SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from JANUARY 1, 2003 to JUNE 30, 2003
Commission File Number 0-22710
INTERPHARM HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3673965
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(State or other jurisdiction of (IRS. Employer
corporation or organization) Identification Number)
69 MALL DRIVE, COMMACK, NEW YORK 11725
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
Securities registered pursuant to
Section 12(b) of the Act: Common Stock $.01 par value
Securities registered pursuant to Section
12(g) of the Act: Series A Preferred Stock $.10
par value
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
---- ----
i
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES X NO
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES NO X
---- ----
On September 12, 2003, the aggregate market value of the voting common
equity of Interpharm Holdings, Inc., held by non-affiliates of the Registrant
was $69,680,001 based on the closing price of $7.10 for such common stock on
said date as reported by the American Stock Exchange. On such date, we had
17,393,886 shares of common stock outstanding.
ii
INTERPHARM HOLDINGS, INC.
Form 10-K
Six Months Ended June 30, 2003
TABLE OF CONTENTS
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PART I PAGE
Item 1. Business........................................................ 2
Item 2. Properties ..................................................... 13
Item 3. Legal Proceedings............................................... 13
Item 4. Submission of Matters to a Vote of
Security Holders................................................ 14
PART II
Item 5. Market for Common Stock
and Related Stockholder Matters............................... 15
Item 6. Selected Financial Data......................................... 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 24
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk............................................. 38
Item 8. Financial Statements and Supplementary Data..................... 38
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures......................................... 39
ITEM 9A. CONTROLS AND PROCEDURES........................................ 39
PART III
Item 10. Directors and Executive Officers
of the Registrant............................................. 40
Item 11. Executive Compensation........................................ 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters........................................... 48
Item 13. Certain Relationships and Related
Transactions.................................................. 51
Item 14. Principal Accounting Fees and Services......................... 52
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K....................................... 52
Signatures.............................................................. 54
Financial Statements ................................................... F-1
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange Commission.
The words "believe, expect, anticipate, intend and plan" and similar
expressions identify forward-looking statements. These statements are subject to
risks and uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date the statement was made.
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PART I
ITEM 1. BUSINESS
GENERAL
Interpharm Holdings, Inc., (the "Company" or "Interpharm") (formerly ATEC
Group, Inc.), through its operating wholly-owned subsidiary, Interpharm, Inc.,
("Interpharm, Inc." and collectively with Interpharm, "we" or "us") is engaged
in the business of developing, manufacturing and marketing generic prescription
strength and over-the-counter pharmaceutical products. On May 30, 2003,
Interpharm, Inc. was acquired by ATEC Group, Inc. ("ATEC") which then changed
its name to Interpharm Holdings, Inc. In that transaction, ATEC acquired all of
the issued and outstanding shares of Interpharm, Inc. in exchange for both ATEC
common and preferred stock. Concurrently with the acquisition of Interpharm,
Inc., ATEC sold its then existing computer/systems integration business to
certain members of ATEC management who simultaneously resigned from ATEC. These
transactions were approved by our shareholders on May 29, 2003 and are fully
described in ATEC's definitive proxy statement, filed with the Securities and
Exchange Commission on May 2, 2003.
Interpharm, Inc. was incorporated under the laws of New York in 1984. We
currently manufacture and market nineteen generic drug products in solid dosage
form. We hold Abbreviated New Drug Applications ("ANDA") for ten of these
products. The remaining products are manufactured under an over-the-counter
monogram or are drugs which do not otherwise require ANDA's. In addition, in the
quarter ending September 30, 2003 we began manufacturing five dosage strengths
of two distinct products for URL/Mutual pursuant to a Manufacturing and Supply
Agreement dated January 24, 2002. For a further description of our contract with
URL/Mutual, see "Recent Business Developments". All of the products that we
manufacture are solid oral dosage form, consisting of tablets, caplets and
capsules.
Approximately 65% of our sales are made under our own label. The remaining
35% are manufactured and delivered to our wholesalers and distributors which
sell our products under their own labels. We distribute our products as follows:
- to our distributors who sell to retail chain stores;
- directly to retail chains;
- to the resellers who repackage our products and sell them to retail
chains; and
- to the U.S. Department of Veterans Affairs through a government
appointed prime vendor.
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During the six-month period ending June 30, 2003, two of our customers
collectively accounted for approximately 50% of our total sales. For the same
period in 2002, two of our customers accounted for approximately 61% of our
total sales. For the twelve-month period ended December 31, 2002, two of our
customers collectively accounted for approximately 53% of our total sales. For
the twelve-month period ending December 31, 2001, three customers accounted for
approximately 19%, 20% and 22%, respectively, of our total sales. Except as
described below, we do not have contracts with any of these customers. During
the period July 1, 2001 to June 30, 2002, we had a contract with the Department
of Veterans Affairs for the supply of Ibuprofen through a prime vendor, which
accounted for 22% of our total sales.
On December 5, 2002, our bid was accepted by the Department of Veterans
Affairs to supply Ibuprofen tablets for the period January 2, 2003 through
January 1, 2004. The bid covers sales to a number of government entities
including: all Department of Veterans Affairs facilities, all Indian Health
Service facilities, Department of Health and Human Service Supply Center at
Perry Point and all Option 2 State Veterans Homes.
This bid provides for four one-year renewals at the option of the
Department of Veterans Affairs. The Department of Veterans Affairs estimated the
annual revenue to be generated by the bid to be $5,054,879.
