10-K 1 c21963_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Year ended June 30, 2001 [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ----------------- ------------------------ Commission File Number 0-14983 NUTRITION 21, INC. ------------------ (Exact Name of Registrant as Specified in its Charter) NEW YORK 11-2653613 ----------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4 Manhattanville Road PURCHASE, NEW YORK 10577-2197 ----------------------------------------- ------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including Area Code: (914) 701-4500 ----------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (PAR VALUE $.005 PER SHARE) Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No --------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the registrant's best knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $18,146,619 as of September 24, 2001. The number of shares outstanding of Registrant's Common Stock as of September 24, 2001: 32,342,818. 1 FORM 10-K REPORT INDEX 10-K Part and Item No. Page No. -------------------------------------------------------------------------------- PART I Item 1 Business 3 Item 2 Properties 11 Item 3 Legal Proceedings 11 Item 4 Submission of Matters to a Vote of Security Holders 11 PART II Item 5 Market Price of Registrant's Common Equity and Related Stockholder Matters 12 Item 6 Selected Financial Data 13 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7a Quantitative and Qualitative Disclosures About Market Risk 21 Item 8 Financial Statements and Supplementary Data 21 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III Item 10 Directors and Executive Officers of the Registrant 22 Item 11 Executive Compensation 26 Item 12 Security Ownership of Certain Beneficial Owners and Management 32 Item 13 Certain Relationships and Related Transactions 34 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35 2 PART I ITEM 1. BUSINESS THE COMPANY NUTRITION 21, INC. (formerly AMBI Inc.) (the "Company") develops and markets clinically substantiated, proprietary nutritional products that make a significant contribution to the health and well-being of consumers. The Company develops Nutrition Products that are regulated by the 1994 Dietary Supplement Health and Education Act (DSHEA), and markets its products to manufacturers, wholesalers, and consumers, and supports the use of these Nutrition Products with data from clinical studies and patents. Nutrition Products may take the form of either foods or beverages and can include vitamins, minerals, enteral and parenteral supplements, other dietary supplements, healthy foods, functional foods, special dietary foods, and medical foods, and are sometimes referred to colloquially as "nutraceuticals". The Company concentrates its business primarily on research, development, and sales of proprietary chromium-based nutritional ingredients and finished nutritional products ("Nutrition Products"). The Company supports the value of its Nutrition Products with "pharmaceutical-type" clinical trials and patent filings. The Company's Nutrition Products are developed for consumers concerned primarily about the benefits associated with improved insulin resistance and blood sugar management, and health concerns for people with diabetes, cardiovascular disease, obesity, and depression. BACKGROUND The Company is a New York corporation that was incorporated on June 29, 1983 to develop and commercialize antibacterial technologies for new drugs. In August 2000, the Company completed the out-licensing of the rights to its antibacterial technologies. The Company now concentrates on its core competencies in proprietary Nutrition Products. On August 11, 1997, the Company acquired the entire beneficial interest in Nutrition 21, a limited partnership. Nutrition 21 was engaged in the business of developing, producing, and marketing proprietary trace minerals as ingredients for supplements. The products acquired from Nutrition 21 constituted a large majority of the Company's revenues during the fiscal year ended June 30, 2001. On September 17, 1998, the Company entered into a strategic alliance with American Home Products Corporation ("AHP") for the right to distribute certain of the Company's proprietary Nutrition Products in certain retail channels in the U.S. The Company retained the exclusive rights to market its products in both direct response and ingredient channels. 3 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 that are marketed under the registered trademark "Lite Bites" through the QVC, Inc. ("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. 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 nutritional products. Currently, the Company's flagship product is 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 eighteen U.S. 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. 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. These new complexes should provide added benefits to people concerned about the management of cholesterol, glucose control, and increasing lean body mass and reducing body 4 fat. These new complexes will have patent protection into the year 2018. See "Proprietary Rights." In June 2001, the Company introduced a new proprietary nutritional compound called Diachrome(TM), comprised of two nutritional ingredients, Chromax chromium picolinate and biotin. The compound's ingredients have been shown to work synergistically to enhance blood sugar control and improve blood cholesterol profiles. 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, 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 are also 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. and, in the future, is expected to be sold in other direct response outlets (such as catalogs, direct mail, multi-level marketing, and the internet, etc.). The Lite Bites products constitute part of a fat fighting system that has been demonstrated in a peer-reviewed clinical trial to promote weight loss when used as part of a program including diet and exercise. In May 2001, the Company launched its new Metabolic Makeover(TM) weight loss system on QVC. The Metabolic Makeover system is a supplement system designed to provide the user with a patented combination of essential nutrients that support optimum metabolism. In connection with the QVC alliance, the Company issued to QVC 420,000 performance-based warrants to purchase the Company's Common Stock. During the year ended June 30, 2001, QVC accounted for approximately 26% of revenues. Other consumer products with proprietary features are developed and marketed for sale in various distribution channels. Triumph Bars are sold in retail stores by Solgar Vitamin and Herb, an operating unit under American Home Product's Whitehall-Robins Healthcare Division. In October 1995, the Company acquired an exclusive license from a division of Orion Corporation ("Orion"), of Finland, to sell Orion's patented salt in the United States. The Company began selling Cardia(R) Salt in April 1996. This product has reduced sodium compared 5 to regular salt and contains potassium and magnesium, essential minerals that have been shown to promote healthy blood pressure. The Company has terminated its exclusive license and is negotiating a non-exclusive license with Orion. CLINICAL STUDIES Nutrition 21's Chromax chromium picolinate has been studied in more than 30 well-controlled clinical trials in people concerned about maintaining healthy blood glucose levels, increasing lean body mass and reducing body fat, and promoting healthy cholesterol levels. In 2000, scientists presented research at the 60th annual scientific sessions of the American Diabetes Association (ADA) and the 41st annual scientific sessions of the American College of Nutrition that supports the emerging role for the dietary supplement Chromax chromium picolinate in the management of diabetes and hypercholesterolemia. Babak Bahadori, MD, of the University of Graz in Austria found that chromium picolinate may enhance the effects of metformin and oral sulfonylureas, the most commonly used drugs in the treatment of diabetes. Dr. Bahadori's data suggest that in obese patients with type 2 diabetes receiving a sulfonylurea and metformin, supplementation with chromium picolinate significantly lowered fasting insulin levels without a detrimental effect on glucose control. The ability of chromium picolinate to lower fasting insulin levels in patients already receiving diabetic medications is clinically important because an elevated insulin level in the blood is an established risk factor for cardiovascular disease. These findings suggest the use of chromium picolinate as a nutritional adjunct in the dietary management of diabetes. Additional research conducted in 1999 by William T. Cefalu, MD, Associate Professor of Medicine in the Endocrinology, Diabetes and Metabolism Unit at the University of Vermont College of Medicine, described an improvement in insulin sensitivity in obese people with pre-diabetic symptoms who received Chromax(R) chromium picolinate. Furthermore, Alexander Ravina, MD, of the Diabetes Department at the Linn Clinic in Haifa, Israel, published results of a clinical trial in DIABETIC MEDICINE that showed that chromium picolinate reduced or eliminated the symptoms in 41 out of 44 patients with steroid-induced diabetes after standard drug therapy failed. In Dr. Ravina's study, the 41 patients who had developed diabetes as a result of undergoing steroid treatment and who benefited from Chromax chromium picolinate were able to reduce or eliminate their diabetic medication, such as insulin. Patients were given Chromax supplements starting at daily doses of 600 micrograms of chromium and gradually decreasing to 200-400 micrograms daily within one week. In 2000, Malcolm McLeod, MD, Clinical Professor of Psychiatry at the University of North Carolina School of Medicine, published the beneficial effects he has seen after initiating chromium supplementation in some of his patients with depression. All of these patients have previously failed to respond to common prescription drug treatments. A follow-up clinical study is currently ongoing at Duke University Medical Center to learn more about these new benefits. 6 Chromium picolinate is marketed by the Company under its registered trademark Chromax(R). In addition, the Company also markets zinc picolinate and selenium formulations. The Company has funded and continues to fund research studies investigating the uses of chromium picolinate and other micronutrients or minerals as dietary supplements with preventative and therapeutic benefits to humans. PHARMACEUTICAL PRODUCTS AND PARTNERS The Company has infectious disease drug technology for diseases in humans, centered around the compound nisin, a member of the lanthocin class of peptides, as a potential treatment for infections of the colon, and lysostaphin, an enzyme, as a potential treatment for endocarditis, and lysostaphin and antibiotic compositions to treat infections while suppressing the formation of staphylococcal and antibiotic resistance. The Company determined that it did not have the resources necessary to take these pharmaceutical products for the treatment of infectious diseases from the development stage through regulatory filings and ultimately to the marketplace, should a product be proven to be safe and efficacious. In March 1996, the Company entered into an exclusive Agreement with AZWELL, Inc. (formerly Nippon Shoji Kaisha, Ltd. of Osaka, Japan), under which AZWELL received exclusive rights to develop and market certain nisin-based drug products as a treatment of infections of the colon and nosocomial infections in Japan, certain Asian countries, Australia and New Zealand. In August 2000, the Company exclusively licensed to Biosynexus the Company's remaining rights to nisin and lysostaphin antibacterial technologies for development and marketing of new drugs for human uses. The Company received a payment of $1.4 million, and the license provides for milestone payments of up to $14 million, and royalties. The Company also received warrants to acquire common stock of Biosynexus, currently a privately held company. The Company also has infectious disease technology centered on nisin and lysostaphin for the treatment of diseases in animals, including a moistened towel using a nisin-based formulation for mastitis prevention that is used for preparing dairy cows for milking. The Company launched the product under its trademark Wipe Out(R) Dairy Wipes in April 1996. On December 30, 1999, the Company sold its Wipe Out Dairy Wipes business to ImmuCell Corporation ("ImmuCell"). On April 12, 2000, the Company exclusively licensed to ImmuCell worldwide rights to develop and market new antibacterial drugs for animals using the Company's technologies. The Company has developed a patented taste masking technology for making the taste of certain minerals such as potassium, calcium, magnesium, iron, copper, chromium, and zinc. The Company is seeking to license its taste masking technology to companies that offer mineral-enriched beverages designed to be taken with mineral-depleting medications, such as diuretics, and to companies that offer mineral-enriched beverages such as sports drinks. The Company is evaluating other proprietary Nutrition Products in the areas of cardiovascular disease, diabetes, 7 infectious disease, and gastrointestinal disorders. 