------- ----------------- ------------------- ------------ ------------ --------------- ---------------
(1) Consists of stock options except for 325,000 SAR's shown for Gail
Montgomery. (2) Expired by reason of termination of employment on February 14,
2003.
36
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Unexercised Value of Unexercised In-the-Money
Acquired realized ($) Options/SARs at FY-End (#) Options/SARs at FY-End
in
Exercise
(#)
---------------- ------------------ ------------------ ----------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
Paul 0 0 60,000 1,000,000 $2,500 $95,000
Intlekofer
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
Alan J. 0 0 79,000 101,000 $0 $4,200
Kirschbaum
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
Gail 0 0 435,000 1,465,000 $0 $87,900
Montgomery
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
Benjamin T. Sporn 0 0 188,500 284,000 $0 $13,500
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
Andrew. 0 0 0 0 0 0
Wertheim (1)
- ------------------ ----------- -------------- ---------------- ------------------ ------------------ ----------------
(1) Stock Options expired by reason of termination of employment.
PENSION PLANS
NUTRITION 21, INC.
Eligible employees of the Company are entitled to participate in the
Burns Philp Inc. Retirement Plan for Non-Bargaining Unit Employees, a
non-contributory pension plan (the "Pension Plan") maintained by Burns Philp as
long as Burns Philp maintains the Pension Plan and owns at least 20% of the
Company's outstanding Common Stock. At June 30, 2003, Burns Philp held
approximately 24% of the Company's outstanding Common Stock. Assuming retirement
at age 65, the Pension Plan provides benefits equal to the greater of (a) 1.1%
of the employee's final average earnings multiplied by the number of years of
credited service plus 0.65% of the employee's final average earnings in excess
of the average of the contribution and the benefit bases in effect under Section
230 of the Social Security Act for each year in the 35-year period ending with
the year in which the employee attains the Social Security retirement age as
calculated under
37
Section 401(l)(5)(E) of the Code and Table I of IRS Notice 89-70, multiplied by
the employee's years of credited service up to 35, minus any predecessor plan
benefit in the case of an employee who participated in a predecessor plan or (b)
$24 multiplied by the number of years of credited service up to 25 years plus
$12 multiplied by the years of employment from 26-40 years, minus any
predecessor plan benefit in the case of an employee who participated in a
predecessor plan. The "final average earnings" are the average earnings during
the five highest-paid consecutive calendar years within the last ten calendar
years of credited service with the Company. Earnings include the salary and
bonus listed in the summary compensation table. Earnings, which may be
considered under the Pension Plan, are limited to $200,000 per year subject to
annual cost of living adjustments as determined by the IRS.
The following table sets forth estimated annual benefits payable upon
retirement, assuming retirement at age 65 in 2003 and a single life annuity
benefit, according to years of credited service and final average earnings. The
benefits listed are not subject to any deduction for Social Security or other
offset amounts.
YEARS OF CREDITED SERVICE
$ 25,000 $ 4,320 $ 5,760 $ 7,200 $ 8,160 $ 9,600
$ 50,000 $ 8,760 $ 11,760 $ 14,640 $ 17,640 $ 20,520
$ 75,000 $ 15,360 $ 20,520 $ 25,960 $ 30,720 $ 35,080
$100,000 $ 21,960 $ 29,280 $ 36,600 $ 43,920 $ 51,240
$150,000 $ 35,040 $ 46,680 $ 58,440 $ 70,080 $ 81,840
$200,000 $ 48,120 $ 64,200 $ 80,280 $ 96,360 $112,440
and up
Paul Intlekofer, Alan J. Kirschbaum, Gail Montgomery, and Benjamin T.
Sporn each have 0.8, 4.5, 3.9, and 11 years, respectively, of credited service
under the Pension Plan as of June 30, 2003, and, at age 65, would have
approximately 30, 11, 19, and 11 years of credited service, respectively.
CERTAIN OTHER INFORMATION
In 2002, the Board of Directors adopted a 2002 Inducement Stock Option
Plan under which the Company can issue options to purchase up to 2,500,000
common shares to induce individuals to become employed by the Company.
38
DIRECTOR COMPENSATION
Non-management Directors each receive a quarterly director's fee of
$1,800 and the Chairman of the Board receives a quarterly director's fee of
$3,600. Each also receives $500 for each meeting of the Board attended in
person, $250 for each meeting of the Board attended telephonically, and each
receives options to acquire 15,000 shares of Common Stock. Such options granted
to Directors during the fiscal year ended June 30, 2003, were granted at an
exercise price of $0.60.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Company, or written representations that no Forms 5 were required, the Company
believes that during the period from July 1, 2002 through June 30, 2003, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors determines executive compensation taking into
consideration recommendations of the Compensation Committee. No member of the
Company's Board of directors is an executive officer of a company whose
compensation committee or board of directors includes an executive officer of
the Company.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of September 19, 2003, information
regarding the beneficial ownership of the Company's Common Stock based upon the
most recent information available to the Company for (i) each person known by
the Company to own beneficially more than five (5%) percent of the Company's
outstanding Common Stock, (ii) each of the Company's executive officers and
directors and (iii) all executive officers and directors of the Company as a
group. Unless otherwise indicated, each stockholder's address is c/o the
Company, 4 Manhattanville Road, Purchase, New York 10577-2197.
Shares Owned Beneficially and of Record (1)
Name and Address No. of Shares % of Total
P. George Benson (2) 85,000 *
Warren D. Cooper (3) 25,000 *
Audrey T. Cross (4) 109,000 *
John H. Gutfreund (5) 105,000 *
Paul Intlekofer (6) 295,383
Alan J. Kirschbaum (3) 100,500 *
Gail Montgomery (7) 834,933 2.41
Marvin Moser (8) 170,000 *
Robert E. Pollack (3) 115,000 *
Benjamin T. Sporn (9) 350,125 1.00
Andrew D. Wertheim 0 *
Wyeth (10) 3,478,261 10.24
5 Giralda Farms
Madison, NJ 07940
Burns Philp & Company Limited (11) 7,763,837 22.89
7 Bridge Street
Sydney, NSW 2000, Australia
|_| All Executive Officers and Directors 1,293,959 6.10
as a Group (9 persons) (12)
- ----------
40
* Less than 1%
(1) Unless otherwise indicated, each person has sole investment and
voting power with respect to the shares indicated. For purposes of this
table, a person or group or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date, which such
person has the right to acquire within 60 days after such date. For
purposes of computing the percentage of outstanding shares held by each
person or group of persons named above on a given date, any security
which such person or group of persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purposes of
computing the percentage ownership of such person or persons, but is
not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 75,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(3) Consists of shares issuable upon exercise of currently exercisable
options under the Company's Stock Option Plans.
(4) Includes 105,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(5) Includes 55,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(6) Includes 283,333 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(7) Includes 745,833 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(8) Includes 160,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(9) Includes 316,000 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
(10) Formerly American Home Products Corporation.
(11) Consists of shares owned by subsidiaries.
(12) Includes 1,740,166 shares issuable upon exercise of currently
exercisable options under the Company's Stock Option Plans.
41
Equity Compensation Plan Information
The following table sets forth securities authorized for issuance under equity
compensation plans as of June 30, 2003.
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------- ----------------------------- ---------------------------- ---------------------------------
Plan Category NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING AVAILABLE FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND UNDER EQUITY COMPENSATION PLANS
WARRANTS AND RIGHTS RIGHTS (EXCLUDING SECURITIES REFLECTED
IN COLUMN(A))
(A) (B) (C)
- ---------------------- ----------------------------- ---------------------------- ---------------------------------
Equity compensation
plans approved by
security holders 4,931,002 $1.34 258,500
- ---------------------- ----------------------------- ---------------------------- ---------------------------------
Equity compensation (1) 1,583,000 $0.38 3,417,000
plans not approved (2) 0
by security holders (3) 845,000 $2.33
- ---------------------- ----------------------------- ---------------------------- ---------------------------------
Total 7,359,002 3,675,500
- ---------------------- ----------------------------- ---------------------------- ---------------------------------
(1) 2001 Stock Option Plan to provide non-executives, who render services to the
Company additional incentives to advance the interests of the Company. Neither
directors nor executive officers of the Company may be granted Stock Options
under the Plan (Exhibit 10.70).
(2) 2002 Inducement Stock Option Plan to inducement an individual to be come an
employee of the Company, and provide additional incentives to advance the
interests of the Company. Neither directors nor executive officers of the
Company may be granted Stock Options under the Plan (Exhibit 10.71).
(3) Warrants granted from time to time as an inducement to various persons or
entities to enter into transactions with the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 12, 1996, the Company completed the sale of its UK-based food
ingredients subsidiary, Aplin & Barrett Limited ("A&B"), to Burns Philp &
Company Limited ("BP") for $13.5 million in cash and the return to the Company
of 2.42 million shares of the Company's Common Stock held by BP. The sale
included the Company's nisin-based food preservative business. In connection
with the transaction, the Company and A&B entered into two License Agreements.