The loss of any of our largest customers could have a material adverse
effect on our business. As is the case with our largest customers, most of our
other sales are not made pursuant to contracts, but pursuant to individual
purchase orders. Therefore, although we have very strong relationships with our
customers, most of whom have requested us to provide larger quantities of our
products than we have historically sold to them, there is nothing requiring many
of them to continue to purchase our products and there can be no guarantee that
they will continue to do so.
INDUSTRY
THE GENERIC DRUG MARKET AND NECESSARY APPROVALS
Pharmaceutical products in the United States are generally marketed as
either "brand-name" or "generic" drugs. Brand-name products are drugs generally
sold by the holder of the drug's patent or through an exclusive marketing
arrangement. A company that receives approval for a new drug application ("NDA")
from the U.S. Food and Drug Administration ("FDA"), usually the patent holder,
has the exclusive right to produce and sell the drug for about 20 years from the
date of filing of the patent application. This market exclusivity generally
provides brand-name products the opportunity to build up physician and customer
loyalties.
Once a patent on a drug expires, a manufacturer can obtain FDA approval to
market a "generic" version. A generic drug is therefore usually marketed after
the patent on a brand drug expires and is comparable to a brand-name drug. In
fact, the FDA requires that generic drugs have the same quality, strength,
purity, identity and efficacy as brand-name drugs. While comparable to
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brand-name drugs, generic drugs are usually far less costly than brand-name
drugs, resulting in substantial savings to consumers, healthcare providers and
hospitals. These cost savings have resulted in sustained growth of the generic
pharmaceutical industry in the United States. According to a Congressional
Budget Office study, "How Increased Competition from Generic Drugs has Affected
Prices and Returns in the Pharmaceutical Industry," (available at
HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0) in 1984, 19% of
prescription drugs sold in the United States were generic. According to a
Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to
Patent Expiration," (available at
HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF) that figure reached more
than 47%.
Much of the growth of the generic pharmaceutical industry has been
attributed to The Drug Price Competition and Patent Term Restoration Act of 1984
(the "Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Now, there is an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that the generic product is
bioequivalent to the brand-name product through the filing of an abbreviated new
drug application ("ANDA"). The ANDA may rely on information from the brand-name
drug's application with the FDA.
On June 12, 2003, the FDA announced new regulations and procedures to
improve implementation of the Waxman-Hatch Act. The new regulations and
procedures are aimed at reducing the time it takes to bring generic drugs to the
market and expanding educational programs to assist health care practitioners
and consumers to get accurate information about the availability of generic
drugs. The FDA has estimated that the new regulations and procedures will reduce
the typical time for generic drug approvals by three months or more over the
next three to five years and will save consumers approximately $35 billion over
10 years.
BUSINESS STRATEGY
PRODUCT DEVELOPMENT
During the six-month period ended June 30, 2003, and the years ended
December 31, 2002, 2001 and 2000, the majority of our revenues were derived from
sales of Ibuprofen tablets in both prescription strength and over-the-counter
strength. We believe that our growth in recent years has been due primarily to
our ability to create competitive advantages in our existing product line
through efficient manufacturing processes, cost competitiveness, and the ability
to create loyalty among our customers.
Over the next few years, patent protections on a large number of brand-name
drugs are expected to expire. We believe that these patent expirations will
provide opportunities for the manufacturers of generic drugs. In order to take
advantage of these upcoming opportunities, we intend to expand our product line
and allocate additional resources to new product development activities on
brand-name products that will become available to generic markets.
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FDA approval is required before any generic drug can be marketed through an
ANDA. While the FDA has significantly streamlined the process of obtaining ANDA
approval for generic drugs, it is difficult to predict how long the process will
take for any specific drug. Therefore, there is always the risk that the
introduction of new products can be delayed.
The ANDA process requires that a company's manufacturing procedures and
operations conform to FDA requirements and guidelines, generally referred to as
current Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in such
areas as production and quality control to ensure full technical compliance. The
evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to comply with regulatory
requirements.
The ANDA process also requires bioequivalency studies to show that the
generic drug is bioequivalent to the approved drug. Bioequivalence compares the
bioavailability of one drug product with that of another formulation containing
the same active ingredient. When established, bioequivalency confirms that the
rate of absorption and levels of concentration in the bloodstream of a
formulation of the approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
Supplemental ANDAs are required for approval of various types of changes to
an approved application, and these supplements may be under review for six
months or more. In addition, certain types of changes may only be approved once
new bioequivalency studies are conducted or other requirements are satisfied.
In December 2001, we received ANDA approval from the FDA to produce
prescription strength Naproxen. In addition, we have five new drugs that are
under development. There can be no assurances, however, that the FDA will
ultimately approve the drugs that are under development.
Even if an ANDA is approved, brand-name companies can impose substantial
barriers to market entry which may include: filing new patents on drugs whose
original patent protection is about to expire, developing patented
controlled-release products or other product improvements, developing and
marketing, as over-the-counter products, brand-name products that will soon face
generic competition, and commencement of marketing initiatives, regulatory
activities and litigation. While none of these actions have been taken against
us to date, there can be no assurance that they will not be taken in the future.
RAW MATERIALS
The raw materials that we use in the manufacturing of our products consist
of pharmaceutical chemicals in various forms, which are available from various
sources. FDA approval is required in connection with the process of selecting
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active ingredient suppliers. The raw materials purchased from these suppliers
are available from a number of vendors. In selecting a vendor, we consider not
only their status as an FDA approved supplier, but consistency of their
products, timeliness of delivery and price.
MANUFACTURING FACILITIES
Currently, we have leased a 100,000 square foot manufacturing facility with
recently purchased and up to date equipment. Over the past five years, we have
upgraded our facilities, including building additional tablet compression and
packaging rooms, adding new air handling units and installing new manufacturing
and laboratory equipment. We intend to significantly increase our manufacturing,
packaging and laboratory capacity to develop new products and to meet the
increasing demand for our existing products.