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 the Dietary Supplement Health and Education Act (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. Products that are intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in humans or animals are subject to extensive governmental regulation. All such products must undergo extensive characterization, and are subject to regulation for quality assurance, toxicology and safety. Products containing such agents must undergo thorough preclinical and clinical evaluations of performance as to safety and efficacy under approved protocols. To take a pharmaceutical product from the discovery stage through research and preclinical development to the point where the Company and/or its partners can make the necessary filings (to the FDA and governmental agencies outside the U.S.) to conduct human clinical trials may take several years. Regulatory requirements for human clinical trials are substantial, depend upon a variety of factors, vary by country, and will further add to the time necessary to determine whether a product candidate can be approved for human use. The Company does not have any pharmaceutical products that have completed this process. There can be no assurance that if the Company has proposed drug products, that they will prove to be safe and effective under these regulatory procedures. See also "Pharmaceutical Products." In 1996, chromium picolinate was approved by the U.S. Food and Drug Administration ("FDA") for use as a supplement in animal feed for swine. In addition to sales for human consumption, the Company sells chromium picolinate for use in certain animal feed applications RESEARCH AND DEVELOPMENT The Company conducts preclinical, formulation, and clinical trials on its nutrition products and product candidates. These efforts are conducted in cooperation with research and academic institutions in various countries. During the fiscal years ended June 30, 2001, 2000 and 1999, approximately $2.5 million, $2.6 million, and $1.8 million, respectively, were spent on research and development by the Company. 8 PROPRIETARY RIGHTS TRADEMARKS Chromax, Diachrome, Selenomax, 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 and yeast-free selenium; Zinmax for zinc picolinate; and Magnemax for manganese picolinate. The Company is developing other nutrition products to be sold under its Chromax trademarks. 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 owns 27 patents on Nutrition Products, and has exclusive licenses under additional patents. Eighteen patents cover certain chromium compositions and their uses, including three patents that expire in 2009, for the basic nutritional uses of chromium picolinate in the management of cholesterol, glucose control, and increasing lean body mass and reducing body fat. The chromium patents owned by the Company also include composition of matter patents for novel chromium picolinate complexes. The improved chromium picolinate complexes contain combinations of chromium and various nutrients for enhancing the benefits of chromium picolinate, including the basic uses for chromium picolinate, and have patent protection into the year 2018. The Company owns other patents relating to, among other things, chromium/biotin treatments for reducing hyperglycemia and stabilizing levels of serum glucose, magnesium taurate treatments of cardiac conditions, and arginine-silicate-inositol complexes for preventing or inhibiting atherosclerosis, which expire during the period from 2015 through 2018. 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. 9 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 developing 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 patents portfolio. 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 for the Company. 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 catalogues sales. EMPLOYEES As of June 30, 2001, the Company had 23 full-time employees, of whom 3 were executive employees, 6 were administrative, 9 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. 10 ITEM 2. PROPERTIES Since September 1998, the Company maintains its headquarters at 4 Manhattanville Road, Purchase, New York 10577-2197 (Tel: 914-701-4500). Pursuant to a seven and one-half year sublease entered into September 1998, the Company is paying an annual rent for its headquarters location in the amount of $589,420, 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. With the completion of the out-licensing of its antibacterial technologies, the Company closed its laboratories at 777 Old Saw Mill River Road, Tarrytown, New York 10591. 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. 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, 2001. 11 PART II ITEM 5. MARKET PRICE OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol "NXXI". The Company has not paid a cash dividend to its public shareholders on its Common Stock. The Company intends to retain all earnings 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 National Market for the Common Stock. COMMON STOCK Fiscal Quarter Ended High Low -------------------------------------------------------------------------------- September 30, 1999 $3.875 $1.938 December 31, 1999 $3.00 $1.906 March 31, 2000 $8.00 $2.25 June 30, 2000 $5.50 $2.703 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 As of September 20, 2001, there were approximately 469 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." 12 ITEM 6. SELECTED FINANCIAL DATA The following tables summarize selected consolidated financial data that should be read in conjunction the more detailed financial statements and related footnotes and management's discussion and analysis of financial condition and results of operations included herein. Figures are stated in thousands of dollars, except per share amounts.
SELECTED STATEMENT OF YEAR ENDED JUNE 30, OPERATIONS DATA: 2001 2000 1999(3) 1998(2) 1997(1) ------------------------------------------------------------------------------------------------ Total Revenues $23,252 $32,814 $28,301 $20,758 $11,280 Gross Profit 17,629 27,034 23,519 17,802 6,282 Operating (Loss) Income (1,003) 7,041 6,469 1,467 (16,635) Income (Loss) Before Taxes 1,400 7,004 6,347 1,168 (6,661) Income Taxes 335 523 482 116 152 Net Income (Loss) 1,065 6,490 5,865 1,052 (6,813) Diluted Earnings (Loss) per Share 0.03 0.20 0.19 (0.04) (0.38)
AT JUNE 30, SELECTED BALANCE SHEET DATA: 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------ Working Capital (deficit) $6,392 $6,486 $1,879 $(2,269) $7,055 Total Assets 38,887 41,085 34,541 20,735 12,754 Total Liabilities 6,495 10,430 12,950 10,437 5,144 Long-Term Obligations 122 1,278 3,807 1,543 2,184 Redeemable Preferred Stock 418 676 921 -- -- Stockholders' Equity 31,974 29,979 20,670 10,298 7,610
------------------ (1) The results for the year ended June 30, 1997, are those of the Company and Aplin & Barrett (a former subsidiary) for the period July 1, 1996 through December 11, 1996 and those of the Company only for the remainder of the fiscal year (see Item 13-Certain Relationships and Related Transactions) and a gain of $9.7 million on sale of Alpin & Barrett (2) Consolidated Statements of Operations includes the operations of Nutrition 21 from August 11, 1997, the date of acquisition. (3) Consolidated Statements of Operations includes the operations of the Lite Bites business from January 1, 1999, the effective date of acquisition. 13 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 Income as a percent of revenues: Fiscal Year Percent of Revenues 2001 2000 1999 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Gross profit* 73.0 82.1 82.2 Selling, general and administrative expense 44.6 40.6 44.0 Research and development expenses 10.9 8.0 6.3 Operating (loss) income (4.3) 21.5 22.9 Net income 4.6 19.8 20.7 *Based upon percent of net sales RESULTS OF OPERATIONS 1. 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 $5.6 million for fiscal 2001 declined $0.2 million when compared to $5.8 14 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 73.0% 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 $10.4 million decreased $2.9 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 $2.5 million for fiscal 2001, decreased slightly when compared to $2.6 million for the same period a year ago. An increase in expenses incurred for NutritionU.com of $0.3 million was offset by 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. 15 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 $61 thousand dollars, for fiscal 2001 was $174 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. 2. Year ended June 30, 2000 vs. Year ended June 30, 1999 REVENUES Net sales for fiscal 2000 increased $5.4 million, or 20%, to $32.3 million, compared to net sales of $26.9 million for fiscal 1999. The improvement in net sales is due to increased nutritional product sales of $2.9 million resulting from the January 1999 acquisition of the Lite Bites Business as well as a $2.4 million increase in ingredient sales. Other revenues for fiscal 2000 declined $0.9 million to $0.5 million, as compared to other revenues of $1.4 million for fiscal 1999. Fiscal 1999 included a $1.0 million non-refundable payment for the rights granted to Whitehall-Robins Healthcare division of American Home Products Corporate (AHP) in accordance with the License, Option and Marketing Agreement entered into on October 8, 1998. 16 COST OF GOODS SOLD Cost of goods sold for fiscal 2000 increased $1.0 million or 20.9% to $5.8 million compared to $4.8 million for fiscal 1999. The increase in cost of goods sold reflects the higher costs associated with the Company's Lite Bites nutritional products. GROSS PROFIT Gross profit for fiscal 2000 increased $3.5 million or 14.9% to $27.0 million compared to $23.5 million for fiscal 1999. The increase in gross profit is due to the full year's benefit of the Lite Bites nutritional products combined with the gross profit from the increased ingredient sales. Partially offsetting the improvement was a decline in other revenues of $0.9 million, as noted above. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expense increased $0.9 million or 6.9% to $13.3 million in fiscal 2000 compared to $12.5 million in fiscal 1999. The increase is due primarily to marketing initiatives related to ingredient products as well as increased marketing and selling costs associated with the nutritional products business. RESEARCH AND DEVELOPMENT Research and development expense increased $0.8 million or 46.1% to $2.6 million in fiscal 2000, compared to $1.8 million in fiscal 1999. The increase is due primarily to $0.5 million of costs associated with NutritionU.com, our online nutrition education subsidiary, combined with increased spending of $0.3 million for ongoing product development, quality control and quality assurance development activities. OPERATING INCOME Operating income increased $0.5 million or 8.8% to $7.0 million in fiscal 2000 compared to $6.5 million in fiscal 1999. The increased sales of ingredient and nutritional products, partially offset by increases in selling, general, and administrative expense and amortization costs associated with the Lite Bites Business acquisition, were the primary reasons for the increase. INTEREST EXPENSE NET AND MINORITY INTEREST Interest expense, net decreased $95 thousand or 45.7% to $113 thousand for fiscal 2000 compared to $208 thousand in fiscal 1999, due primarily to reduced debt levels and additional interest income earned on funds invested in interest-bearing deposits. Minority interest, net of tax of $9 thousand in fiscal 2000, is related to minority shareholder interest in the Company's online internet subsidiary. 17 INCOME TAXES Income taxes increased $41 thousand to $0.5 million in fiscal 2000 when compared to fiscal 1999. The increase is primarily due to estimated state income taxes resulting from the Company's increased profitability. The Company has substantially utilized its federal tax loss carryforwards; therefore its effective tax rate will increase significantly. BUSINESS SEGMENTS The Company operates in two business segments - Nutritional Products and Pharmaceutical Products. NUTRITIONAL PRODUCTS 1. 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 decease is due primarily to the reduction in the selling price of chromium picolinate, and the funding of the operations of NutritionU.com, which was part of the restructuring charge as previously discussed. 2. Year ended June 30, 2000 vs. Year ended June 30, 1999 Nutritional product revenues in fiscal 2000 increased $4.9 million, or 17.8% to $32.2 million compared to $27.3 million in fiscal 1999. The increase in revenues is due to increased nutritional product sales of $2.8 million resulting from the January 1999 acquisition of the Lite Bites Business; as well as a $2.4 million increase in ingredient product sales, partially offset by reduced revenues of $0.4 million due to the sale of the Company's Wipe Out(R) Dairy Wipes business in December 1999. Nutritional products operating income was $7.0 million in fiscal 2000, an increase of $0.4 million or 5.6% compared to $6.6 million in fiscal 1999. The increase is primarily due to the full year's benefit resulting from the acquisition of the Lite Bites Business, as well as increased sales of ingredient products. Partially offsetting these increases were higher selling, general and administrative expense as well as increased amortization cost resulting from the acquisition of the Lite Bites Business. 18 PHARMACEUTICAL PRODUCTS 1. 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. 2. Year ended June 30, 2000 vs. Year ended June 30, 1999 Pharmaceutical products revenues were $0.6 million in fiscal 2000, a decrease of $0.3 million compared to $0.9 million in fiscal 1999. The decrease in revenues is due to reduced sales of nisin-based animal health products resulting from the sale of the nisin-based animal health business in December 1999. Pharmaceutical products operating income was $63 thousand in fiscal 2000, as compared to an operating loss of $139 thousand in fiscal 1999. The increase is primarily due to reduced costs in the Company's Wipe Out(R) Dairy Wipes business, as well as increased sales of the Company's lysostaphin products. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at June 30, 2001 decreased $3.1 million to $5.4 million compared to $8.5 million at June 30, 2000. As of June 30, 2001, the Company had a working capital surplus of $6.4 million, compared to a working capital surplus of $6.5 million as of June 30, 2000. Net cash provided by operations for fiscal 2001 was $3.6 million compared to $9.4 million for fiscal year 2000. The decrease is due primarily to lower profitability. Net cash used in investing activities for fiscal 2001 was $5.0 million compared to $4.2 million for fiscal 2000. The increase in cash used is due primarily to increased contingent payments made to the former owners of Nutrition 21. Net cash used in financing activities in fiscal 2001 was $1.8 million compared to $1.1 million for fiscal 2000. There were no cash exercises of options and warrants in fiscal 2001. The Loan Agreement with Citizens Bank of Massachusetts ("Citizens") is for a $5.5 million term loan and a $4.0 million 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% and are due February 1, 2002. The Company is making monthly payments of principal and interest on the loan. The Company had no outstanding balance on the revolving credit 19 facility as of June 30, 2001. As of June 30, 2001, the Company had an outstanding term loan balance of $1.1 million with Citizens. In accordance with the Purchase Agreement for the acquisition of Nutrition 21, the Company recorded on its balance sheet at June 30, 2001, a current liability of $1.3 million for the contingent payment due in September 2001 to the former owners of Nutrition 21 as provided for in the purchase agreement. 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 recorded on its balance sheet at June 30, 2001, a current liability of $0.4 million for a contingent payment due in January 2002 to the former owners of OLI. 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 continuing operations and the Citizens revolving credit facility. The availability under the Citizens revolving credit facility is based on the Company's accounts receivable and inventory. At June 30, 2001, the availability under the revolving line of credit was $3.3 million. At June 30, 2001, the Company had no borrowings under this line. 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 contingent 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. Also, the Company is obligated to repay the borrowings to Citizens no later than February 2002. 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. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company has substantially utilized it's federal tax loss and credit carryforwards, and therefore it is expected that its effective tax rate will increase from 24% in fiscal 2001 to an effective tax rate of 36%, thereby reducing net income and earnings per share in future periods as well as affecting comparisons with prior periods. 20 RECENTLY ISSUED ACCOUNTING STANDARDS The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" on December 3, 1999, SAB No. 101A on March 24, 2000 and SAB No. 101B on June 26, 2000 and a document issued on October 12, 2000 responding to frequently asked questions (FAQ) regarding accounting standards related to revenue recognition and SAB No. 101. For fiscal year 2001, there was no material impact on our financial position or results of operations as a result of the above. 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. The Company has not yet determined what the effect of these Statements will have on the future financial position and results of operations of the Company. 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. The Company's existing term loan with Citizens Bank of Massachusetts (successor in interest to State Street Bank and Trust Company) bears interest at a rate equal to the prime lending rate plus one percent. As a result, the Company does have exposure to changes in interest rates. For example, if interest rates increase by one percentage point from current levels, the Company would incur incremental interest expense of $7 thousand through the scheduled maturity of the term loan on February 1, 2002. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are included herein commencing on page F-1. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE At a meeting held on January 12, 2001, the Audit Committee of the Board of Directors of the Company approved the engagement of Ernst & Young LLP as its independent auditors for the fiscal year ending June 30, 2001 to replace the firm of KPMG LLP, who were dismissed as auditors of the Company effective January 18, 2001. The audit reports of KPMG LLP on the consolidated financial statements of AMBI Inc. and subsidiaries as of and for the years ended June 30, 2000 and 1999, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. 21 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT OFFICERS AND DIRECTORS The officers and directors of the Company are as follows: Year Joined Name and Age Company Position ------------------------------------------------------------------------------- Gail Montgomery (48) 1999 President, Chief Executive Officer, and Director Robert E. Flynn (68)* 1996 Chairman of the Board P. George Benson, PhD (55) 1998 Director Audrey T. Cross, PhD (56) 1995 Director John H. Gutfreund (71)* 2000 Director Alan J. Kirschbaum (56) 1999 Senior Vice President, Finance and Administration, and Chief Financial Officer Marvin Moser, MD (77) 1997 Director Robert E. Pollack, PhD (61) 1995 Director Benjamin T. Sporn (63) 1986 Senior Vice President, General Counsel, and Secretary * Mr. Gutfreund will become Chairman of the Board on September 30, 2001, succeeding Mr. Flynn who will remain on the Board until December 31, 2001. 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 22 capacities in the health and fitness sector. She received a BA from Douglas College of Rutgers University in communications. Robert E. Flynn was elected a Director of the Company in October 1996 and Chairman of the Board of Directors in October 1997. He served as Chairman of the NutraSweet Company from June 1990 until he retired in December 1995. Mr. Flynn also served as Chief Executive Officer of the NutraSweet Company from June 1990 until March 1995. From 1981 to 1990, he served in various executive capacities with Fisher Controls International Inc., including Chairman and Chief Executive Officer. Prior thereto from 1957 to 1981, Mr. Flynn held positions of increasing importance with The Carborundum Co. Mr. Flynn is also a member of the Board of Stantec Inc. and WorldPages.com. He received a BSc from Loyola College, a BEE from McGill University and an MBA from Rutgers University 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. 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. Mr. Gutfreund is 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, and the Astor, Lenox, Tilden, and Aperture Foundations. Mr. Gutfreund is also a director of AccuWeather, Inc., Arch Wireless, 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. 23 Alan J. Kirschbaum was elected Senior Vice President, Finance and Administration, and Chief Financial Officer, in March 2001. 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. The directors' serve for a term of one year and until their successors are duly elected and qualified. Officers serve at the pleasure of the Board of Directors. 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. 24 COMMITTEES OF THE BOARD OF DIRECTORS The Company has an audit committee consisting of Mr. Flynn, Mr. Gutfreund, and Dr. Benson. In addition, the Company has a compensation committee consisting of Dr. Cross, Mr. Flynn, and Dr. Pollack. During the year ended June 30, 2001, the audit committee met three times, and the compensation committee met three times. 25 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued by the Company during the periods indicated for (i) each person that served as chief executive officer during fiscal year 2001 and (ii) certain other person that served as an executive officer in fiscal year 2001 whose total annual salary and bonus was in excess of $100,000.