Pursuant to the first License Agreement, the Company is exclusively licensed by
A&B for the use of nisin generally in pharmaceutical products and animal
healthcare products. Pursuant to the second License Agreement, A&B is
exclusively licensed by the Company generally for the use of nisin as a food
preservative and for food preservation. As long as BP owns at least 20% of the
Company's outstanding common stock, BP is entitled to nominate one member for
election to the Company's Board. BP has not nominated a member for election to
the Company's
42
Board. The amount of consideration for the sale was arrived at through
arms-length negotiation and a fairness opinion was obtained. As of June 30,
2002, BP owned 7,763,837 shares of Common Stock, and continues such Common Stock
ownership as of the date hereof.
In October 1998, the Company issued 3,478,261 shares of Common Stock to
Wyeth for $4.0 million. At June 30, 2003, Wyeth held approximately 10.75% of the
Company's outstanding Common Stock. Under a separate agreement in October 1998,
Wyeth paid the Company $1.0 million for exclusive rights to sell the Company's
Cardia Salt in retail markets in the United States. During fiscal 2001, Wyeth
made payments to the Company of $500,000.
On July 1, 2000, the Company licensed its remaining rights to sell
lysostaphin for research purposes, to Benjamin T. Sporn, its senior vice
president, for $300,000, payable in cash over a three-year period. Payment of
the $300,000 has been made. The price and other terms of the transaction were
established through arms-length negotiations.
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
1. Information Concerning Fees Paid to Independent Auditors for the fiscal year
ended June 30, 2003.
Set forth below is certain information concerning audit services
rendered to the Company by J.H. Cohn LLP and Ernst & Young LLP for the fiscal
year ended June 30, 2003. As indicated below, in addition to reviewing financial
statements, J.H. Cohn LLP and Ernst & Young LLP provided other services in the
fiscal year ended June 30, 2003. The Audit Committee has determined that the
provision of these other services is compatible with maintaining the
independence of both firms..
Audit Fees. Ernst & Young LLP billed the Company for aggregate fees of
approximately $85,370 for (1) audit services for the fiscal year ended June 30,
2003, up to their dismissal on July 31, 2003, and (2) the reviews of the
financial statements included in the Company's quarterly reports on Form 10-Q
for periods within the fiscal year ended June 30, 2003. In addition, the Company
incurred fees by J.H. Cohn LLP of approximately $60,000 for audit services
rendered for the fiscal year ended June 30, 2003.
Audit related fees. None
Tax Fees. Ernst & Young LLP billed the Company for aggregate fees of
approximately $25,975 for other services rendered in the fiscal year ended June
30, 2003, consisting primarily of tax compliance fees. In addition, the Company
incurred fees by J.H. Cohn LLP of approximately $10,000 for other services
rendered for the fiscal year ended June 30, 2003, consisting primarily of tax
compliance fees.
All other fees. None
43
2. Information Concerning Fees Paid to the Company's Auditors for the fiscal
year ended June 30, 2002.
Set forth below is certain information concerning fees billed to the
Company by Ernst & Young LLP in respect of services provided in the fiscal year
ended June 30, 2002. As indicated below, in addition to auditing and reviewing
financial statements, Ernst & Young LLP provided other services in the fiscal
year ended June 30, 2002. The Audit Committee has determined that the provision
of these other services is compatible with maintaining the independence of Ernst
& Young LLP.
Audit Fees. Ernst & Young LLP billed the Company for aggregate fees of
approximately $214,000 for (1) professional services rendered for the audit of
the Company's annual financial statements for the fiscal year ended June 30,
2002 and (2) the reviews of the financial statements included in the Company's
quarterly reports on Form 10-Q for periods within the fiscal year ended June 30,
2002.
Audit related fees None
Tax Fees. Ernst & Young LLP billed the Company for aggregate fees of
approximately $39,191 for other services rendered in the fiscal year ended June
30, 2002 consisting primarily of tax compliance fees.
All other fees. None
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements on page F-1 and are filed as part of this
annual report.
2. Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
All other schedules are not submitted because they are not
applicable, not required, or because the information is included
in the Consolidated Financial Statements.
3. Exhibits
The Index to Exhibits following the Signature Page indicates the
Exhibits, which are being filed herewith, and the Exhibits, which
are incorporated herein by reference.
(b) Reports on Form 8-K
The Company filed one Report on Form 8-K during the fiscal
quarter ended June 30, 2003.
1. Report dated May 16, 2003 furnishing a copy of a press release
of financial results for the fiscal quarter ended March 31,
2003.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
NUTRITION 21, INC.
By: /s/ Gail Montgomery
Gail Montgomery, President,
CEO and Director
Dated: September 29, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below as of September 29, 2003 by the following
persons on behalf of Registrant and in the capacities indicated.
/s/ Gail Montgomery
Gail Montgomery, President,
CEO and Director
/s/ John H. Gutfreund
John H. Gutfreund,
Chairman of the Board
/s/ P. George Benson
P. George Benson, Director
/s/ Warren D. Cooper
Warren D. Cooper Director
/s/ Audrey T Cross
Audrey T. Cross, Director
/s/ Marvin Moser
Marvin Moser, Director
/s/ Robert E. Pollack
Robert E. Pollack, Director
/s/ Paul Intlekofer
Paul Intlekofer, Chief
Financial Officer
46
EXHIBITS
3.01 Certificate of Incorporation (1)
3.01a Certificate of Amendment to the Certificate of Incorporation (2)
3.01b Certificate of Amendment to the Certificate of Incorporation (3)
3.01c Certificate of Amendment to the Certificate of Incorporation (11)
3.01d Certificate of Amendment to the Certificate of Incorporation (11)
3.01e Certificate of Amendment to the Certificate of Incorporation (12)
3.02 Amended and Restated By-laws (2)
10.01 Form of Incentive Stock Option Plan (8)
10.02 Form of Non-qualified Stock Option Plan (8)
10.02a Form of 1989 Stock Option Plan (1)
10.02b Form of 1991 Stock Option Plan (1)
10.02c Form of 1998 Stock Option Plan (15)
10.24 Exclusive Option and Collaborative Research Agreement dated July 1,
1988 between the Company and the University of Maryland (4)
10.25 License and License Option Agreement dated December 15, 1988 between
the Company and Babson Brothers Company (4)
10.36 Agreement, dated October 6, 1992 between the Company and PHRI (5)
10.47 Employment Agreement dated August 30, 1994 between the Company and
Fredric D. Price, as amended and restated (6)
10.48 Lease dated as of February 7, 1995, between the Company and Keren
Limited Partnership (7)
10.49 Share Purchase Agreement dated as of December 12, 1996, by and among
Applied Microbiology, Inc., Aplin & Barrett Limited and Burns Philp
(UK) plc. (9)
10.50 License Agreement dated as of December 12, 1996 between Licensee
Applied Microbiology, Inc. and Licensor Aplin & Barrett Limited. (9)
47
10.51 License Agreement dated as of December 12, 1996 between Licensee
Aplin & Barrett Limited and Licensor Applied Microbiology, Inc. (9)
10.52 Supply Agreement dated as of December 12, 1996 between Aplin &
Barrett Limited and Applied Microbiology, Inc. (9)
10.53 Investors' Rights Agreement dated as of December 12, 1996 between
Applied Microbiology, Inc. and Burns Philp Microbiology. Pty
Limited. (9)
10.54 Revolving Loan and Security Agreement dated as of December 12, 1996
between Burns Philp Inc. as Lender and Applied Microbiology, Inc. as
Borrower. (9)
10.55 Stock and Partnership Interest Purchase Agreement dated as of August
11, 1997, for the purchase of Nutrition 21. (10)
10.57 Sublease dated as of September 18, 1998, between the Company and
Abitibi Consolidated Sales Corporation (12)
10.58 Stock Purchase Agreement dated as of September 17, 1998 between
American Home Products Corporation and AMBI Inc. (13)*
10.59 License, Option, and Marketing Agreement dated as of September 17,
1998 between American Home Products, acting through its
Whitehall-Robins Healthcare division, and AMBI Inc. (13)*
10.60 Amended and Restated Revolving Credit and Term Loan Agreement dated
as of January 21, 1999 between State Street Bank & Trust Company as
Lender and the Company and Nutrition 21 as Borrower. (14)
10.61 Agreement of Purchase and Sale of Assets made as of January 19, 1999
by and among Dean Radetsky and Cheryl Radetsky, Optimum Lifestyle,
Inc. and AMBI Inc. (14)
10.62 Strategic Alliance Agreement dated as of August 13, 1999 between
AMBI Inc. and QVC, Inc. (15)*
10.63 Asset Purchase Agreement made as of December 30, 1999, by and
between ImmuCell Corporation and AMBI Inc. (16)
10.64 License Agreement entered into as of August 2, 2000 between AMBI
Inc. and Biosynexus Incorporated. (17)*
10.65 License and Sublicense Agreement entered into as of August 2, 2000
between AMBI Inc. and Biosynexus Incorporated. (17)*
10.66 Amendment effective as of June 30, 2000, to the Amended and Restated
Revolving Credit and Term Loan Agreement dated as of January 21,
1999 between Citizens Bank of Massachusetts (successor in interest
to loans originally made by State Street Bank & Trust
48
Company) as Lender and the Company and Nutrition 21 as Borrower.