RECENT BUSINESS DEVELOPMENTS
In January 2002, we entered into an agreement with United Research
Laboratories, Inc. and Mutual Pharmaceutical Company, Inc. ("URL/Mutual") to
manufacture, on a contract basis, four drugs in various dosage strengths.
The agreement is for a five-year term, which may be renewed for an
additional two years. The agreement also contains a non-compete provision
stating that we may not distribute any of the drugs covered by the agreement for
five years after its termination. We are currently in the process of obtaining
Site Transfer Approval ("STA") from the FDA for two drugs covered under the
agreement with URL/Mutual and have already received an STA for the other two.
Whereas an ANDA approves the formula for a given product produced at a
specified location, an STA granted by the FDA allows for the production of an
approved drug at a site other than the one approved in the ANDA. In order for
the FDA to approve an STA, the new production location must be shown to comply
with all of the terms and conditions set forth in the approved ANDA
In July 2003, we began manufacturing Atenolol Tablets for URL/Mutual. This
was the first of the four products that we are scheduled to manufacture for
URL/Mutual. Atenolol is a synthetic, beta-selective (cardioselective)
adrenoreceptor blocking agent and a generic version of the branded drug
Tenormin(R). Atenolol is indicated in the management of hypertension, for the
long-term management of patients with angina pectoris, and in the management of
patients with definite or suspected acute myocardial infarction to reduce
cardiovascular mortality.
In August 2003, we began manufacturing Allopurinol Tablets for URL/Mutual
in both 100mg and 300mg strengths. Allopurinol is a xanthine oxidase inhibitor
which is a generic version of the branded drug Zyloprim (R). Allopurinol is used
to lower blood uric acid levels. Uric acid is produced when the body breaks down
purines that are found in foods. Uric acid forms crystals in the tissues of the
body to cause the inflammation of gout. Elevated blood uric acid levels can also
cause kidney disease and stones. Allopurinol can be used to prevent uric acid
kidney stones and to prevent recurrent gouty arthritis attacks.
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Allopurinol also can be used to treat patients with multiple recurrent gout
attacks, erosive destructive gouty joint disease, hard lumps or uric acid
deposits in tissues (called tophi), gouty kidney disease, or uric acid stones.
It is also used to prevent elevation of blood uric acid in patients undergoing
chemotherapy for the treatment of certain cancers.
We believe that our continued growth is dependent upon our ability to (i)
continue increasing our market share in our existing product lines by utilizing
our manufacturing efficiency, cost competitiveness, and customer loyalty, (ii)
obtain FDA approval for the drugs currently under development, (iii) greatly
increase our product line, particularly with respect to "niche" products and
products with higher margins, (iv) leverage off of our competitive strengths to
capture market share on our new product lines, (v) utilize our manufacturing
efficiencies to enter into additional contract manufacturing arrangements and
(vi) enter into joint ventures and strategic alliances with companies whose
strengths compliment ours.
MARKETING STRATEGY
We market our products primarily through wholesalers, drug distributors,
other manufacturers and by our internal sales staff, as well as independent
sales representatives. Some of our wholesalers and distributors purchase
products that are warehoused for drug chains, independent pharmacies, state and
federal governmental agencies and managed healthcare organizations. Consistent
with industry practice, we have a returned goods policy. Pursuant to our policy,
any unopened item in its original packaging may be returned if accompanied by
(i) an authorization form obtained from Interpharm, and a "Returned Goods
Authorization Number" with a proof of purchase. Transportation charges for
returns are paid by the customer. If the foregoing procedures are followed, we
will return the customer's original purchase price or the current market price,
whichever is lower.
Pursuant to our return policy, we will not accept any of the following for
return: (i) short-dated products (14 months or less remaining on the expiration
date), (ii) expired products, products which have been opened, tampered with or
which have a broken seal, (iii) products which have stickers or other price
markings, (iv) products which have been damaged by improper handling, fire,
flood or other catastrophes, (v) products stored under conditions other than as
specified on the label, (vi) products returned by someone other than the direct
purchaser, or (vii) products without proof of purchase.
We have not experienced returns of material quantities of any of the
products we sell and therefore, do not believe that we are subject to material
risk of inventory buildup attributable to returns.
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PRODUCTS
INTERPHARM'S PRODUCT LINE
Below is a list of the drugs that we manufacture, including the drugs that
we are currently manufacturing pursuant to our agreement with URL/Mutual. The
names of all of the drugs under the caption "Brand-Name Drug" are registered
trademarks. The holders of the registered trademarks are non-affiliated
pharmaceutical manufacturers.
