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