(17)
10.67 Employment Agreement dated as of October 16, 2000 between AMBI Inc.
and Gail Montgomery. (18)
10.68 Consulting Agreement entered into as of September 29, 2000 between
AMBI Inc. and Fredrick D. Price. (19)
10.69 Amended and Restated By-laws, and Rights Agreement adopted September
12, 2002 (20)
10.70 Nutrition 21, Inc. 2001 Stock Option Plan. (21)
10.71 Nutrition 21, Inc. 2002 Inducement Stock Option Plan. (21)
10.72 Nutrition 21, Inc. Change of Control Policy adopted September 12,
2002. (21)
10.73 Employment Agreement entered into as of September 1, 2002 between
Nutrition 21, Inc. and Gail Montgomery. (21)
10.74 Employment Agreement entered into as of August 5, 2002 between
Nutrition 21, Inc. and Andrew Wertheim. (21)
10.75 Employment Agreement entered into as of September 1, 2002 between
Nutrition 21, Inc. and Benjamin Sporn (21)
10.76 Employment Agreement entered into as of September 16, 2002 between
Nutrition 21, Inc. and Paul Intlekofer (22)
23.1 Consent of J.H. Cohn LLP (22)
23.2 Consent of Ernst & Young LLP (22)
31.1 Certification of President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (22)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (22)
32.1 Certification of President and Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (22)
- ----------
(1) Incorporated by reference to the Company's Report on Form 10-K for
1991.
(2) Incorporated by reference to the Company's Report on Form 8-K dated
September 4,
49
1992.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8 dated August 8, 1996, file No. 333-09801.
(4) Incorporated by reference to the Company's Report on Form 10-K for
1988.
(5) Incorporated by reference to the Company's Report on Form 10-K for
the fiscal period January 31, 1992 through August 31, 1992.
(6) Incorporated by reference to the Company's Report on Form 10-K for
1994.
(7) Incorporated by reference to the Company's Report on Form 10-K for
1995.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 originally filed April 15, 1986, file No. 33-4822.
(9) Incorporated by reference to the Company's Report on Form 8-K dated
December 27, 1996.
(10) Incorporated by reference to the Company's Report on Form 8-K dated
August 25, 1997.
(11) Incorporated by reference to the Company's Report on Form 10-K/A2
for 1997.
(12) Incorporated by reference to the Company's Report on Form 10-K/A for
1998.
(13) Incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended September 30. 1998.
(14) Incorporated by reference to the Company's Report on Form 8-K dated
February 3, 1999.
(15) Incorporated by reference to the Company's Report on Form 10-K for
1999.
(16) Incorporated by reference to ImmuCell Corporation's Report on Form
8-K dated January 13, 2000.
(17) Incorporated by reference to the Company's Report on Form 10-K for
2000
(18) Incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended December 31. 2000.
(19) Incorporated by reference to the Company's Report on From 10-K for
2001
(20) Incorporated by reference to the Company's Report on Form 8-K dated
September 18, 2002.
50
(21) Incorporated by reference to the Company's Report on From 10-K for
2002
(22) Filed Herewith.
* Subject to an order by the Securities and Exchange Commission granting
confidential treatment. Specific portions of the document for which confidential
treatment has been granted have been blacked out. Such portions have been filed
separately with the Commission pursuant to the application for confidential
treatment.
51
NUTRITION 21, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FILED WITH THE ANNUAL REPORT OF THE
COMPANY ON FORM 10-K
JUNE 30, 2003
PAGE
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2-3
CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2003 AND 2002 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED JUNE 30, 2003, 2002 AND 2001 F-6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2003, 2002 AND 2001 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED JUNE 30, 2003, 2002 AND 2001 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of Nutrition 21,
Inc. (the "Company) as of June 30, 2002, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each the two years in
the period ended June 30, 2002. Our audits also included the related financial
statement schedule (for the 2002 and 2001 information) listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nutrition 21, Inc.
at June 30, 2002, and the consolidated results of its operations and its cash
flows for each the two years in the period ended June 30, 2002, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule (for the 2002 and 2001
information), when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ J.H. COHN LLP
Roseland, New Jersey
September 26, 2003
F-2
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Nutrition 21, Inc.
We have audited the accompanying consolidated balance sheet of Nutrition 21,
Inc. (the "Company") as of June 30, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended June 30, 2002. Our audits also included the
related financial statement schedule (for the 2002 and 2001 information) listed
in the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Nutrition 21, Inc.
at June 30, 2002, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended June 30, 2002, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule (for the 2002 and 2001
information), when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 16, 2002,
except for the first paragraph of Note 12, Note 13 and
the first, second and third paragraphs of Note 21, as to which the date is
September 12, 2002
F-3
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, June 30,
2003 2002
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 4,059 $ 3,974
Short-term investments -- 1,000
Accounts receivable (less allowance for doubtful accounts and returns of $430
in 2003 and $19 in 2002) 1,140 2,219
Other receivables 1,100 1,097
Inventories 1,135 1,075
Prepaid expenses and other current assets 196 788
------- -------
Total current assets 7,630 10,153
Property and equipment, net 479 654
Patents, trademarks and other intangibles (net of accumulated amortization of
$13,334 in 2003 and $12,721 in 2002) 10,612 17,073
Other assets 199 220
------- -------
TOTAL ASSETS $18,920 $28,100
======= =======
See accompanying notes.
F-4
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, JUNE 30,
2003 2002
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,456 $ 2,102
Contingent payments payable 26 43
Preferred dividends payable 2 6
-------- --------
TOTAL LIABILITIES 3,484 2,151
-------- --------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, authorized 5,000,000 shares Series G
convertible preferred, 1,769 shares issued, 188 and 471 shares outstanding
at June 30, 2003 and 2002, respectively (aggregate
liquidation value $193) 188 471
Common stock, $0.005 par value, authorized 65,000,000 shares; 33,602,990 and
33,048,655 shares issued and outstanding at June 30,
2003 and 2002, respectively 168 165
Additional paid-in capital 64,103 63,936
Accumulated deficit (49,023) (38,501)
Less: treasury stock, at cost, 136,000 shares of common stock at June
30, 2002 -- (122)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 15,436 25,949
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,920 $ 28,100
======== ========
See accompanying notes.
F-5
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEAR ENDED JUNE 30,
-------------------
2003 2002 2001
------------ ------------ ------------
Net sales $ 10,265 $ 14,314 $ 20,809
Other revenues 350 354 2,443
------------ ------------ ------------
TOTAL REVENUES 10,615 14,668 23,252
Cost of goods sold 4,129 4,344 6,216
------------ ------------ ------------
GROSS PROFIT 6,486 10,324 17,036
Selling, general & administrative expense 8,201 7,349 10,321
Research & development expense 2,232 1,017 1,946
Depreciation & amortization expense 2,691 2,619 3,359
Restructuring & other charges -- -- 2,365
Charges for impairment of intangibles 4,443 7,128 --
------------ ------------ ------------
OPERATING (LOSS) (11,081) (7,789) (955)
Interest income 64 94 304
Interest (expense) (33) (110) (291)
Other income -- 1,794 2,342
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (11,050) (6,011) 1,400
Income taxes (benefit) (544) -- 335
------------ ------------ ------------
NET (LOSS) INCOME $ (10,506) $ (6,011) $ 1,065
============ ============ ============
Basic (loss) earnings per share $ (0.32) $ (0.19) $ 0.03
============ ============ ============
Diluted (loss) earnings per share $ (0.32) $ (0.19) $ 0.03
============ ============ ============
Weighted average number of common
shares - basic 33,309,371 32,621,918 31,781,403
============ ============ ============
Weighted average number of common
shares and equivalents - diluted 33,309,371 32,621,918 31,879,614
============ ============ ============
See accompanying notes.