PRODUCT NAME BRAND-NAME DRUG
1. Acetaminophen 500 mg White Tablets Tylenol(R)
2. Acetaminophen 500 mg White Caplets Tylenol(R)
3. Acetaminophen 325 mg White Tablets Tylenol(R)
4. Allopurinol 100 mg White Tablets* Zyloprim(R)
5. Allopurinol 300 mg White Tablets* Zyloprim(R)
6. Atenolol 25 mg White Tablets* Tenormin(R)
7. Atenolol 50 mg White Tablets* Tenormin(R)
8. Atenolol 100 mg White Tablets* Tenormin(R)
9. Clorpheniramine Maleate 4mg Yellow Tablets Chlortrimetron(R)
10. Ibuprofen 200mg White Tablets Advil(R)
11. Ibuprofen 200mg Brown Tablets Advil(R)
12. Ibuprofen 200mg Orange Tablets Motrin(R)
13. Ibuprofen 200mg White Caplets Advil(R)
14. Ibuprofen 200mg Brown Caplets Advil(R)
15. Ibuprofen 200mg Orange Caplets Motrin(R)
16. Ibuprofen 400mg White Tablets Motrin(R)
17. Ibuprofen 600mg White Tablets Motrin(R)
18. Ibuprofen 800mg White Tablets Motrin(R)
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19. Isometheptene Mucate, Dichloralphenazone,
Acetaminophen, Red/Red Capsule, 65mg/100mg/325mg Midrane(R)
20. Naproxen 250mg White Tablets Naprosyn(R)
21. Naproxen 375mg White Tablets Naprosyn(R)
22. Naproxen 500mg White Tablets Naprosyn(R)
23. Pseudoephedrine HCl 60mg White Tablets Sudafed(R)
24. Pseudoephedrine HCl, Triprolidine HCl White
Tablets, 60mg/2.5mg Actifed(R)
* Manufactured, on a contract basis, for URL/Mutual, which holds the ANDA for
the product.
RESEARCH AND DEVELOPMENT
For the six-month period ended June 30, 2003, our expenditures on research
and development were approximately $185,600. In the fiscal years ended December
31, 2002 and 2001, our expenditures on research and development were
approximately $415,600 and $110,000, respectively. Our research and development
expenses in and prior to 2000 were negligible.
Currently, our research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or will expire in the near future, (ii)
researching and developing new product formulations based upon such drugs, (iii)
obtaining approval from the FDA for such new product formulations, and (iv)
introducing technology to improve production efficiency and enhance product
quality.
The research and development of oral solid dosage products requires studies
and FDA review and approval which have historically taken approximately two to
three years. However, the length of time necessary to bring a product to market
can vary significantly and can depend on, among other things, availability of
funding, problems relating to formulation, safety or efficacy, patent issues
associated with the product or barriers to market entry from brand-name product
manufacturers.
We contract with outside laboratories to conduct biostudies, which, in the
case of oral solids, generally are required for FDA approval. Historically, the
vast majority of our research and development expenditures have been on
biostudies. While we believe that the companies contracted to perform the
biostudies are reliable, there can be no assurance that they will use the proper
due diligence or that their work will otherwise be accurate.
The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed and approved despite the amount spent on
research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
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COMPETITION
The generic pharmaceutical industry is intensely competitive. The primary
means of competition involve manufacturing capabilities and efficiencies,
innovation and development, timely FDA approval, product quality, marketing,
reputation, level of service, including the maintenance of sufficient inventory
levels to assure timely delivery of products, product appearance and price.
Often, price is the key factors in the generic pharmaceutical business.
Therefore, to compete effectively and remain profitable, a generic drug
manufacturer must manufacture its products in a cost effective manner. We
believe that we maintain adequate levels of inventories to meet customer demand
and have them readily available. In addition, the modernization of our facility,
hiring of experienced staff, and implementation of quality control programs have
improved our competitive position in recent years.
During the past several years the number of chain drug stores and
wholesaler customers have declined due to industry consolidation. In addition,
the remaining chain drug stores and wholesaler customers have instituted buying
programs that have caused them to buy more products from fewer suppliers. At the
same time, mail-order prescription services and managed care organizations have
grown in importance and they also limit the number of vendors. The reduction in
the number of our customers and limitation on the number of vendors by the
remaining customers has increased competition among generic drug marketers.
However, these pressures have not had a material adverse impact on our business
and we believe that we have good relationships with our key customers.
In addition to generic manufacturers, we have also experienced competition
from brand-name companies that have purchased generic companies or license their
products to generic companies prior to, or as relevant patents expire. No
further regulatory approvals are required for a brand-name manufacturer to sell
its pharmaceutical products directly or through a third party to the generic
market, nor do such manufacturers face any other significant barriers for entry
into such market.
As is the case with many generic pharmaceutical manufacturers, many of our
competitors have longer operating histories and greater financial resources than
us. Consequently, some of these competitors may have larger production
capabilities, may be able to develop products at a significantly faster pace at
a reduced cost, and may be able to devote far greater resources to marketing
their product lines.
Certain manufacturers of brand-name drugs and/or their affiliates have been
introducing generic pharmaceutical products equivalent to such brand-name drugs
at relatively low prices. Such pricing, with its attendant diminished profit
margins, could have the effect of inhibiting us and other manufacturers of
generic pharmaceutical products from developing and introducing generic
pharmaceutical products comparable to certain brand-name drugs. Also,
consolidation among wholesalers, distributors, and repackagers, and
technological advances in the industry and pricing pressures from large buying
groups, may create pricing pressure, which could reduce our profit margins on
our product lines.
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In addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products being
reintroduced into the market, has led to an increase in demands by customers for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on our earnings.
Brand-name companies also pursue other strategies to prevent or delay
generic competition. These strategies may include: seeking to establish
regulatory and legal obstacles that would make it more difficult to demonstrate
bioequivalence, initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand-name pharmaceuticals,
instituting legal action that automatically delays approval of generic products,
the approval of which requires certifications that the brand-name drug's patents
are invalid or unenforceable, or introducing "second generation" products prior
to the expiration of market exclusivity for the reference product, obtaining
extensions of market exclusivity by conducting trials of brand-name drugs,
persuading the FDA to withdraw the approval of brand-name drugs, for which the
patents are about to expire, thus allowing the brand-name company to obtain new
patented products serving as substitutes for the products withdrawn, or seeking
to obtain new patents on drugs for which patent protection is about to expire.