SUMMARY COMPENSATION TABLE (1)(2) =========================================================================================================== LONG-TERM ALL OTHER NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION COMPENSATION COMPENSATION --------------------------------------------------------------------- PERIOD SALARY BONUS SECURITIES ($) ($) ($) UNDERLYING OPTIONS (#) ----------------------------------------------------------------------------------------------------------- Gail Montgomery, President, Chief Executive Officer and Director 7/27/99 - 6/30/00 113,180 50,000 25,000 (3) --------------------------------------------------------------------- 7/1/00 - 6/30/01 257,307 275,000 200,000 ----------------------------------------------------------------------------------------------------------- Fredric D. Price, former President, Chief Executive Officer and Director 7/1/98 - 6/30/99 275,000 275,000 (4) --------------------------------------------------------------------- 7/1/99 - 6/30/00 275,000 275,000 21,154 (5) --------------------------------------------------------------------- 7/1/00 - 6/30/01 68,750 (6) 227,404 (6) ----------------------------------------------------------------------------------------------------------- Jonathan de la Harpe, PhD, former Senior Vice President, Commercial 7/1/98 - 6/30/99 129,923 30,000 15,000 Operations (7) --------------------------------------------------------------------- 7/1/99 -6/30/00 160,000 50,000 32,000 2,713 (5) --------------------------------------------------------------------- 7/1/00 -6/30/01 150,267 50,000 32,000 2,713 (5) ----------------------------------------------------------------------------------------------------------- Alan J. Kirschbaum, Senior Vice President, Finance and 7/1/99 - 6/30/00 137,500 15,000 15,000 Administration, and Chief Financial Officer --------------------------------------------------------------------- 7/1/00 - 6/30/01 150,000 30,000 ----------------------------------------------------------------------------------------------------------- Benjamin T. Sporn, Senior Vice President, General Counsel and 7/1/98 - 6/30/99 160,000 50,000 25,000 Secretary --------------------------------------------------------------------- 7/1/99 - 6/30/00 190,000 75,000 --------------------------------------------------------------------- 7/1/00 - 6/30/01 207,500 66,688 ===========================================================================================================
(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. 26 (2) Pursuant to the regulations promulgated by the Securities and Exchange Commission (the "Commission"), the table omits a number of columns reserved for types of compensation not applicable to the Company. (3) Ms. Montgomery succeeded Mr. Price as CEO, President and Director on September 29, 2000. (4) Mr. Price's employment with the Company terminated September 29, 2000. Includes salary and payments made to Mr. Price under the terms of a consulting agreement entered into as of September 29, 2000. (5) Represents loans and interest forgiven. (6) Mr. Price's employment with the Company terminated on September 29, 2000. Effective as of such date the Company entered into a consulting agreement with Mr. Price as described under "Employment and Consulting Agreements." For fiscal 2001, the "other compensation" for Mr. Price was comprised of $206,250 paid pursuant to such consulting agreement and the forgiveness of $21,154 of loans and interest pursuant to such agreement. (7) Dr. de la Harpe employment by the Company terminated April 30, 2001. None of the individuals listed above received any long-term incentive plan awards during the fiscal year. EMPLOYMENT AND CONSULTING AGREEMENTS The Company entered into an employment agreement, effective October 1, 2000, with Gail Montgomery. The agreement has a two-year term, which ends on September 30, 2002, and provides for an annual salary of $275,000, and the grant of Stock Options to purchase up to 150,000 shares of the Company's common stock at $1.3125 per share. The Options vest 50% on October 16, 2001 and 50% on October 16, 2002, but only if Ms. Montgomery is employed by the Company on these dates, and expire in 2005. The agreement also provides for certain performance bonuses. Although employment under the agreement is at will, if employment is terminated by the Company under certain circumstances, Ms. Montgomery will receive continuation of her salary for one year, certain benefits will continue for twelve months after termination, and all of Ms. Montgomery's stock options will vest. In addition, in the event of certain changes in control in stock ownership of the Company, Ms. Montgomery will receive a minimum of two times her annual salary. Mr. Price's employment with the Company terminated on September 29, 2000. Effective as of such date, the Company entered into a consulting agreement with Mr. Price. 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 27 rate of $100,000 thereafter. All of Mr. Price's stock options ( 900,000 shares) vest and are exercisable until June 30, 2004. Upon the occurrence of a change of control (as defined in the agreement), the agreement terminates and the Company is required to pay to Mr. Price a lump-sum payment equal to the fees that would have been paid to him over the remaining term of the agreement had the change of control not occurred. The following tables set forth information with regard to options granted during the fiscal year (i) to the Company's Chief Executive Officer, and (ii) to other officers of the Company named in the Summary Compensation Table. OPTION/SAR GRANTS IN LAST FISCAL YEAR
--------------------------------------------------------------------------------------------------------------- Individual Grants Potential Realizable Value At Assumed Annual Rates Of Stock Price Appreciation For Option Term --------------------------------------------------------------------------------------------------------------- Percent Of Number Of Total Securities Options Exercise Underlying Granted To Of Base Options Employees In Price Expiration Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($) --------------------------------------------------------------------------------------------------------------- A. Jonathan de la Harpe 25,000 1.95 $0.938 (1) $6,479 $14,376 50,000 3.90 $1.813 (1) $25,044 $55,343 --------------------------------------------------------------------------------------------------------------- B. Alan J. Kirschbaum 5,000 0.39 $1.813 (2) $2,505 $5,534 10,000 0.78 $0.813 (2) $2,246 $3,773 30,000 2.34 $1.140 (2) $9,448 $20,879 30,000 2.34 $0.938 (3) $7,775 $17,180 --------------------------------------------------------------------------------------------------------------- C. Gail Montgomery 50,000 3.90 $1.813 (2) $25,044 $55,343 150,000 11.71 $1.313 (4) $54,414 $120,239 --------------------------------------------------------------------------------------------------------------- D. Fredric D. Price 0 0 - - - - --------------------------------------------------------------------------------------------------------------- E. Benjamin T. Sporn 35,000 2.73 $0.938 (3) $9,070 $20,043 50,000 3.90 $1.813 (2) $25,044 $55,343 40,000 3.12 $1.140 (2) $12,598 $27,839 40,000 3.12 $1.140 (5) $47,544 $72,675 ---------------------------------------------------------------------------------------------------------------
(1) Options are expired by reason of termination of employment. (2) Vesting 20% per year; expiration the earlier of 5 years from vesting or 89 days after termination of employment. 28 (3) Vesting 33 and 1/3% on date of grant and on the next two anniversaries of the grant; expiration the earlier of 5 years from vesting or 89 days after termination of employment. (4) Vesting 50% per year; expiration the earlier of 5 years from vesting or one year after termination of employment. (5) Vested; expiration earlier of 10 years from vesting or 89 days after termination of employment. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
---------------------------------------------------------------------------------------------------------- INDIVIDUAL GRANTS ---------------------------------------------------------------------------------------------------------- Name Shares Value Number of Unexercised Options Value of Unexercised In-the- Acquired realized ($) at FY-End (#) Money Options at FY-End in Exercise (#) -------------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable ---------------------------------------------------------------------------------------------------------- Jonathan de 0 0 0 0 $0 $0 la Harpe ---------------------------------------------------------------------------------------------------------- Alan J. Kirschbaum 0 0 29,000 86,000 $1,570 $4,278 ---------------------------------------------------------------------------------------------------------- Gail 0 0 5,000 270,000 $0 $0 Montgomery ---------------------------------------------------------------------------------------------------------- Fredric D. 0 0 900,000 0 $0 $0 Price ---------------------------------------------------------------------------------------------------------- Benjamin T. 0 0 106,666 140,833 $2,356 $4,713 Sporn ----------------------------------------------------------------------------------------------------------