F-6
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
PREFERRED STOCK
SERIES G COMMON STOCK
SHARES $ SHARES $
---------- ------------ ------------ ------------
Balance at June 30, 2000 663 663 31,581,427 158
Conversion of Series E preferred stock to common stock -- 231,136 1
Cancellation of stock exercise -- -- (315,408) (2)
Premium on redemption of Series F preferred stock -- -- -- --
Issuance of warrants -- -- -- --
Preferred stock dividends declared -- -- -- --
Preferred stock issued for Optimum Lifestyle, Inc. contingent payment 941 941 -- --
Conversion of Series G preferred stock to common stock (663) (663) 845,663 4
Net income for the year -- -- -- --
---------- ------------ ------------ ------------
Balance at June 30, 2001 941 941 32,342,818 161
---------- ------------ ------------ ------------
Conversion of Series E preferred stock to common stock -- -- 155,605 1
Issuance of warrants -- -- -- --
Preferred stock dividends declared -- -- -- --
Premium on redemption of Series F preferred stock -- -- -- --
Conversion of Series G preferred stock to common stock (470) (470) 686,232 3
Repurchase of common stock for treasury -- -- (136,000) --
Net loss for the year -- -- -- --
---------- ------------ ------------ ------------
Balance at June 30, 2002 471 471 33,048,655 165
---------- ------------ ------------ ------------
Preferred stock dividends declared -- -- -- --
Issuance of warrants -- -- -- --
Conversion of Series G preferred stock to common stock (283) (283) 654,335 4
Repurchase of common stock for treasury -- -- (100,000) --
Retirement of treasury stock -- -- -- (1)
Net loss for the year -- -- -- --
---------- ------------ ------------ ------------
Balance at June 30, 2003 188 $ 188 33,602,990 $ 168
========== ============ ============ ============
Additional Accumulated Treasury
Paid-In Capital Deficit Stock Total
$ $ $ $
------------ ------------ ------------ ------------
Balance at June 30, 2000 62,291 (33,133) -- 29,979
Conversion of Series E preferred stock to common stock 236 -- -- 237
Cancellation of stock exercise 2 -- -- --
Premium on redemption of Series F preferred stock -- (110) -- (110)
Issuance of warrants 8 -- -- 8
Preferred stock dividends declared -- (146) -- (146)
Preferred stock issued for Optimum Lifestyle, Inc. contingent payment -- -- -- 941
Conversion of Series G preferred stock to common stock 659 -- -- --
Net income for the year -- 1,065 -- 1,065
------------ ------------ ------------ ------------
Balance at June 30, 2001 63,196 (32,324) -- 31,974
------------ ------------ ------------ ------------
Conversion of Series E preferred stock to common stock 193 -- -- 194
Issuance of warrants 80 -- -- 80
Preferred stock dividends declared -- (51) -- (51)
Premium on redemption of Series F preferred stock -- (115) -- (115)
Conversion of Series G preferred stock to common stock 467 -- -- --
Repurchase of common stock for treasury -- -- (122) (122)
Net loss for the year -- (6,011) -- (6,011)
------------ ------------ ------------ ------------
Balance at June 30, 2002 63,936 (38,501) (122) 25,949
------------ ------------ ------------ ------------
Preferred stock dividends declared -- (16) -- (16)
Issuance of warrants 47 -- -- 47
Conversion of Series G preferred stock to common stock 279 -- -- --
Repurchase of common stock for treasury -- -- (38) (38)
Retirement of treasury stock (159) -- 160 --
Net loss for the year (10,506) -- (10,506)
------------ ------------ ------------ ------------
Balance at June 30, 2003 $ 64,103 $ (49,023) $-- $ 15,436
============ ============ ============ ============
See accompanying notes.
F-7
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED JUNE 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net (loss) income $(10,506) $ (6,011) $ 1,065
Adjustments to reconcile net (loss) income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 2,691 2,619 3,359
Impairment write-off 4,443 7,128 --
Deferred taxes -- (725) (298)
(Gain) loss on disposal of equipment 7 (55) (23)
Issuance of warrants 47 80 8
Changes in operating assets and liabilities:
Accounts receivable 1,079 1,744 624
Other receivables (3) 710 (1,186)
Inventories (60) 231 60
Prepaid expenses and other current assets 591 26 540
Other assets 21 96 46
Accounts payable and accrued expenses 1,354 (1,391) (563)
-------- -------- --------
Net cash (used in)/provided by operating activities (336) 4,452 3,632
-------- -------- --------
Cash flows from investing activities:
Contingent payments for acquisitions (135) (2,770) (4,637)
Purchases of property and equipment (86) (274) (167)
Payments for patents and trademarks (350) (336) (209)
Proceeds from sale of equipment 50 200 32
Proceeds (purchase) of investments 1,000 (1,000) --
-------- -------- --------
Net cash provided by/ (used in) investing activities 479 (4,180) (4,981)
-------- -------- --------
Cash flows from financing activities:
Debt repayments -- (1,125) (1,500)
Purchase of common stock for treasury (38) (122) --
Redemption of redeemable preferred stock -- (345) (177)
Preferred stock dividends paid (20) (61) (107)
-------- -------- --------
Net cash used in financing activities (58) (1,653) (1,784)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 85 (1,381) (3,133)
Cash and cash equivalents at beginning of year 3,974 5,355 8,488
-------- -------- --------
Cash and cash equivalents at end of year $ 4,059 $ 3,974 $ 5,355
======== ======== ========
See accompanying notes.
F-8
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) CONSOLIDATION
Effective March 8, 2001, Nutrition 21, Inc. (the "Company")
changed its name from AMBI Inc. The consolidated financial
statements include the results of operations of the Company,
and its wholly owned subsidiary, Nutrition 21, LLC. All
intercompany balances and transactions have been eliminated in
consolidation.
b) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
c) CASH EQUIVALENTS
The Company considers all liquid interest-earning investments
with a maturity of three months or less when acquired to be
cash equivalents. Investments with maturities beyond one year
may be classified as short-term based on their highly liquid
nature and because such marketable securities represent the
investment in cash that is available for current operations.
All short-term investments are classified as available for sale
and are recorded at market value using the specific
identification method: unrealized gains and losses would be
reflected in Accumulated Comprehensive Income. Cash equivalents
included in the accompanying financial statements include money
market accounts, bank overnight investments and commercial
paper.
d) INVENTORIES
Inventories are carried at the lower of cost (on a first-in,
first-out method) or estimated net realizable value.
e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line
method over the related assets' estimated useful lives. The
estimated useful lives are as follows:
Leasehold improvements -- Term of lease
Furniture and fixtures -- 7 years
Machinery and equipment -- 5 to 7 years
Office equipment -- 3 to 5 years
Computer equipment 3 to 5 years
f) PATENTS AND TRADEMARKS
The Company capitalizes certain patents and trademarks. Patents
and trademarks are amortized over their estimated useful lives,
ranging from 3 to 15 years.
g) REVENUE RECOGNITION
Sales revenue from proprietary ingredient products is
recognized when title transfers, upon shipment of the product.
Sales revenue from finished nutritional products are also
recognized when title transfers, which is upon delivery at the
customer site. There are no customer acceptance provisions to
lapse before the recognition of any product revenue. Only
revenue where collectability of accounts receivables is
probable is recognized. Other revenues are comprised primarily
of license and royalty fees recognized as earned in accordance
with agreements entered into by the Company when there is no
further involvement required by the Company. The Company
accrues for related product returns based on historical
activity.
F-9
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
h) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
i) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to the temporary
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.
j) STOCK-BASED COMPENSATION
The Company continues to account for employee stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Compensation cost for stock
options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value
method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method
of accounting as described above, and has adopted the
disclosure requirements of SFAS No. 123.
k) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO
BE DISPOSED
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to future undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
l) RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure- an
Amendment of FASB Statement No 123." SFAS No. 148, provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 requires prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. The Company adopted the disclosure provisions of SFAS
No. 148 effective December 31, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The FASB's
new rules on asset impairment supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and became effective for
the Company's fiscal year beginning July 1, 2002.
F-10
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
m) ADVERTISING COSTS
Advertising costs are expensed as incurred. The amount charged
to expense during fiscal years 2003, 2002 and 2001was $0.6
million, $0.4 million and $0.8 million, respectively.
n) RECLASSIFICATIONS
Certain reclassifications have been made to prior years'
financial statement amounts to conform to the 2003
presentation.
Note 2: ACQUISITION
In 1999, the Company acquired the Lite Bites product line from
Optimum Lifestyles, Inc. Contingent payments in conjunction with
this acquisition are made to the former owners of Optimum
Lifestyles, Inc. ("OLI") depending primarily on sales levels of
the Lite Bites Business achieved during the five year period
following closing and/or the availability of Lite Bites products
through certain distribution channels in the future as follows: a
maximum of $3.0 million in cash and/or Nutrition 21 common stock,
at the option of the former owners of OLI, payable $1.0 million
on each of the first three anniversaries of the acquisition; $3.0
million in newly issued Nutrition 21 preferred stock, payable
$1.5 million, subject to adjustment for the achievement of net
sales levels, on each of the first two anniversaries of the
acquisition, in newly issued Nutrition 21 preferred stock; and a
single payment of $1.0 million in cash, subject to achieving
certain sales levels in new markets, prior to the fifth
anniversary of the acquisition. During fiscal 2002, the Company,
in satisfaction of the contingent payment requirement paid $1.0
million in cash resulting in an increase in goodwill. During
fiscal 2001, the Company, in satisfaction of the contingent
payment requirement, paid $1.0 million in cash and issued 941
shares of its Series G Preferred Stock, which resulted in an
increase in goodwill of $1.9 million. During fiscal years ended
June 30, 2003, 2002 and 2001, respectively, the Company recorded
approximately $0.4 million in amortization expense related to
other intangible assets.