The ability of brand-name companies to successfully delay generic
competition in any of our targeted new product lines may adversely affect our
ability to enter into the desired product line or may impact our ability to
attain our desired market share for that product.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand-name companies are
utilizing this provision to extend periods of market exclusivity.
BACKLOG
We do not have a significant backlog, as we normally deliver products
purchased by our customers within a short time of the date of order.
GOVERNMENTAL REGULATION AND CONTRACTS
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive, complex and
evolving regulation by Federal, state and local governmental entities,
principally by the FDA, and, to a lesser extent, by the U.S. Drug Enforcement
Administration, Environmental Protection Agency and state governmental agencies.
The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the
Waxman-Hatch Act, the Generic Drug Enforcement Act and other Federal statutes
and regulations govern or influence the testing, manufacture, packaging, safety,
labeling, storage, record keeping, approval, advertising and promotion of our
products.
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Noncompliance with applicable requirements can result in judicially and/or
administratively imposed sanctions including the initiation of product seizures,
injunction actions, fines and criminal prosecutions. Administrative enforcement
measures can involve the recall of products, as well as the refusal of the
government to enter into supply contracts or to approve new drug applications.
The FDA also has the authority to withdraw approval of drugs in accordance with
regulatory due process procedures. Although, we have internal compliance
programs and standard operating procedures which have been reviewed by
independent consultants, and have had a favorable compliance history, if these
programs were not to meet regulatory agency standards in the future, or if our
compliance were deemed deficient in any significant way, it could have a
material adverse effect on our business and earnings.
The FDA inspects manufacturer's facilities to assure compliance with cGMP.
Manufacturers must follow cGMP regulations at all times during the manufacture
and processing of drugs. To comply with the standards set forth in these
regulations, we must continue to expend significant time, money and effort in
the areas of production, quality control and quality assurance.
In addition to the Federal government, individual states have laws
regulating the manufacture and distribution of pharmaceuticals, as well as
regulations pertaining to the substitution of generic drugs for brand-name
drugs. Our operations are subject to regulation, licensing requirements and
inspection by the states in which we are located or conduct business.
We must also comply with federal, state and local laws of general
applicability, such as laws regulating working conditions and equal opportunity
employment. Additionally, we are subject, as are all manufacturers, to various
federal, state and local environmental protection laws and regulations,
including those governing the discharge of materials into the environment.
Historically, the costs of complying with such environmental provisions have not
had a material adverse effect on our earnings, cash requirements or competitive
position, and we do not expect such costs to have any such material adverse
effect in the foreseeable future. However, if changes to such environmental
provisions are made that require significant changes in our operations or the
expenditure of significant funds, such changes could have a material adverse
effect on our earnings, cash requirements or competitive position.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the pharmaceutical industry,
government agencies and others. Such studies, which increasingly employ
sophisticated methods and techniques, can call into question the utilization,
safety and efficacy of previously marketed products. There can be no assurances
that these studies will not, in the future, result in the discontinuance of
product marketing.
PATENTS AND TRADEMARKS
We do not have any Patents or Trademarks that are currently used in our
business. However, the U.S. Patent and Trademark Office awarded ATEC a patent,
which we hold, for an advanced PC motherboard and chassis design. The patent
addresses an Inverted Socket Process Architecture and design that place the
processor, system memory and cache sockets on the undercarriage of the
motherboard.
12
EMPLOYEES
As of June 30, 2003, we had 214 full time employees, of whom 20 were
employed in selling, general and administrative activities, 32 were employed in
quality assurance and regulatory roles and 162 were employed in manufacturing.
We believe we have a strong relationship with our employees. None of our
employees are represented by a union.
ITEM 2. PROPERTIES
DESCRIPTION OF PROPERTY
We do not own any real property. We lease an entire building in Hauppauge,
New York, pursuant to a non-cancellable lease expiring in October, 2019, which
houses our manufacturing, warehousing and some of our executive offices. The
leased building is approximately 100,000 square feet and is located in an
industrial/office park. The current annual lease payments to the landlord,
Sutaria Family Realty, LLC, are $480,000. Sutaria Family Realty, LLC is owned by
Mona Rametra, Perry Sutaria and Raj Sutaria, who collectively own 4,613,384
shares of our common stock, 456,562 shares of our Series A-1 Preferred Stock and
1,537,795 shares of our Series K Preferred Stock and are the children of Dr.
Maganlal K. Sutaria, the Chairman of our Board of Directors and our Chief
Executive Officer, and the niece and nephews of Bhupatlal K. Sutaria, our
President and a member of our Board of Directors. Mona Rametra is also the wife
of our General Counsel and Secretary, Munish K. Rametra. In addition, Raj
Sutaria is an officer of Interpharm, Inc. Upon a change in ownership of the
Company, and every three years thereafter, the annual base rent will be adjusted
to fair market value, as determined by an independent appraisal. There are no
tenants in the building other than us.
We also lease approximately 23,175 square feet of office space at 69 Mall
Drive in Commack, New York for some our executive offices. The lease for this
office space expires in 2005. The annual lease payments are approximately
$187,000 and we have sublet 18,500 square feet for $164,000 per year.
ITEM 3. LEGAL PROCEEDINGS
On or about January 31, 2002, Teresa Casey and Jerry Casey, as plaintiffs,
commenced a lawsuit against Interpharm, Inc., as defendant in Superior Court,
State of Washington, County of Pierce. On September 26, 2003, the Court
dismissed the lawsuit without prejudice. While the dismissal terminated the
civil action, plaintiffs may institute a new action. The basis for the dismissal
was that plaintiffs' counsel had resigned from his representation and plaintiffs
failed to get new counsel by a court-imposed deadline. Also on September 25,
2003, the plaintiffs voluntarily moved to dismiss their case Pro Se (without
counsel).