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 29 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 basis 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 $170,000 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 2001 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 $8,250 $9,625 $50,000 $9,497 $12,663 $15,828 $18,994 $22,159 $75,000 $16,059 $21,412 $26,766 $32,119 $37,472 $100,000 $22,622 $30,162 $37,030 $45,244 $52,748 $150,000 $35,747 $47,662 $59,578 $71,494 $83,409 $170,000 $40,997 $54,600 $68,328 $81,994 $95,659 and up Alan J. Kirschbaum, Gail Montgomery, and Benjamin T. Sporn each have 2.5, 1.9, and 9 years, respectively, of credited service under the Pension Plan as of June 30, 2001, and, at age 65, would have approximately 11, 19, and 11 years of credited service, respectively. 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 30 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, which were granted at an exercise price of $0.875. Each also received an additional grant of 10,000 shares at an exercise price of $0.875 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, 2000 through June 30, 2001, 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. 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 24, 2001, information regarding the beneficial ownership of the Company's Common Stock based upon the most recent information available to the Company for (i) each person known by the Company to own beneficially more than five (5%) percent of the Company's outstanding Common Stock, (ii) each of the Company's executive officers and directors and (iii) all executive officers and directors of the Company as a group. Unless otherwise indicated, each stockholder's address is c/o the Company, 4 Manhattanville Road, Purchase, New York 10577-2197. Shares Owned Beneficially and of Record (1) Name and Address No. of Shares % of Total P. George Benson (2) 55,000 * Audrey T. Cross (3) 84,000 * Robert E. Flynn (4) 132,000 * John H. Gutfreund (5) 80,000 * Alan J. Kirschbaum (6) 42,500 * Gail Montgomery (7) 105,000 * Marvin Moser (8) 145,000 * Robert E. Pollack (9) 90,000 * Benjamin T. Sporn (10) 135,891 * American Home Products Corporation 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 o All Executive Officers and Directors 869,391 2.63 as a Group (9 persons) (12) ------------------ * Less than 1% 32 (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 50,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (3) Includes 80,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (4) Includes 120,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (5) Includes 30,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (6) Includes 32,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (7) Includes 95,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (8) Includes 135,000 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (9) Consists of shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (10) Includes 106,666 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. (11) Consists of shares owned by subsidiaries. (12) Includes 738,666 shares issuable upon exercise of currently exercisable options under the Company's Stock Option Plans. 33 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. Currently, 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, 2001, 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 AHP for $4.0 million. AHP currently holds approximately 10.75% of the Company's outstanding Common Stock. Under a separate agreement in October 1998, AHP 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, AHP made payments to the Company of $500,000. See "Item 1. Business - Background" 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. A payment of $100,000 has been made, and payments of $100,000 each are due prior to July 1, 2002 and July 1, 2003, respectively. The price and other terms of the transaction were established through arms-length negotiations. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements are listed in the Index to Consolidated Financial Statements on page F-1 and are filed as part of this annual report. 2. Financial Statement Schedules The following financial statement schedule is included herein: Schedule II - Valuation and Qualifying Accounts All other schedules are not submitted because they are not applicable, not required, or because the information is included in the Consolidated Financial Statements. 3. Exhibits The Index to Exhibits following the Signature Page indicates the Exhibits, which are being filed herewith, and the Exhibits, which are incorporated herein by reference. (b) Reports on Form 8-K The Company did not file any Reports on Form 8-K during the fiscal quarter ended June 30, 2001. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NUTRITION 21, INC. By: /s/ Gail Montgomery ------------------------------- Gail Montgomery, President, CEO and Director Dated: September 28, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below as of September 28, 2001 by the following persons on behalf of Registrant and in the capacities indicated. /s/ Gail Montgomery ------------------------------- Gail Montgomery, President, CEO and Director /s/ Robert E. Flynn ------------------------------- Robert Flynn, Chairman of the Board /s/ P. George Benson ------------------------------- P. George Benson, Director /s/ Audrey T Cross ------------------------------- Audrey T. Cross, Director /s/ John H. Gutfreund ------------------------------- John H. Gutfreund, Director /s/ Marvin Moser ------------------------------- Marvin Moser, Director /s/ Robert E. Pollack ------------------------------- Robert E. Pollack, Director /s/ Alan J. Kirschbaum ------------------------------- Alan J. Kirschbaum, Chief Financial Officer 36 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 37 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 38 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) 23.1 Consent of Ernst & Young LLP (19) 23.2 Consent of KPMG LLP (19) -------------------------------------- (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. 39 (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) 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. ** Subject to a request for confidential treatment currently pending with the Securities and Exchange Commission. 40 NUTRITION 21, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FILED WITH THE ANNUAL REPORT OF THE COMPANY ON FORM 10-K JUNE 30, 2001 PAGE REPORTS OF INDEPENDENT AUDITORS F-2 CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2001 AND 2000 F-4 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999 F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR YEARS ENDED JUNE 30, 2001, 2000 AND 1999 F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Nutrition 21, Inc. We have audited the accompanying consolidated balance sheet of Nutrition 21, Inc. and subsidiaries (the "Company") as of June 30, 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. Our audit 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 audit. We conducted our audit 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 audit provides 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. and subsidiaries at June 30, 2001, and the results of their operations and their cash flows for the year then ended 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 and Young LLP Stamford, CT September 10, 2001 F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Nutrition 21, Inc.: We have audited the consolidated balance sheet of Nutrition 21, Inc. and subsidiaries, formerly known as AMBI Inc., as of June 30, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended June 30, 2000 and 1999. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index at Item 14(a). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nutrition 21, Inc. and subsidiaries as of June 30, 2000, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 2000, 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 consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Stamford, CT September 15, 2000 F-3 NUTRITION 21, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) JUNE 30, JUNE 30, 2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 5,355 $ 8,488 Accounts receivable (less allowance for doubtful accounts of $45 in 2001 and $134 in 2000) 3,963 4,587 Other receivables 1,650 464 Inventories 1,322 1,382 Prepaid expenses and other current assets 475 717 ------- ------- Total current assets 12,765 15,638 Property and equipment, net 633 734 Patents and trademarks (net of accumulated amortization of $10,375 in 2001 and $7,843 in 2000) 22,804 21,711 Goodwill (net of accumulated amortization of $886 in 2001 and $449 in 2000) 2,369 2,640 Other assets 316 362 ------- ------- TOTAL ASSETS $38,887 $41,085 ======= ======= See accompanying notes. F-4 NUTRITION 21, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) JUNE 30, JUNE 30, 2001 2000 ---- ---- LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,125 $ 1,500 Accounts payable and accrued expenses 3,371 4,039 Contingent payments payable 1,855 3,584 Preferred dividends payable 22 29 ------- ------- Total current liabilities 6,373 9,152 Long-term debt and lease obligation -- 1,125 Other long-term obligations 122 153 ------- ------- TOTAL LIABILITIES 6,495 10,430 ------- ------- Commitments and contingent liabilities REDEEMABLE PREFERRED STOCK Series E convertible preferred, 1,500 shares issued; 191 and 476 shares outstanding at June 30, 2001 and 2000, respectively (aggregate liquidation value $196) 191 389 Series F convertible preferred, 575 shares issued; 227 and 343 shares outstanding at June 30, 2001 and 2000, respectively (aggregate liquidation value $233) 227 287 STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, authorized 5,000,000 shares Series G convertible preferred, 1,769 shares issued, 941 and 663 shares outstanding at June 30, 2001 and 2000, respectively (aggregate liquidation value $952) 941 663 Common stock, $0.005 par value, authorized 65,000,000 shares; 32,342,818 shares and 31,581,427 shares issued and outstanding at June 30, 2001 and 2000, respectively 161 158 Additional paid-in capital 63,196 62,291 Accumulated deficit (32,324) (33,133) ------- ------- TOTAL STOCKHOLDERS' EQUITY $31,974 $29,979 ------- ------- TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $38,887 $41,085 ======= ======= See accompanying notes. F-5 NUTRITION 21, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data)
YEAR ENDED JUNE 30, -------------------- 2001 2000 1999 ---- ---- ---- Net sales $20,809 $32,289 $26,911 Other revenues 2,443 525 1,390 ----- --- ----- REVENUES 23,252 32,814 28,301 Cost of goods sold 5,623 5,780 4,782 ------- ------- ------- GROSS PROFIT 17,629 27,034 23,519 Selling, general & administrative expense 10,370 13,314 12,456 Research & development expense 2,538 2,610 1,787 Depreciation & amortization expense 3,359 4,069 2,807 Restructuring & other charges 2,365 -- -- ------ ------ ----- OPERATING (LOSS) INCOME (1,003) 7,041 6,469 Interest income 304 306 189 Interest expense 243 419 397 Other income 2,342 76 86 ------ ----- ----- INCOME BEFORE INCOME TAXES 1,400 7,004 6,347 Income taxes 335 523 482 Minority interest in subsidiary -- 9 -- ------- ------- ------- NET INCOME $1,065 $6,490 $5,865 ====== ====== ====== Basic earnings per share $0.03 $0.21 $0.20 ===== ===== ===== Diluted earnings per share $0.03 $0.20 $0.19 ===== ===== ===== Weighted average number of common shares - basic 31,781,403 30,741,861 26,481,880 ========== ========== ========== Weighted average number of common shares and equivalents - diluted 31,879,614 32,546,198 27,754,827 ========== ========== ==========