Note 3: SHORT-TERM INVESTMENT
June 30,
2003 2002
---- ----
Available for sale:
3.10% corporate bond, maturing 12/05/03
(in thousands) $----- $1,000
Note 4: INVENTORIES
The components of inventories at June 30, 2003 and 2002 are as
follows (in thousands):
2003 2002
---- ----
Raw materials $ -- $ 444
Finished goods 1,135 631
----- ---
Total inventories $1,135 $1,075
====== ======
F-11
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5: STOCK-BASED COMPENSATION
The Company applies the intrinsic value method pursuant to APB Opinion
No. 25 in accounting for its employee stock option plans and,
accordingly, no compensation cost has been recognized in the
consolidated financial statements for its employee stock options, which
have an exercise price equal to the fair value of the stock on the date
of the grant. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income (loss) would have been reduced (increased) to
the pro forma amounts indicated below (in thousands, except per share
data) (see Note 12):
Year-ended
June 30,
2003 2002 2001
---------- ---------- ----------
Net (loss) income as reported $ (10,506) $ (6,011) $ 1,065
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards (256) (383) (432)
---------- ---------- ----------
Pro forma net (loss) income $ (10,762) $ (6,394) $ 633
========== ========== ==========
(Loss) earnings per share
Basic - as reported $ (0.32) $ (0.19) $ 0.03
Basic - pro forma $ (0.32) $ (0.20) $ 0.02
Diluted - as reported $ (0.32) $ (0.19) $ 0.03
Diluted - pro forma $ (0.32) $ (0.20) $ 0.02
The effects of applying SFAS No. 123 in this pro forma disclosure are
not necessarily indicative of future amounts because the calculation
does not take into consideration pro forma compensation expense related
to grants made prior to 1995.
Note 6: FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, short-term investments and
accounts receivable approximate carrying amounts due to the short
maturities of these instruments.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents and accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited as the Company
performs on-going credit evaluations of its customers and maintains
credit insurance on customers' balances. On a periodic basis, the
Company evaluates its accounts receivable and establishes an allowance
for doubtful accounts, based on a history of past write-offs and
collections and current credit considerations. Management does not
believe that significant credit risk exists at June 30, 2003. The
Company places its cash primarily in market interest rate accounts,
overnight investments and short-term investments. The Company had $0.7
million in overnight investments and $3.4 million invested in mutual
money market funds at June 30, 2003. The Company had $0.9 million in
overnight investments, $3.0 million invested in money market funds and
$1.0 million in short term investments at June 30, 2002.
F-12
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Company sells its products to customers in the Americas and Europe.
The Company performs ongoing credit evaluations of its customer's
financial condition and limits the amount of credit extended as deemed
appropriate, but generally requires no collateral. The Company
maintains reserves for credit losses and, to date, such losses have
been within management's expectations.
In fiscal year 2003, two customers accounted for approximately 27% of
net sales. For fiscal years 2002 and 2001, one customer accounted for
28% and 29% of net sales, respectively. In addition, two customers
accounted for 40% of accounts receivable, net at June 30, 2003, and one
customer accounted for 23% of accounts receivable, net at June 30,
2002.
Note 7: RELATED PARTY TRANSACTIONS
On September 17, l998, the Company commenced a strategic alliance with
Wyeth (formerly American Home Products Corporation) ("Wyeth") for
retail distribution of the Company's proprietary nutrition products. As
part of the alliance, Wyeth's Whitehall-Robins Healthcare Division was
granted an exclusive license to sell the Company's Cardia(R) Salt in
retail markets in the United States and received a first negotiation
option for exclusive rights and licenses for additional nutrition
products for retail distribution in the United States. The Company
retained the exclusive rights to market its products in both direct
response and ingredient channels. On October 8, l998, the Company
received a non-refundable payment of $1.0 million for the rights
granted to Wyeth. Also on October 8, l998, Wyeth paid $1.15 per share
or a total of $4.0 million for 3,478,261 shares of the Company's Common
Stock. For the fiscal year ended 2001, the Company received
approximately $0.5 million in license fees from Wyeth.
A former officer's employment with the Company terminated on September
29, 2000. Effective as of such date, the Company entered into a
consulting agreement with the former officer. The agreement is for the
period from October 1, 2000 through June 30, 2004, and provides for
payment of $206,250 for the period from October 1, 2000 through June
30, 2001, and a fee at an annual rate of $100,000 thereafter. All of
the former officer's stock options (900,000 shares) became fully vested
and became exercisable until June 30, 2004. Upon the occurrence of a
change of control (as defined in the agreement), the agreement
terminates and the Company is required to pay to the former officer a
lump-sum payment equal to the fees that would have been paid to him
over the remaining term of the agreement had the change of control not
occurred.
On July 1, 2001 the Company licensed its remaining rights to sell
lysostaphin for research purposes, to one of its senior vice
presidents, for $300,000, payable in cash over a three-year period. As
of June 30, 2003, all payments have been made.
Note 8 PROPERTY AND EQUIPMENT, NET
The components of property and equipment, net, at June 30, 2003 and
2002 are as follows (in thousands):
2003 2002
------- -------
Furniture and fixtures $ 422 $ 422
Machinery and equipment 135 135
Office equipment & leasehold improvements 542 561
Computer equipment 766 732
------- -------
1,865 1,850
Less: accumulated depreciation and amortization (1,386) (1,196)
------- -------
Property and equipment, net $ 479 $ 654
======= =======
F-13
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9: PATENTS AND TRADEMARKS, NET
During fiscal year 2003, changes in intangible assets relate to the
investment of $0.5 million in existing patents, which will be amortized
over the remaining life of the patents, as well as a $4.4 million
impairment charge relating to the discontinuance of the Lite Bites
product line. No significant residual value is estimated for these
intangible assets. Intangible asset amortization expense was $2.5
million for fiscal year 2003, $2.4 million for fiscal year 2002 and
$2.7 million for fiscal year 2001. The components of intangible assets
were as follows (in thousands):
June 30,
2003 2002
------------------------- ----------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------------------------------------------------
Patents and licenses $ 9,069 $ (6,346) $ 9,228 $ (5,582)
Trademarks, trade names and other 14,877 (6,988) 20,566 (7,139)
-------- -------- -------- --------
Intangible assets $ 23,946 $(13,334) $ 29,794 $(12,721)
======== ======== ======== ========
Amortization expense for the net carrying amount of intangible assets
at June 30, 2003 is estimated to be $2.1 million in fiscal years 2004
through 2007, respectively.
Note 10: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following items are included in accounts payable and accrued
expenses at June 30, 2003 and 2002 (in thousands):
2003 2002
------ ------
Accounts payable $1,903 $1,115
Consulting and professional fees payable 109 46
Accrued compensation and benefits 160 109
Taxes payable -- 725
Other accrued expenses 1,284 107
------ ------
$3,456 $2,102
====== ======
Note 11: REDEEMABLE PREFERRED STOCK
During fiscal year 2002, all remaining shares of the Company's E
Preferred Stock plus accrued dividends on these shares were converted
into Common Stock.
During fiscal year 2001, 285 shares of the Company's E Preferred Stock
plus accrued dividends on these shares were converted into 231,136
shares of Common Stock.
During fiscal year 2002, 227 shares of the Company's F Preferred Stock
plus accrued dividends on these shares were redeemed for $0.3 million.
During fiscal year 2001, 116 shares of the Company's F Preferred Stock
plus accrued dividends on these shares were redeemed for $0.2 million.
Note 12: STOCKHOLDERS' EQUITY
INDUCEMENT PLAN
The Company adopted a 2002 Inducement Stock Option Plan (the
"Inducement Plan"). The Inducement Plan provides for the grant of
options to purchase shares of the Company's common stock to induce
individuals to become employed by the Company. The aggregate number of
shares of common stock, which may become subject to options shall not
exceed 2,500,000.
Approximately 2,500,000 options remain available for grant under the
Inducement Plan at June 30, 2003.
F-14
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. STOCKHOLDERS' EQUITY (CONTINUED)
SERIES G CONVERTIBLE PREFERRED STOCK
In January 1999, the Company created a non-voting Series G Convertible
Preferred Stock ("G Preferred") with a par value of $0.01 per share.