13
Plaintiffs had alleged that Teresa Casey suffered a hemorrhagic stroke and
aneurysm caused by ingesting guaifenesin/phenylpropanolamine ("PPA") for relief
of bronchitis symptoms. Plaintiffs also had alleged that (i) Teresa Casey
suffered severe injuries, including, but not limited to, invasive surgery,
physical and cognitive impairment, emotional distress and other economic and
non-economic damages and (ii) Interpharm, Inc. was the alleged designer,
constructor, manufacturer, producer, marketer, seller and distributor of the PPA
Teresa Casey ingested. Plaintiffs causes of action were for product liability,
tort liability, negligence, breach of implied and express warranties and
violation of the Washington Consumer Protection Act.
Should plaintiff re-commence the action, we believe that we have
meritorious defenses and will vigorously defend the action.
On or about August 13, 2002, Interpharm, Inc., as plaintiff, commenced a
lawsuit against General Star Indemnity Company, G.P. Insurance Agency, Inc. and
Mortsan General Agency, Inc., as defendants in the Supreme Court of the State of
New York, County of Suffolk. The lawsuit arose from General Star's refusal to
cover or defend Interpharm, Inc. under an insurance policy with respect to the
Casey action discussed in the preceding paragraphs. The insurance policy is
alleged to have been obtained for Interpharm, Inc. by G.P. Insurance Agency,
Inc. and Mortsan General Agency, Inc.
On September 26, 2003, the court rendered a decision on the parties'
motions for summary judgment (i) granting dismissal of all claims against
General Star Indemnity Company; (ii) granting dismissal of Interpharm, Inc.'s
statutory claims against G.P. Insurance Agency, Inc. and Mortsan General Agency,
Inc.; and (iii) allowing Interpharm, Inc. to continue its negligence claims
against G.P. Insurance Agency, Inc. and Mortsan General Agency, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 2003 we held our annual meeting of stockholders for the
following purposes:
(i) To approve the acquisition of all of the outstanding stock of
Interpharm, Inc;
(ii) To approve an amendment to our Certificate of Incorporation to change
the name of the Company from ATEC Group, Inc. to Interpharm Holdings, Inc.;
14
(iii) To approve the sale of the assets of ATEC's computer and systems
integration businesses to, and assumption of substantially all of the
liabilities of those businesses to Baar Group, Inc.;
(iv) To elect Maganlal K. Sutaria, Bhupatlal Sutaria, Surinder Rametra,
Praveen Bhutani, David Reback and Stewart Benjamin as members of our Board of
Directors;
(v) To ratify and approve Weinick Sanders Leventhal & Co., LLP as our
independent public accountants to audit our financial statements for the year
ending June 30, 2003; and
(vi) To approve adjournment of the meeting in the event a quorum was not
present.
The votes cast for each of the foregoing matters was as follows:
PROPOSAL FOR AGAINST ABSTAIN/WITHHELD
1 4,805,061 86,803 8,858
2 4,808,407 83,457 8,858
3 4,805,587 84,956 10,179
4
S. Rametra 4,804,171 -- 96,551
S. Benjamin 4,805,721 -- 95,001
D. Reback 4,808,682 -- 92,040
P. Bhutani 4,805,231 -- 95,491
Dr. Sutaria 4,804,171 -- 96,551
B. Sutaria 4,805,231 -- 95,491
5 7,788,126 74,757 9,476
6 7,774,717 80,400 17,233
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the American Stock Exchange under
the symbol "IPA." The following table sets forth the high and low sale prices
for our common stock for the periods indicated as reported by the American Stock
Exchange. Such prices reflect inter-dealer prices, without retail mark-up,
15
markdown or commissions and may not necessarily represent actual transactions.
It should be noted that prior to May 30, 2003, the Company was in the
computer/systems integration business. On May 30, 2003, that business was sold
and Interpharm, Inc. was acquired. Accordingly, historical stock prices prior to
May 30, 2003 are not representative of our current business. On June 2, 2003,
our stock symbol changed from "TEC" to "IPA."
COMMON STOCK
HIGH LOW
2001
Quarter ended 3/31.................................. $1.12 $ 0.37
Quarter ended 6/30.................................. $0.81 $ 0.38
Quarter ended 9/30.................................. $0.84 $ 0.37
Quarter ended 12/31................................. 0.84 0.43
2002
Quarter ended 3/31................................. 0.79 0.43
Quarter ended 6/30................................. 0.50 0.40
Quarter ended 9/30................................. 0.44 0.26
Quarter ended 12/31................................ 0.85 0.26
2003
Quarter ended 3/31................................. 0.72 0.54
May 30, 2003....................................... 1.03 0.85
Quarter ended 6/30................................. 2.93 0.62
As of September 12, 2003, there were approximately 2,600 holders of our
common stock, 17 holders of record of Series A preferred shares, 294 holders of
record of Series C preferred shares, 4 holders of record of Series K Preferred
Stock and 3 holders of record of Series A-1 Preferred Stock.
We do not currently pay dividends on our common stock. It is our current
intention not to declare or pay dividends on our common stock, but to retain
earnings for the operation and expansion of our business.
The holders of our Series A and Series A-1 preferred shares are entitled to
certain dividend payments upon declaration by the Board of Directors. The Series
A preferred shares are entitled to a cumulative dividend of 10% of par value
($0.10 per share), when and as declared by our Board of Directors. The Series B
preferred shares are entitled to a non-cumulative dividend of $1.00 per share.
The Series A-1 preferred shares are entitled to a cumulative annual dividend of
$0.0341 per share when and as declared by our Board of Directors (See "Series K
and Series A-1 Preferred Stock" below).