See accompanying notes. F-6 NUTRITION 21, INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Preferred Stock Preferred Stock Preferred Stock Series C Series D Series G Shares $ Shares $ Shares $ ------ --- ------ --- ------ --- Balance at June 30, l998 222 $-- 22,500 $-- -- $-- Conversion of Series D preferred stock to common stock, including dividends issued as common stock -- -- (16,750) -- -- -- Exchange and redemption of Series C preferred stock, including -- -- -- -- -- -- accrued dividends for common stock and Series E preferred stock (222) -- -- -- -- -- Exchange and redemption of Series D preferred stock, including accrued dividends for common stock and Series F preferred stock -- (5,750) -- -- -- Premium on redemption of Series F preferred stock -- -- -- -- -- -- Shares issued in connection with the settlement of AZWELL obligation -- -- -- -- -- -- Preferred stock dividends -- -- -- -- -- -- Conversion of Series E preferred stock to common stock, including dividends issued as common stock Issuance of common stock in connection with the acquisition of the Lite Bites Business -- -- -- -- -- -- Issuance of common stock to American Home Products -- -- -- -- -- Compensation related to issuance and repricing of stock options and warrants to non-employees -- -- -- -- -- -- Net income for the year -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- Balance at June 30, 1999 -- -- -- -- -- -- Conversion of Series E preferred stock to common stock -- -- -- -- -- -- Common stock issued on exercise of options and warrants Common stock issued for Optimum Lifestyle, Inc. contingent payment -- -- -- -- -- -- Issuance of warrants -- -- -- -- -- -- Preferred stock dividends -- -- -- -- -- -- Preferred stock issued for Optimum Lifestyle, Inc. contingent payment -- -- -- -- 828 828 Conversion of Series G preferred stock to common stock -- -- -- -- (165) (165) Net income for the year -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- Balance at June 30, 2000 -- -- -- -- 663 663 Conversion of Series G preferred stock to common stock -- -- -- -- (663) (663) Cancellation of stock exercise -- -- -- -- -- -- Premium on redemption of Series F preferred stock -- -- -- -- -- -- Issuance of warrants -- -- -- -- -- -- Preferred stock dividends -- -- -- -- -- -- Preferred stock issued for Optimum Lifestyle, Inc. contingent payment -- -- -- -- 941 941 Conversion of Series E preferred stock to common stock -- -- -- -- Net income for the year -- -- -- -- -- -- ----- ----- ----- ----- ----- ----- Balance at June 30, 2001 -- $-- -- $-- 941 $941 ===== ===== ===== ===== ===== ===== =====
See accompanying notes. Additional Accumulated Common Stock Paid-In Capital Deficit Total Shares $ $ $ $ ------ ---- ------- -------- ------- 20,898,297 $105 $54,942 $(44,749) $10,298 2,696,246 12 128 -- 140 -- -- -- 324,689 2 (1,729) (242) (1,969) 78,166 -- (379) (81) (460) -- -- -- (117) (117) 780,488 4 996 -- 1,000 -- -- -- (201) (201) 591,812 3 604 -- 607 1,304,347 7 1,430 -- 1,437 3,478,261 17 3,983 -- 4,000 -- -- 70 -- 70 -- -- -- 5,865 5,865 ------------ ----- -------- --------- -------- 30,152,306 150 60,045 (39,525) 20,670 243,546 1 249 -- 250 959,508 4 1,251 -- 1,255 200,000 1 503 -- 504 -- -- 80 -- 80 -- -- -- (98) (98) -- -- -- -- 828 26,067 2 163 -- -- -- -- -- 6,490 6,490 ------------ ----- -------- --------- -------- 31,581,427 158 62,291 (33,133) 29,979 845,663 4 659 -- -- (315,408) (2) 2 -- -- -- -- -- (110) (110) -- -- 8 -- 8 -- -- -- (146) (146) -- -- -- -- 941 231,136 1 236 -- 237 -- -- -- 1,065 1,065 ------------ ----- -------- --------- -------- 32,342,818 $161 $63,196 $(32,324) $31,974 ============ ===== ======== ========= ======== F-7 NUTRITION 21, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED JUNE 30, ------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $1,065 $ 6,490 $5,865 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,359 4,069 2,807 Deferred taxes (298) -- -- (Gain) loss on disposal of equipment (23) 11 138 Gain on sale of product line -- (19) -- Consulting expense -- 196 214 Other, non-cash items 8 80 62 Changes in assets and liabilities: Accounts receivable 624 (607) (668) Other receivables (1,186) 9 (377) Inventories 60 (129) (610) Prepaid and other current assets 540 (32) (272) Other assets 46 (161) (80) Accounts payable and accrued expenses (563) (521) 1,707 ------- ------- ------- Net cash provided by operating activities 3,632 9,386 8,786 ------- ------- ------- Cash flows from investing activities: Contingent payments for acquisitions (4,637) (4,005) (2,747) Purchases of property and equipment (167) (194) (443) Payments for patents and trademarks (209) (541) (1,145) Proceeds from sale of assets 32 512 76 Payments for acquisition -- -- (6,088) ------- ------- ------- Net cash used in investing activities (4,981) (4,228) (10,347) ------- ------- ------- Cash flows from financing activities: Proceeds from term loan borrowings -- -- 5,500 Debt repayments (1,500) (2,250) (4,036) Proceeds from exercise of options and warrants -- 1,255 4,000 Capital lease obligation repayments -- (63) (122) Redemption of redeemable preferred stock (177) -- (1,388) Preferred stock dividends paid (107) (70) (44) ------- ------- ------- Net cash ( used in) provided by financing activities (1,784) (1,128) 3,910 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (3,133) 4,030 2,349 Cash and cash equivalents at beginning of year 8,488 4,458 2,109 ------- ------- ------- Cash and cash equivalents at end of year $ 5,355 $ 8,488 $ 4,458 ======= ======= =======
See accompanying notes. F-8 NUTRITION 21, INC. AND SUBSIDIARIES 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 for the year ended June 30, 1999 include the results of operations of the Company, its wholly owned subsidiary, Nutrition 21 and the Lite Bites Business from January 21, 1999. 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 highly liquid debt instruments with original maturities of three months or less to be cash equivalents. 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 f) PATENTS AND TRADEMARKS The Company capitalizes certain patents and trademarks. Patents and trademarks are amortized over their estimated economic lives, ranging from 2 to 15 years. g) GOODWILL Goodwill represents the excess of cost over the fair value of net assets acquired and is amortized using the straight-line method over 15 years. h) REVENUE RECOGNITION Sales revenue from proprietary ingredient products is recognized when title transfers, generally upon shipment of the product. Sales revenue from finished nutritional products are also recognized when title transfers, which is upon delivery at the customer site. There are no customer acceptance provisions to lapse before the recognition of any product revenue. Only revenue where collectability of accounts receivables is probable is recognized. Other revenues are comprised primarily of license and royalty fees recognized as earned in accordance with agreements entered into by the Company when there is no further involvement required by the Company. F-9 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED i) RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. j) 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. k) 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. l) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. m) RECENTLY ISSUED ACCOUNTING STANDARDS The Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" on December 3, 1999, SAB No. 101A on March 24, 2000 and SAB No. 101B on June 26, 2000 and a document issued on October 12, 2000 responding to frequently asked questions (FAQ) regarding accounting standards related to revenue recognition and SAB No. 101. There was no material impact on the 2001 financial position or results of operations for the year ended June 30, 2001 as a result of SAB No. 101. 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. The Company has not yet determined what the effect of these Statements will have on the future financial position and results of operation of the Company. F-10 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED n) ADVERTISING COSTS Advertising costs are expensed as they are incurred. The amount charged to expense during fiscal 2001, 2000 and 1999 was $0.8 million, $1.4 million and $0.3 million, respectively. o) RECLASSIFICATIONS Certain reclassifications have been made to prior years' financial statement amounts to conform to the 2001 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. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of assets acquired $ 7,617 Cash paid, including transaction costs (6,088) Restricted common stock issued (1,437) -------- Liabilities assumed $ 92 ======== 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 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. At June 30, 2001, the Company has outstanding on its balance sheet a current liability of $0.4 million in respect of the 2001 contingent cash payments. 