The G Preferred bears dividends of $50 per share per annum. The G
Preferred is convertible into Common Stock at the average closing price
of the Common Stock during the 10 days immediately preceding
conversion. The G Preferred is subject to mandatory conversion after
three years from the date of issuance. During the fiscal year ended
June 30, 2003 and 2002, 283 and 470 shares, respectively, of the
Company's G Preferred were converted into 654,335 and 686,232 shares,
respectively, of the Company's common stock. On February 12, 2001, the
Company issued 941 shares of G Preferred, and converted 663 shares of G
Preferred into 845,663 shares of the Company's Common Stock
WARRANTS
The Company, from time to time, issues warrants to purchase Common
Stock to non-employees for services rendered. Warrants are granted to
purchase the Company's Common Stock with exercise prices set at fair
market value on the date of grant. The terms of the warrants vary
depending on the circumstances, but generally expire in three to five
years.
The Company had outstanding warrants for the purchase of its Common
Stock as follows:
Number of Exercise price
WARRANTS PER SHARE
--------- -----------
Outstanding at June 30, 2000 1,348,926 $1.25-$6.75
Issued 50,000 $ 0.89
Exercised (8,265) $ 2.72
Cancelled (258,524) $1.25-$6.75
---------
Outstanding at June 30, 2001 1,132,137 $0.89-$6.30
Issued 160,000 $0.63-$0.74
Exercised -- --
Cancelled (482,137) $1.25 -$6.30
---------
Outstanding at June 30, 2002 810,000 $0.63-$3.65
Issued 105,000 $0.40-$0.57
Exercised -- --
Cancelled (70,000) $2.59-$3.62
---------
Outstanding at June 30, 2003 845,000 $0.40-$3.65
=========
The warrants expire between 2003 and 2012. Certain of the warrants
include anti-dilution clauses.
Warrants outstanding and exercisable at June 30, 2003, are as follows:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- --------- -------- ----------- ------
$0.40 - $0.89 315,000 3.43 $0.70 290,000 $0.73
$1.38 - $1.50 80,000 4.29 $1.42 70,000 $1.43
$3.26 - $3.65 450,000 1.30 $3.63 450,000 $3.63
------- -------
845,000 810,000
======= =======
The Company recorded compensation expense associated with the issuance
of warrants to third parties of $47 thousand, $80 thousand and $8
thousand during fiscal years 2003, 2002 and 2001, respectively.
F-15
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS
In addition, the Company had adopted five other Stock Option Plans
("Plans") whereby options to purchase an aggregate of 8,750,000 shares
of the Company's common stock may be granted to employees, consultants
and others who render services to the Company. The exercise price per
share for the options granted under these Plans may not be less than
the fair value of the Company's Common Stock on the date of grant. The
options issuable pursuant to the Plans expire between 2004 and 2013.
Approximately 1,175,500 options remain available for grant under these
Plans.
A summary of stock option activity related to the Company's stock
option plans is as follows:
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
--------- --------------
Outstanding at June 30, 2000 2,649,391 $0.75 - $7.56
Issued 1,280,889 $0.81 - $2.63
Exercised -- --
Cancelled (978,181) $0.75 - $5.00
---------
Outstanding at June 30, 2001 2,952,099 $0.81 - $7.56
Issued 1,230,000 $0.55 - $1.23
Exercised -- --
Cancelled (542,110) $0.69 - $7.56
---------
Outstanding at June 30, 2002 3,639,989 $0.55 - $5.63
Issued 3,466,000 $0.31 - $0.71
Exercised -- --
Cancelled (591,987) $0.37 - $3.50
---------
Outstanding at June 30, 2003 6,514,002 $0.31- $5.63
=========
Each of these options is entitled to one share of common stock. Stock
options generally vest ratably over five years from the date of grant
and expire within five years from the date of vesting.
Options outstanding and exercisable at June 30, 2003 are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ------------ ----------- ----------- ---------
$0.31 - $0.94 3,860,000 9.05 $0.44 551,700 $0.73
$1.09 - $1.44 1,032,402 7.58 $1.21 660,998 $1.22
$1.50 - $2.94 996,600 2.80 $2.11 916,400 $2.13
$3.00 - $5.63 625,000 1.79 $3.49 612,200 $3.50
--------- ---------
6,514,002 2,741,298
========= =========
The per share weighted-average fair value of stock options granted
during fiscal years 2003, 2002 and 2001 was $0.06, $0.15 and $0.20,
respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
2003 2002 2001
------ ------ ------
Risk-free interest rate 2.2% 3.8% 5.2%
Expected life-years 2.5 2.0 2.5
Expected volatility 45.4% 45.6% 45.8%
Expected dividend yield -- -- --
F-16
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13: SHAREHOLDER RIGHTS PLAN
The Company adopted a Shareholder Rights Plan on September 12, 2002.
Under this plan, the Company will distribute, as a dividend, one
preferred share purchase right for each share of Common Stock of the
Company held by stockholders of record as of the close of business on
September 25, 2002. The Rights Plan is designed to deter coercive
takeover tactics, including the accumulation of shares in the open
market or through private transactions, and to prevent an acquirer from
gaining control of the Company without offering a fair price to all of
the Company's stockholders. The Rights will expire on September 11,
2012.
Each Right initially will entitle stockholders to buy one
one-thousandth of a share of newly created Series H Participating
Preferred Stock of the Company for $3.00 per share. Each one
one-thousandth of a share of the Preferred Stock is designed to be the
functional equivalent of one share of Common Stock. The Rights will be
exercisable only if a person or group acquires beneficial ownership of
15% or more of the Company's Common Stock (30% in the case of a person
or group that is currently a 15% holder) or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15% or more the Company's Common Stock.
If any person or group (an "Acquiring Person") becomes the beneficial
owner of 15% or more of the Company's Common Stock (30% in the case of
a person that is currently a 15% holder), then (1) the Rights become
exercisable for Common Stock instead of Preferred Stock, (2) the Rights
held by the Acquiring Person and certain affiliated parties become
void, and (3) the Rights held by others are converted into the right to
acquire, at the purchase price specified in the Right, shares of Common
Stock of the Company having a value equal to twice such purchase price.
The Company will generally be entitled to redeem the Rights, at $.001
per right, until 10 days (subject to extension) following a public
announcement that an Acquiring Person has acquired a 15 % position.
Note 14: (LOSS)EARNINGS PER SHARE
Basic and diluted (loss) earnings per share for the fiscal years ended
June 30, 2003, 2002 and 2001 are as follows (in thousands, except
share and per share amounts):
The following table sets forth the computation of basic and diluted
(loss) earnings per share for the periods indicated.
YEAR ENDED JUNE 30,
2003 2002 2001
------------ ------------ ------------
Basic (loss) earnings per share:
Net (loss) income $ (10,506) $ (6,011) $ 1,065
Less: Dividends on preferred shares (16) (51) (146)
Premium on redemption of preferred stock -- (115) (110)
------------ ------------ ------------
(Loss) income applicable to common stockholders $ (10,522) $ (6,177) $ 809
============ ============ ============
Weighted average shares 33,309,371 32,621,918 31,781,403
============ ============ ============
Basic (loss) earnings per share $ (0.32) $ (0.19) $ 0.03
============ ============ ============
Diluted (loss) earnings per share:
(Loss) income applicable to common stockholders $ (10,521) $ (6,177) $ 809
============ ============ ============
Weighted average shares 33,309,371 32,621,918 31,781,403
Plus incremental shares from assumed conversions of
stock options -- -- 98,211
------------ ------------ ------------
Adjusted weighted average shares 33,309,371 32,621,918 31,879,614
============ ============ ============
Diluted (loss) earnings per share $ (0.32) $ (0.19) $ 0.03
============ ============ ============
F-17
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14: (LOSS)EARNINGS PER SHARE (CONTINUED)
Diluted (loss) earnings per share for the fiscal years ended June 30,
2003, 2002 and 2001, do not reflect the incremental shares from the
assumed conversion of preferred stock (127,150, 377,181 and 833,313
shares, respectively) as the effect of such inclusion would be
anti-dilutive.
Note 15: RESTRUCTURING AND OTHER CHARGES
The Company recorded $2.4 million for restructuring and other
non-recurring charges, relating to its Nutritional Products segment, in
the second quarter of fiscal 2001. A $1.6 million restructuring charge
was recorded as part of the Company's initiative to reduce costs and to
create a more flexible and efficient organization. Included in the
restructuring charge were $0.7 million of cash termination benefits
associated with the separation of twenty employees. All of the affected
employees left their positions with the Company as of June 30, 2001.
All of the termination benefits were paid. This cash outlay was funded
through cash from operations. Approximately $0.9 million of the
restructuring charge relates to the Company's decision to discontinue
its efforts to launch NO YO, a consumer weight loss product intended
for the retail channel and to consolidate certain of the Company's
facilities. At June 30, 2001, all restructuring charges accrued during
the fiscal year 2001 had been paid.