16
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our equity
compensation plans as of June 30, 2003. The table includes the following plans:
1997 Stock Option Plan and 2000 Flexible Stock Plan.
Number of Number of securities
Securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding Outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a))
=================================================== ======================= ================= ============================
Equity compensation plans approved by security
holders:
1997 Stock Option Plan 2,236,533 $ 3.78 -0-
2000 Flexible Stock Plan(1) 10,309,158 $ 0.556 1,883,682
=========== ========= ============
Total 12,545,691 $ 1.17 1,883,682
=========== ========= ============
====================================================================================================================================
(1) Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 20 million shares.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three fiscal years, we have made the following sales of
restricted securities.
On May 30, 2003, we exchanged a total 6,151,178 shares of our common stock
and 2,050,393 shares of our Series K Preferred Stock for all of the outstanding
common stock of Interpharm, Inc. The common stock and Series K preferred stock
were issued to Mona Rametra, Raj Sutaria, Perry Sutaria and Ravi Sutaria without
registration in reliance upon Section 4(2) of the Securities Act because each
was an accredited investor.
On May 29, 2003, we agreed to the issuance of 4,855,389 shares of our
Series A-1 Preferred Stock to a grantor annuity trust and annuity set up by Dr.
Maganlal K. Sutaria, our Chief Executive Officer, in exchange for the
cancellation of $3 million of loans from the trust and annuity to Interpharm,
Inc. and to Mona Rametra, in exchange for cancellation of a $311,375 loan to
Interpharm, Inc. The offer and issuance was accomplished in reliance upon
Section 4(2) of the Securities Act.
17
On May 28, 2003, we issued 10,200 shares of our common stock to an
employee, Kenneth Bohacs, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On May 28, 2003, we issued 500,000 shares of our common stock to an
employee, Rajnish Rametra, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On March 31, 2003, we issued 7,500 shares of our common stock to an
employee, Kenneth Bohacs, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On March 28, 2003, we issued 357,142 shares of our common stock to our then
Chairman, Surinder Rametra, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On July 22, 2002, we made the following issuances of common stock pursuant
to consulting agreements: 300,000 shares to Balwinder Singh Baltha, 20,000
shares to Deepak Kumar, 20,000 shares to Jaspal Chhachhi, 100,000 shares to Drew
Alexander Associates, 60,000 shares to Nuripinder Kaur Bathla, 200,000 shares to
Parmjit Singh, 30,000 shares to Tejinder Kaur Sodhi, 150,000 shares to
Intellicorp, Inc. and 100,000 shares to Alan Prefer (90,000 of which were
subsequently canceled). The shares were issued in reliance upon Section 4(2) of
the Securities Act.
SERIES K AND A-1 PREFERRED STOCK
The following is a summary of the designations, preferences and rights of
our Series K and Series A-1 preferred stocks, which is qualified in its
entirety, by the certificate of designations, preferences and rights for the
Series K and A-1 preferred stocks.
SERIES K
- Title. $.01 par value per share Series K Convertible Preferred Stock.
- Voting. The Series K Stock is entitled to one vote per share, voting
together as a class with the holders of our Common Stock.
- Liquidation Preference. None.
- Dividend Rights. Same as Common Stock.
- Redemption Provisions. None.
18
- Amount Authorized. 3 million shares.
- Amount Outstanding. 2,050,393
- Conversion. The Series K Stock will be convertible into shares of our
Common Stock, no sooner than May 30, 2004, upon the happening of any of the
following events (the "Triggering Events"): the Company is (i) deemed by AMEX to
be in compliance with applicable listing standards; (ii) deemed by another
exchange to be in compliance with its applicable listing standards in the event
our securities are listed on such exchange; or (iii) we are no longer listed on
AMEX, the Nasdaq National Market or SmallCap Market, or the New York Stock
Exchange.
Upon the occurrence of any of the above Triggering Events, the shares of
Series K Stock will become convertible into shares of common stock. The
aggregate number of shares of common stock to be issued upon the full conversion
of all of the Series K Stock is equal to:
4 times (COP - P - T) - T
where:
COP means the company outstanding common stock (as defined below).
P means the number of all shares of common stock issued by the Company
pursuant to any agreements or obligations which arose after May 30, 2003,
up to and including the dated a Triggering Event occurs (the "Trigger
Date").
T means the number of shares of common stock issued to the former Interpharm,
Inc. shareholders pursuant to the November 25, 2002 Capital Stock Exchange
Agreement - 6,151,178.
The "Company Outstanding Common Stock" shall mean the sum of (a) the number of
shares of common stock issued and outstanding on the Trigger Date and (b) the
number of shares of common stock that are issuable upon the conversion of all
issued and outstanding shares of Series A, Series B, Series C and Series J
preferred stock of the Company, such number to be calculated as if all of the
issued and outstanding shares of Series A, Series B, Series C and Series J that
are issued and outstanding on the Trigger Date had been converted on the day
immediately preceding the Trigger Date.
Beginning on the Trigger Date and on each anniversary date thereof,
one-seventh of the total number of shares of Series K Stock will automatically
convert into common stock until all of the Series K Stock has been converted.
The Series K preferred stock certificate of designations, preferences and rights
further provides that if, at any time after the Trigger Date, the holders of the
Series K Stock own less than 51% of our outstanding common stock, then the
holders may convert such number of Series K Stock as will be necessary such that
the holder will own 51% of the outstanding common stock. The holders of the
Series K stock have agreed with the Company to waive this accelerated vesting
provision of the Series K stock unless and until such time as (a) any person, or
any two or more persons acting as a group, and all affiliates of such person or
persons, shall, acquire and own, beneficially, 50% or more of our outstanding
common stock , or (b) if following (i) a tender or exchange offer for voting
securities of the Company, or (ii) a proxy contest for the election of
Directors, the persons who were Directors of the Company immediately before the
initiation of such event cease to constitute a majority of our Board of
Directors upon the completion of such tender or exchange offer or proxy contest
or within one year after such completion.