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. The Company is amortizing the 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, 2001, the Company recorded approximately $0.8 million in amortization expense related to the goodwill and other intangible assets described above. F-11 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2: ACQUISITIONS, CONTINUED NUTRITION 21 On August 11, l997, the Company purchased Nutrition 21 for $10.0 million in cash plus 500,000 shares of restricted Common Stock of the Company. In connection with the acquisition, liabilities assumed were as follows (in thousands): Fair value of assets acquired $ 11,645 Cash purchase price (10,000) Common stock issued (1,188) --------- Liabilities assumed $ 457 ========= The related purchase agreement also provides for annual contingent payments to the former owners of Nutrition 21 for each of the four years after the closing of $2.5 million, but subject to adjustment for the achievement of net sales levels of certain products (contingent consideration clause), and royalties of 1.5% on net sales of products recommended for certain patented uses. At June 30, 2001, the Company recorded on its balance sheet a current liability and additional goodwill of $1.3 million in respect of the contingent payment due in September 2001. On September 30, 2000 and 1999, the Company made cash payments to the former owners of Nutrition 21 of approximately $3.6 million and $3.5 million, respectively, which increased goodwill, patents and trademarks. These payments represented the full amount of the contingent payment due for the 12-month periods September through August of each respective year. The following represents the pro forma consolidated results of operations as if the Company and the Lite Bites Business had been combined for the year ended June 30, 1999. The pro forma results of operations reflect amounts adjusted to their accounting basis as if the acquisition had occurred at the beginning of the period. The pro forma information is not necessarily indicative of the results of operations as they may be in the future or as they would have been had the acquisition been effected on the assumed date. The pro forma information for the year ended June 30, 1999 is as follows (in thousands, except for per share amounts): 1999 ---- Revenues $30,208 Net income 5,116 Basic earnings per share 0.19 Diluted earnings per share 0.18 Note 3: INVENTORIES The components of inventories at June 30, 2001 and 2000 are as follows (in thousands): 2001 2000 ---- ---- Raw materials $ 471 $ 493 Finished goods 851 889 ------ ------- Total inventories $1,322 $ 1,382 ====== ======= F-12 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4: FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents and accounts receivable approximate carrying amounts due to the short maturities of these instruments. The fair value of long-term debt approximates its carrying value, as there is no difference between the stated interest rate on the debt and the current market rate of interest available to the Company for debt with the same maturities. 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 commercial paper. The Company had $0.4 million in overnight investments and $5.0 million invested in commercial paper at June 30, 2001. At June 30, 2000, the Company had $2.5 million in overnight investments and $6.0 million invested in commercial paper. 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 29% of net sales and 33% of accounts receivable in fiscal 2001. Note 5: RELATED PARTY TRANSACTIONS On September 17, l998, the Company commenced a strategic alliance with American Home Products Corporation ("AHP") for retail distribution of the Company's proprietary nutrition products. As part of the alliance, AHP'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 AHP. Also on October 8, l998, AHP 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 ending 2001, 2000 and 1999, respectively, the Company received approximately $0.5 million in license fees from AHP. 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. A payment of $100,000 has been made, and payments of $100,000 each are due prior to July 1, 2002 and July 1, 2003, respectively. The price and other terms of the transaction were established through arms-length negotiations. Note 6: PROPERTY AND EQUIPMENT, NET The components of property and equipment, net, at June 30, 2001 and 2000 are as follows (in thousands): 2001 2000 ---- ---- Furniture and fixtures $ 496 $ 454 Machinery and equipment 135 167 Office equipment 301 247 Computer equipment 726 683 ------ ------ 1,658 1,551 Less: accumulated depreciation (1,025) (817) ------ ------ Property and equipment, net $ 633 $ 734 ====== ====== F-13 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7: LINES OF CREDIT AND LONG-TERM DEBT Long-term debt consists of the following at June 30, 2001 and 2000 (in thousands): 2001 2000 ---- ---- Citizens Bank term loan $ 1,125 $ 2,625 Obligations under capital leases -- -- ------- ------- 1,125 2,625 Less: Current portion (1,125) (1,500) ------- ------- $ -- $ 1,125 ======= ======= 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 is 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 are due February 1, 2002. The Company is making 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. At June 30, 2001, the availability under the revolving credit facility, based on the Company's accounts receivables and inventory, was $3.3 million. Note 8: ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following items are included in accounts payable and accrued expenses at June 30, 2001 and 2000 (in thousands): 2001 2000 ---- ---- Accounts payable $1,179 $ 1,652 Consulting and professional fees payable 204 296 Royalty fees 112 407 Accrued compensation and benefits 983 902 Taxes payable 475 67 Series E Preferred Stock fee -- 250 Other accrued expenses 418 465 ------ ------- $3,371 $ 4,039 ====== ======= Note 9: 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 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. During fiscal 1999, 727 shares of the Company's E Preferred plus accrued dividends on these shares were converted into 591,812 shares of common stock. There were no redemptions of E preferred to date. F-14 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9: REDEEMABLE PREFERRED STOCK, CONTINUED 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 2001, 116 shares of the Company's F Preferred plus accrued dividends on these shares were redeemed for $0.2 million. During fiscal 1999, 232 shares of the Company's F Preferred plus accrued dividends on these shares were redeemed for $0.4 million. There were no conversions of F preferred into Common Stock in fiscal year 2001, 2000 or 1999. Note 10: STOCKHOLDERS' EQUITY (3) 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. 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. b) 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. The Company had outstanding warrants for the purchase of its common stock as follows: Number of Exercise price Warrants Per Share -------- -------------- Outstanding at June 30, 1998 1,305,685 $1.18-$6.75 Issued 100,000 $1.38-$1.84 ---------- Outstanding at June 30, 1999 1,405,685 $1.18-$6.75 Issued 647,460 $1.80-$3.65 Exercised (556,759) $1.80-$4.84 Cancelled (147,460) $1.18-$4.13 ---------- Outstanding at June 30, 2000 1,348,926 $1.25-$6.75 Issued 50,000 $0.89 Exercised (8,265) $2.72 Cancelled (258,524) $1.25-$6.75 ---------- Outstanding at June 30, 2001 1,132,137 $0.89-$6.30 ========== F-15 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10: STOCKHOLDERS' EQUITY, CONTINUED At June 30, 2001, 1,132,137 shares were issuable upon exercise of the above warrants. The warrants expire between 2001 and 2006. Certain of the warrants include anti-dilution clauses. Warrants outstanding and exercisable at June 30, 2001, are as follows:
Warrants Outstanding Warrants Exercisable -------------------------------------- ------------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- -------- $0.89 - $1.84 150,000 4.77 $1.30 70,000 $1.56 $2.25 - $2.72 494,781 0.92 $2.29 494,781 $2.29 $2.78 - $6.30 487,356 3.19 $3.64 382,356 $3.63 --------- ------- 1,132,137 947,137 ========= =======
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 $8 thousand, $80 thousand and $70 thousand during fiscal years 2001, 2000 and 1999, respectively. c) 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 four Stock Option Plans ("Plans") whereby options to purchase an aggregate of 6,250,000 shares of the Company's common stock may be granted to officers, directors, 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 2,100,000 options remain available for grant under the Plans. A summary of stock option activity related to the Company's stock option plans is as follows: Number of Exercise price Options Per Share ----------- -------------- Outstanding at June 30, 1998 2,787,345 $1.56 - $6.00 Issued 620,470 $0.75 - $2.31 Cancelled (454,030) $0.75 - $5.63 ---------- Outstanding at June 30, 1999 2,953,785 $0.75 - $6.00 Issued 446,500 $2.03 - $7.56 Exercised (398,194) $0.84 - $3.25 Cancelled (352,700) $0.93 - $6.00 ---------- Outstanding at June 30, 2000 2,649,391 $0.75 - $7.56 Issued 1,280,889 $0.81 - $2.63 Exercised - - Cancelled (978,181) $0.75 - $5.00 ---------- Outstanding at June 30, 2001 2,952,099 $0.81 - $7.56 ========== 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. F-16 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10: STOCKHOLDERS' EQUITY, CONTINUED Options outstanding and exercisable at June 30, 2001 are as follows:
Options Outstanding Options Exercisable ------------------------------------- ------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ----------- -------- ----------- ----------- $0.91 - $1.19 815,899 6.88 $1.01 341,829 $0.99 $1.31 - $1.94 932,500 4.75 $1.74 568,300 $1.87 $1.97 - $2.94 528,700 3.66 $2.41 425,500 $2.38 $3.00 - $7.56 675,000 3.29 $3.53 608,700 $3.50 --------- --------- 2,952,099 1,944,329 ========= =========
The per share weighted-average fair value of stock options granted during fiscal 2001, 2000 and 1999 was $0.20, $0.45 and $1.33, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 2001 2000 1999 ---- ---- ---- Risk-free interest rate 5.2% 5.6% 5.0% Expected life-years 2.5 2.5 2.5 Expected volatility 45.8% 45.6% 46.1% Expected dividend yield -- -- -- 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 would have been reduced to the pro forma amounts indicated below (in thousands): 2001 2000 1999 ---- ---- ---- Net income As reported $1,065 $6,490 $5,865 Pro forma $ 633 $6,257 $4,963 Basic earnings per share As reported $0.03 $0.21 $0.20 Pro forma $0.02 $0.20 $0.16 Diluted earnings per share As reported $0.03 $0.20 $0.19 Pro forma $0.02 $0.19 $0.16 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. F-17 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11: EARNINGS PER SHARE Basic and diluted earnings per share for the years ended June 30, 2001, 2000 and 1999 are as follows (in thousands, except share and per share amounts):