Other charges of $0.7 million include a non-cash write off of the
carrying value of the website development costs related to
NutritionU.com, the Company's online nutrition education internet
company. The Company believes that since sufficient uncertainty
surrounds the ability of the Company to find strategic partners for
NutritionU.com, there will be no substantive future benefit to be
derived from the website development costs. In addition, other charges
include $0.1 million for the write- off of the remaining carrying value
of a license fee for one of its products.
Note 16: OTHER INCOME
During the fiscal year 2001, the Company recorded as other income $1.8
million from the settlement of patent infringement claims related to
chromium picolinate as well as a sale of assets.
Note 17: SEGMENT REPORTING
Effective in fiscal year 1999, the Company adopted FASB Statement No.
131 "Disclosures about Segments of an Enterprise and Related
Information" which established revised standards for reporting
information about operating segments. Pursuant to Statement No. 131,
the Company's reporting segments are nutritional products and
pharmaceutical products.
The Company's Nutritional Products segment develops and markets
proprietary essential trace elements to the vitamin supplement market
for both human and animal applications. The Company's Pharmaceutical
Products segment includes all licensing activities related to certain
antibacterial technologies.
A summary of business data for the Company's reportable segments for
the fiscal years 2003, 2002, and 2001 follows. Information by business
segment (in thousands):
F-18
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17:SEGMENT REPORTING (CONTINUED)
2003 2002 2001
-------- -------- --------
REVENUES
Nutritional Products $ 10,220 $ 14,237 $ 21,127
Pharmaceutical Products 395 431 2,125
-------- -------- --------
$ 10,615 $ 14,668 $ 23,252
======== ======== ========
OPERATING (LOSS) INCOME
Nutritional Products $(11,331) $ (8,046) $ (2,876)
Pharmaceutical Products 250 257 1,921
-------- -------- --------
$(11,081) $ (7,789) $ (955)
======== ======== ========
DEPRECIATION AND AMORTIZATION
Nutritional Products $ 2,577 $ 2,497 $ 3,216
Pharmaceutical Products 114 122 143
-------- -------- --------
$ 2,691 $ 2,619 $ 3,359
======== ======== ========
SEGMENT ASSETS
Nutritional Products $ 18,149 $ 27,186 $ 37,698
Pharmaceutical Products 771 914 1,189
-------- -------- --------
$ 18,920 $ 28,100 $ 38,887
======== ======== ========
CAPITAL EXPENDITURES
Nutritional Products $ 571 $ 3,380 $ 5,013
Pharmaceutical Products -- -- --
-------- -------- --------
$ 571 $ 3,380 $ 5,013
======== ======== ========
Geographic information about the Company's revenues, which is based on
the location of the buying organization, for the fiscal years 2003,
2002 and 2001 is presented below (in thousands):
2003 2002 2001
-------- -------- --------
REVENUES
United States $ 10,560 $ 13,950 $ 21,526
United Kingdom 55 718 1,726
-------- -------- --------
$ 10,615 $ 14,668 $ 23,252
======== ======== ========
PROPERTY AND EQUIPMENT, NET
United States $ 479 $ 654 $ 633
United Kingdom -- -- --
-------- -------- --------
$ 479 $ 654 $ 633
======== ======== ========
One nutritional product segment customer accounted for approximately
19%, 28% and 29% of the segment revenue in fiscal years 2003, 2002 and
2001, respectively
Presented below is a reconciliation of total business segment operating
(loss) income to consolidated (loss) income before income taxes for the fiscal
years 2003, 2002 and 2001(in thousands):
2003 2002 2001
-------- -------- --------
Total segment operating (loss) $(11,081) $ (7,789) $ (955)
Other, net 31 1,778 2,355
-------- -------- --------
(Loss) income before income taxes $(11,050) $ (6,011) $ 1,400
======== ======== ========
F-19
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18: GOODWILL
The Company adopted SFAS No. 142 effective July 1, 2001. Under SFAS No.
142, goodwill is no longer amortized but reviewed for impairment
annually, or more frequently if certain indicators arise. The Company
was required to complete the initial step of a transitional impairment
test within six months of adoption of SFAS No. 142 and to complete the
final step of the transitional impairment test by the end of the fiscal
year. The initial step was completed in the first quarter of fiscal
2002. In addition, the Company assesses the impairment of identifiable
intangible assets and goodwill whenever events or changes in
circumstances indicate that the carrying value of the relevant assets
may not be recoverable. Management's judgment regarding the existence
of impairment is based on factors such as significant changes in the
manner or the use of acquired assets or the Company's overall business
strategy; significant negative industry or economic trends; significant
declines in the Company's stock price for a sustained period and the
Company's market capitalization relative to book value. Upon adoption,
goodwill in the amount of $4.1 million included in patents and
trademarks since acquisition (although accounted for separately by the
Company and included therein because of its estimated economic life)
was reclassified in the accompanying balance sheets in accordance with
the requirements of SFAS No. 142. Due to declining market conditions,
as well as a change in business strategy, it was determined that a $7.1
million impairment charge was warranted in fiscal year 2002. The
Company used a discounted cash flow analysis for purposes of estimating
the fair value of its reporting unit. Had the Company been accounting
for its goodwill under SFAS No. 142 for all periods presented, the
Company's net (loss) income and (loss) earnings per share would have
been as follows( in thousands, except share data):
Year-ended June 30,
2003 2002 2001
---------- ---------- ----------
Reported net (loss) income: $ (10,506) $ (6,011) $ 1,065
Add back goodwill amortization, net of tax -- -- 475
---------- ---------- ----------
Adjusted net (loss) income $ (10,506) $ (6,011) $ 1,540
========== ========== ==========
Basic (loss) earnings per share:
Reported net (loss) income $ (0.32) $ (0.19) $ 0.03
Goodwill amortization, net of tax -- -- 0.02
---------- ---------- ----------
Adjusted net (loss) income $ (0.32) $ (0.19) $ 0.05
========== ========== ==========
Diluted earnings per share:
Reported net (loss) income $ (0.32) $ (0.19) $ 0.03
Goodwill amortization, net of tax -- -- 0.02
---------- ---------- ----------
Adjusted net (loss) income $ (0.32) $ (0.19) $ 0.05
========== ========== ==========
Note 19: PENSION PLAN
Eligible employees of the Company are entitled to participate in the
Burns Philp Inc. Retirement Plan for Non-Bargaining Union Employees
(the "Pension Plan"), a defined benefit pension plan, as long as Burn
Philp maintains the Pension Plan and owns at least 20% of the Company's
outstanding Common Stock. At June 30, 2003, Burns Philp held
approximately 24% of the Company's outstanding Common Stock.
During fiscal years 2003, 2002, and 2001, the Company made
contributions to the Pension Plan of $131 thousand, $106 thousand and
$100 thousand, respectively.
F-20
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20: INCOME TAXES
The provisions for income taxes for the fiscal years ended June 30,
2003, 2002 and 2001 consist of the following (in thousands):
2003 2002 2001
------- ------- -------
Current $(1,182) $ 725 $ 633
Deferred 638 (725) (298)
------- ------- -------
$ (544) $--- $ 335
======= ======= =======
Income taxes attributed to pre-tax ( loss) income differed from the
amounts computed by applying the US federal statutory tax rate to
pre-tax income as a result of the following (in thousands):
2003 2002 2001
------- ------- -------
Income taxes at U.S. statutory rate $(3,757) $(2,044) $ 476
Increase/(reduction) in income taxes resulting from:
Change in valuation allowance 4,184 1,607 (263)
Goodwill book basis in excess of tax -- 263 --
State taxes, net of federal (663) (268) 26
Other items (308) 442 96
------- ------- -------
$ (544) $ -- $ 335
======= ======= =======
The tax effects of temporary differences that give rise to deferred
taxes and deferred tax assets and deferred tax liabilities at June 30,
2003 and 2002 are presented below (in thousands):
2003 2002
------- -------
Deferred tax assets:
Net operating loss carryforwards $ 2,920 $ 515
Accrued expenses 580 234
Allowance for doubtful accounts 8 8
Inventory reserve 95 --
Intangible assets 2,188 1,370
Other -- 118
------- -------
Total gross deferred tax assets 5,791 2,245
Less valuation allowance (5,791) (1,607)
------- -------
Net deferred tax assets $ -- $ 638
======= =======
Deferred tax assets are included in other receivables.
At June 30, 2003, the Company has available, for federal and state
income tax purposes, net operating loss carry forwards of approximately
$7.0 million and $9.0 million, respectively, expiring through 2023.
Ultimate utilization of such net operating loss carryforwards may be
significantly curtailed if a significant change in ownership of the
Company were to occur. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax
assets will not be realized.
F-21
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21: COMMITMENTS AND CONTINGENT LIABILITIES
The Company entered into a three-year employment agreement with Gail
Montgomery as President and Chief Executive Officer, effective as of
September 1, 2002. The agreement provides for an annual salary of
$275,000, $300,000, and $325,000 in the successive years under the
agreement, and for performance bonuses based on achieving defined
revenue targets. Ms. Montgomery is also entitled to additional payments
equal to one year's salary plus an additional month of salary for
defined years of service, if her employment is terminated without cause
before the agreement expires, or if the Company fails to offer to enter
into a new one-year agreement upon expiration. If Ms. Montgomery's
employment is terminated or she resigns within six months after a
change of control (as defined) the Company will pay to her 2.99 times
her annual salary and previous year's bonus plus certain gross-ups, but
these payments will be reduced to the extent necessary to prevent the
application of Section 280G of the Internal Revenue Code. The Company
in July 2002 granted to Ms. Montgomery options to purchase an aggregate
of 850,000 shares of common stock at $0.39 per share, and 325,000 stock
appreciation rights ("SAR") on the same general terms as the option
grant, except that upon exercise of the SAR the Company will pay to her
the SAR's in-the-money value in cash or common stock.
The Company entered into a three-year employment agreement with Andrew
Wertheim as Chief Operating Officer, effective as of August 5, 2002.
The agreement provides for an annual salary of $225,000, $250,000, and
$275,000 in the successive years under the agreement, and for
performance bonuses based on achieving defined revenue targets. Mr.
Wertheim is also entitled to additional payments equal to one year's
salary, if his employment is terminated without cause before the
agreement expires. If Mr. Wertheim's employment is terminated or he
resigns within six months after a change of control (as defined) the
Company will pay to him 2.99 times his annual salary and previous
year's bonus plus certain gross-ups, but these payments will be reduced
to the extent necessary to prevent the application of Section 280G of
the Internal Revenue Code. The Company in August 2002 granted to Mr.
Wertheim options to purchase an aggregate 675,000 shares of the
Company's Common Stock at $0.36 per share. On February 14, 2003, Mr.
Wertheim's employment with the Company was terminated. As a result, his
stock options terminated. Mr. Wertheim has demanded arbitration of
whether he has any entitlements under his employment agreement. As of
June 30, 2003, the Company did not provide for any termination
benefits.
The Company entered into a four-year agreement with Benjamin Sporn
effective as of September 1, 2002, which provides for his services as
Senior Vice President, General Counsel, and Secretary as an employee
during the first two years of the term and as General Counsel as a
consultant during the balance of the term. Mr. Sporn's salary and fees
will be $207,500, $225,000, $150,000 and $100,000 in successive years
under the agreement, plus performance bonuses based on achieving
defined revenue targets. Mr. Sporn is also entitled to additional
payments equal to two years' salary if his employment is terminated
without cause before the agreement expires. If Mr. Sporn's employment
is terminated or he resigns within six months after a change of control
(as defined) the Company will pay to him 2.99 times his annual salary
and previous year's bonus plus certain gross-ups, but these payments
will be reduced to the extent necessary to prevent the application of
Section 280G of the Internal Revenue Code. The Company in July 2002
granted to Mr. Sporn options to purchase an aggregate of 225,000 shares
of the Company's Common Stock at $0.39 per share.
Effective as of September 16, 2002, the Company entered into a
three-year employment agreement with Paul Intlekofer, who has served as
Chief Financial Officer and Senior Vice President, Corporate
Development since January 17, 2003. The agreement provides for an
annual salary of $200,000, $225,000, and $250,000 in the successive
years under the agreement, and for performance bonuses based on
achieving defined revenue targets. Mr. Intlekofer is also entitled to
additional payments equal to one year's salary, if his employment is
terminated without cause before the agreement expires. If Mr.
Intlekofer's employment is terminated or he resigns within six months
after a change of control (as defined) the Company will pay to him 2.99
times his annual salary and previous year's bonus plus certain
gross-ups, but these payments will be reduced to the extent necessary
to prevent the application of Section 280G of the Internal Revenue
Code. The Company in accordance with the agreement granted to Mr. Paul
Intlekofer options to purchase an aggregate 550,000 shares of the
Company's common stock at $0.40 per share.
F-22
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
In October 1995, the Company entered into an exclusive license
agreement whereby the Company received a license to sell a patented
salt alternative in the United States. During the term of the license,
the Company agreed to pay a royalty of 4.5% of net sales of the salt
alternative. The Company is required to make royalty payments quarterly
through 2007. In connection with this agreement, the Company recorded
royalty expense of $2 thousand for the fiscal year ended June 30, 2003;
$0.2 million for the fiscal year ended June 30, 2002 and $0.5 million
for the fiscal year ended June 30, 2001.
The Company has entered into various research and license agreements
with certain universities to supplement the Company's research
activities and to obtain for the Company rights to certain technology.
The agreements generally require the Company to fund the research and
to pay royalties based upon a percentage of product sales.
The Company leases certain office space in the United States. The lease
expires in the year 2006. Payments under this lease were approximately
$0.4 million in fiscal year 2003, $0.5 million in fiscal year 2002, and
$0.7 million in fiscal year 2001. Future non-cancelable minimum
payments under this lease are as follows (in thousands):
YEAR AMOUNT
2004 $ 370
2005 370
2006 261
--------
Total $ 1,001
========
Note 22: SUPPLEMENTAL CASH FLOW INFORMATION
Year ended June 30,
2003 2002 2001
------ ------ ------
Supplemental disclosure of cash flow information (in thousands)
Cash paid for interest $ 33 $ 62 $ 243
Cash paid for income taxes 41 504 146
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property & equipment -- -- 152
Obligation for N21 contingent payment 26 369 1,938
Obligation for Lite Bites contingent payment -- 589 970
Issuance of common stock for Series E conversion -- -- 237
Issuance of common stock for Series G conversion 283 -- 663
Issuance of Series G preferred stock for Optimum Lifestyle, Inc.
contingent payment -- -- 941
Note 23: RISKS AND UNCERTAINTIES
The Company buys certain of its inventories from single suppliers.
Management believes that other suppliers could provide similar products
at comparable terms. As a result, management believes a change in
suppliers would not disrupt on-going operations and would not affect
operating results adversely.
F-23
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 24: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER (A)
- ----------------------------------- ------- ------- ------- -----------
FISCAL YEAR 2003
Revenues $ 3,315 $ 2,334 $ 3,132 $ 1,834
Gross Profit 2,506 1,352 2,115 513
(Loss) before Income Taxes (112) (2,270) (1,449) (7,219)
Net (Loss) (112) (2,270) (1,143) (6,981)
Net (Loss) per common share:
Basic $ (0.00) $ (0.07) $ (0.03) $ (0.22)
Diluted $ (0.00) $ (0.07) $ (0.03) $ (0.22)
FISCAL YEAR 2002
Revenues $ 3,949 $ 2,912 $ 3,987 $ 3,820
Gross Profit 2,709 2,041 2,713 2,861
Income (loss) before Income Taxes 1,996 (627) (297) (7,083)
Net Income (loss) 1,277 (375) (197) (6,716)
Net Income (loss) per common share:
Basic $ 0.04 $ (0.02) $ (0.01) $ (0.20)
Diluted $ 0.04 $ (0.02) $ (0.01) $ (0.20)
(a) The fourth quarters of fiscal years 2003 and 2002 include $4.4 million
and $7.1 million, respectively, of non-cash charges for impairment of
intangibles.
Note 25: SUBSEQUENT EVENT
On August 28, 2003, the remaining 188 shares of Series G preferred
stock were converted into 316,498 shares of the Company's Common Stock.
F-24
SCHEDULE II
NUTRITION 21, INC.
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE CHARGED TO CHARGED TO
BEGINNING COST AND OTHER BALANCE END
ACCOUNTS OF YEAR EXPENSE ACCOUNTS DEDUCTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------
($ in thousands)
Year ended June 30, 2003
Allowance for Doubtful Accounts 19 -- -- -- 19
Deferred Tax Valuation Allowance 1,607 4,184 -- -- 5,791
Allowance for returns and allowances 140 920 1,060*
Allowance for inventory obsolescence 1 236 -- -- 237
Year ended June 30, 2002
Allowance for Doubtful Accounts 45 -- -- (26) 19
Deferred Tax Valuation Allowance 1,360 -- 247 -- 1,607
Allowance for returns and allowances 117 23 0 140*
Allowance for inventory obsolescence 31 (30) -- -- 1
Year ended June 30, 2001
Allowance for Doubtful Accounts 134 1 -- (90) 45
Deferred Tax Valuation Allowance 1,623 -- -- (263) 1,360
Allowance for returns and allowances 112 -- 5 -- 117*
Allowance for inventory obsolescence 136 (105) -- -- 31
*Included in accounts receivable, net and accrued expenses in the consolidated
balance sheets.