Year ended June 30, 2001 2000 1999 ---- ---- ---- Net income $ 1,065 $ 6,490 $ 5,865 Preferred stock dividends (256) (98) (641) -- -- -- ------- ------- ------- Net income available to common stockholders $ 809 $ 6,392 $ 5,224 ===== ======= ======= Weighted average number of common shares 31,781,403 30,741,861 26,481,880 ========== ========== ========== Basic earnings per share $ 0.03 $ 0.21 $ 0.20 ========== ========== ======== Year ended June 30, 2001 2000 1999 ---- ---- ---- Net income available to common stockholders $ 809 $ 6,392 $ 5,224 Interest on AZWELL, Inc. note, net -- -- 33 Preferred stock dividends -- 98 94 ------- ------- ------- Net income available to common stockholders after giving effect to dilution $ 809 $ 6,490 $ 5,351 ===== ======= ======= Weighted average number of common shares 31,781,403 30,741,861 26,481,880 Plus incremental dilutive shares from assumed conversions: Preferred stock -- 785,004 752,110 Stock options and warrants 98,211 1,019,333 34,838 5% Promissory Note -- -- 485,999 ---------- ---------- ---------- Weighted average number of common shares and equivalents 31,879,614 32,546,198 27,754,827 ========== ========== ========== Diluted earnings per share $ 0.03 $ 0.20 $ 0.19 ========== ========== ========
Diluted earnings per share for the year ended June 30, 2001, does not reflect the incremental shares for the assumed conversion of preferred stock (833,313 shares), as the effect of such inclusion would be anti-dilutive. Note 12: 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. F-18 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12: RESTRUCTURING AND OTHER CHARGES, CONTINUED 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 13: OTHER INCOME During the fiscal year 2001, the Company successfully settled several patent infringement claims related to chromium picolinate. The Company recorded $2.3 million as other income as a result of the settlements. At June 30, 2001, cash proceeds of $0.8 million from the settlements remain to be collected. In addition, certain of the settlements include agreements to purchase future chromium picolinate needs from the Company. Note 14: 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 2001, 2000, and 1999 follows. Information by business segment (in thousands): 2001 2000 1999 ---- ---- ---- REVENUES Nutritional Products $ 21,127 $ 32,224 $ 27,356 Pharmaceutical Products 2,125 590 945 -------- -------- -------- $ 23,252 $ 32,814 $ 28,301 ======== ======== ======== OPERATING (LOSS) INCOME Nutritional Products $ (2,924) $ 6,978 $ 6,608 Pharmaceutical Products 1,921 63 (139) -------- -------- -------- $ (1,003) $ 7,041 $ 6,469 -------- -------- -------- DEPRECIATION AND AMORTIZATION Nutritional Products $ 3,216 $ 3,918 $ 2,658 Pharmaceutical Products 143 151 149 -------- -------- -------- $ 3,359 $ 4,069 $ 2,807 ======== ======== ======== SEGMENT ASSETS Nutritional Products $ 37,698 $ 39,479 $ 32,427 Pharmaceutical Products 1,189 1,606 2,114 -------- -------- -------- $ 38,887 $ 41,085 $ 34,541 ======== ======== ======== CAPITAL EXPENDITURES Nutritional Products $ 5,013 $ 4,740 $ 4,335 Pharmaceutical Products -- -- -- -------- -------- -------- $ 5,013 $ 4,740 $ 4,335 ======== ======== ======== Information by geographic segment (in thousands): F-19 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 14: SEGMENT REPORTING, CONTINUED Geographic information about the Company's revenues, which is based on the location of the buying organization, is presented below: 2001 2000 1999 ---- ---- ---- REVENUES United States $ 21,526 $ 31,533 $ 28,301 United Kingdom 1,726 1,281 -- -------- -------- -------- $ 23,252 $ 32,814 $ 28,301 ======== ======== ======== PROPERTY AND EQUIPMENT, NET United States $ 633 $ 734 $ 1,066 United Kingdom -- -- -- -------- -------- -------- $ 633 $ 734 $ 1,066 ======== ======== ======== One nutritional product segment customer accounted for approximately 29% of the segment revenue in fiscal 2001. Presented below is a reconciliation of total business segment operating income to consolidated income before income taxes: 2001 2000 1999 ---- ---- ---- Total segment operating (loss) income $ (1,003) $ 7,041 $ 6,469 Other, net 2,403 37 122 -------- -------- -------- Income before income taxes $ 1,400 $ 7,004 $ 6,347 ======== ======== ======== Note 15: PENSION PLAN Eligible employees of the Company are entitled to participate in the Burns Philp Inc. Retirement 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 2001, 2000, and 1999, the Company made contributions to the Burns Philp & Company Inc. Retirement Plan of $100 thousand, $104 thousand and $96 thousand, respectively. Note 16: INCOME TAXES Income before income taxes for the years ended June 30, 2001, 2000 and 1999 is as follows (in thousands): 2001 2000 1999 ---- ---- ---- Domestic income $1,400 $7,004 $6,347 Foreign income -- -- -- ------ ------ ------ Income before income taxes $1,400 $7,004 $6,347 ====== ====== ====== Provisions for income taxes for the years ended June 30, 2001, 2000 and 1999 consist of the following (in thousands): 2001 2000 1999 ---- ---- ---- Current $633 $ 523 $ 482 Deferred (298) -- -- ---- ----- ----- $335 $ 523 $ 482 ==== ===== ===== F-20 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16: INCOME TAXES, CONTINUED 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):
2001 2000 1999 ---- ---- ---- Income taxes at U.S. statutory rate $476 $2,381 $ 2,171 Increase/(reduction) in income taxes resulting from: Change in valuation allowance (263) -- -- Utilization of operating loss carryforward -- (2,316) (2,070) Federal alternative minimum tax 148 State taxes, net of federal benefit 26 420 233 Other items 96 -- -- ------ ------- ---- $ 335 $ 523 $482 ====== ======= ====
The tax effect of temporary differences that give rise to deferred tax assets and deferred tax liabilities at June 30, 2001 and 2000 is presented below (in thousands):
Deferred tax assets: 2001 2000 ---- ----- Net operating loss carry forwards $597 $ 769 AMT tax credit -- 176 R&D credit -- 236 Accrued expenses 289 100 Allowance for doubtful accounts 18 54 Partnership basis 879 970 Inventory reserve 12 54 Property and equipment -- 4 ------ ------ Total gross deferred tax assets 1,795 2,363 Less valuation allowance (1,360) (1,623) ------ ------ Net deferred tax assets $ 435 $ 740 ====== ====== Deferred tax liabilities: Property and equipment -- -- Intangible assets, principally due to amounts capitalized for financial reporting purposes 137 740 ------ ------ Net deferred tax liabilities 137 740 ------ ------ Total deferred tax assets, net of valuation allowance $ 298 $ -- ====== ====== Deferred tax assets are included in prepaid expense and other current assets
At June 30, 2001, 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. F-21 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17: 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 but not less than the minimum of $0.5 million per year. 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 $0.5 million for each fiscal year ended June 30, 2001, 2000 and 1999, respectively. 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 and $0.6 million for the fiscal years ended June 30, 2001, 2000 and 1999, 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 $0.6 million in fiscal 2001, $0.7 million in fiscal 2000, $0.4 million in fiscal 1999. Future non-cancelable minimum payments under this lease are as follows (in thousands): YEAR AMOUNT ---- ------ 2002 $ 589 2003 589 2004 589 2005 589 2006 418 ------ Total $2,774 ====== Note 18: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in 2001 2000 1999 thousands): ---- ---- ---- Cash paid for interest $ 243 $ 390 $ 337 Cash paid for income taxes 146 382 217 Supplemental schedule of non-cash financing activities: Common stock issued for Nutrition 21 acquisition -- -- 1,118 Obligation for purchase of property & equipment 152 181 208 Obligation for N21 contingent payment 1,938 3,143 2,855 Obligation for Lite Bites contingent payment 970 441 438 Obligation related to Series C redemption -- -- 250 Conversion of long-term debt to common stock -- -- 1,000 Issuance of common stock for Series C redemption -- -- 345 Issuance of common stock for Series D redemption -- -- 105 Issuance of common stock for Series E conversion 237 304 592 Issuance of common stock for Series G conversion 663 121 -- Issuance of Series G preferred stock for Optimum Lifestyle, Inc. contingent payment. 941 828 --
F-22 NUTRITION 21, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19: 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 20: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth In Thousands, Except Per Share Data Quarter Quarter Quarter Quarter (A) ----------------------------------- ------- ------- ------- ----------- Fiscal Year 2001 ---------------- Revenues $ 6,903 $ 4,610 $ 6,409 $ 5,330 Gross Profit 5,471 3,653 4,579 3,926 Income (loss) Before Income Taxes 9 (2,393) 2,820 964 Net Income (loss) 6 (1,914) 2,258 715 Net (loss) Income per common share: Basic (0.0) (0.06) 0.07 0.02 Diluted (0.0) (0.06) 0.07 0.02 Fiscal Year 2000 ---------------- Revenues $ 8,424 $ 9,825 $ 7,771 $ 6,794 Gross Profit 6,894 8,340 6,400 5,400 Income Before Income Taxes 2,169 2,933 1,706 196 Net Income 2,004 2,713 1,578 195 Net Income per common share: Basic 0.07 0.09 0.05 0.00 Diluted 0.06 0.09 0.05 0.00
(a) The fourth quarter of fiscal year 2001 includes a reversal of $82 thousand attributable to a restructuring charge incurred in the second quarter of fiscal 2001. F-23 SCHEDULE II NUTRITION 21, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
Additions --------------------------------- Balance Charged to Balance Beginning Charged to Other End of Accounts of Period Cost and Expense Accounts Deductions Period -------- --------- ---------------- -------- ---------- ------ ($ in thousands) Year ended June 30, 2001 Allowance for Doubtful Accounts $ 134 1 -- $(90) $ 45 Deferred Tax Valuation Allowance $1,623 -- -- ($263) $1,360 Year ended June 30, 2000 Allowance for Doubtful Accounts $ 242 -- -- $(108) $ 134 Deferred Tax Valuation Allowance $4,638 -- -- $(3,015) $1,623 Year ended June 30, 1999 Allowance for Doubtful Accounts $ 377 -- -- $(135) $ 242 Deferred Tax Valuation Allowance $5,159 -- -- $(521) $4,638