19
SERIES A-1
- Title. $.01 par value per share Series A-1 Convertible Cumulative
Preferred Stock.
- Voting. No voting rights.
- Liquidation Preference. $0.682 per share.
- Dividend Rights. $0.0341 per share, per year, when and as declared by our
Board of Directors.
- Redemption Provisions. None.
- Amount Authorized. 5 million shares.
- Amount Issued. 4,855,389
- Conversion. Converts on a 1:1 basis into common stock upon:
i. the Company reaching $150 million in revenues;
ii. a merger, consolidation, sale of assets or similar transaction; or
iii. a "Change in Control" which occurs if (a) any person, or any two or
more persons acting as a group, and all affiliates of such person or persons,
shall, acquire and own, beneficially, 50% or more of the common stock
outstanding, or (b) if following (i) a tender or exchange offer for voting
securities of the Company, or (ii) a proxy contest for the election of directors
of the Company, the persons who were directors of the Company immediately before
the initiation of such event cease to constitute a majority of the Board of
Directors of the Company upon the completion of such tender or exchange offer or
proxy contest or within one year after such completion.
20
ANALYSIS OF EQUITY CAPITAL
The following is an analysis of the number of shares of common stock
outstanding as of September 24, 2003, on a fully diluted basis, including shares
potentially issuable upon exercise or conversion of outstanding options and
preferred stock. The descriptions of our preferred stock contained below are
qualified, in their entirety, by their respective Certificates of Designation,
Preferences and Rights.
As of September 24, 2003, we had 17,393,886 shares of common stock and
10,334,578 options to purchase our common stock outstanding. Of these options,
5,259,578 were issued prior to the acquisition of Interpharm, Inc. on May 30,
2003. Of the 5,259,578 options, 1,259,578 are currently exercisable and
4,000,000 are not exercisable prior to the Trigger Date of the Series K
Preferred Stock.
We also have five series of preferred stock outstanding. Our Series A, B
and C preferred stock, which were issued prior to May 30, 2003, are convertible
into 7,438 shares of common stock.
On May 30, 2003, we issued 5,075,000 options, of which 25,000 will vest on
December 31, 2003, and 25,000 will vest on December 31, 2004. The remaining
5,025,000 options are subject to vesting schedules that are dependant on certain
circumstances that are, as yet, undeterminable. However, the following is a
table setting forth the earliest dates on which such options can be exercised,
absent a change in control.
January 1, 2005 1,272,500
May 30, 2005 15,000
December 31, 2005 1,207,500
December 31, 2006 1,207,500
December 31, 2007 1,207,500
December 31, 2010 15,000
December 31, 2011 100,000
On May 30, 2003, we also issued 4,855,389 shares of Series A-1 Cumulative
Convertible Preferred Stock in exchange for the retirement of approximately
$3.31 million in related party debt. Each share of the Series A-1 stock is
convertible into one share of common stock only if: (i) our total revenue for
any four consecutive three month periods equals or exceeds $150 million, (ii) we
or Interpharm, Inc. merge with or into another company or sell substantially all
of our or Interpharm Inc.'s assets, or (iii) there is a change in control.
On May 30, 2003, we also issued 2,050,393 shares of our Series K Preferred
Stock. The timing and amount of shares of common stock that the Series K
Preferred Stock can be converted into is dependant on certain factors discussed
in this Form 10-K under the heading "Series K and A-1 Preferred Stock." The
Series K Preferred Stock is to vest ratably over a seven-year period beginning
on a date no sooner than May 30, 2004, and only after certain triggering events
have occurred. The Series K Preferred Stock also provides that at any time the
holders of the Series K Preferred Stock do not own 51% of our outstanding shares
of common stock, the vesting provisions would accelerate. In August 2003, we
21
entered into an agreement with the holders of the Series K Preferred Stock
whereby they have agreed to waive their rights to accelerate vesting unless and
until such time as (a) any person, or any two or more persons acting as a group,
and all affiliates of such person or persons, shall, acquire and own,
beneficially, 50% or more of our common stock, or (b) if following (i) a tender
or exchange offer for our voting securities, or (ii) a proxy contest for the
election of directors, the persons who were directors of the Company immediately
before the initiation of such event cease to constitute a majority of our Board
of Directors upon the completion of such tender or exchange offer or proxy
contest or within one year after such completion. If any of these events occur,
and the accelerated vesting provision set forth in the Certificate of
Designations, Preferences, and Rights of the Series K Preferred Stock have been
met, then the Series K Preferred Stock shall vest as set forth in the
Certificate of Designations, Preferences, and Rights.
The Series K and Series A-1 Preferred Stock are held by a total of seven
holders, each of whom is an affiliate of the Company. Assuming that all
currently vested options that are eligible to be exercised are exercised prior
to the triggering date of the Series K stock, we will ultimately issue
43,887,718 shares to the holders of the Series K stock.
Based on the foregoing, the following table illustrates the maximum number
of shares that will be issued by us based on our current capital structure for
the periods presented assuming (i) all options are exercised as soon as they are
eligible to be exercised; (ii) the Series A, B, and C Preferred Stock are
converted prior to May 30, 2003; (iii) the trigger date of the Series K stock
will be May 30, 2004; (iv) we achieve the $150,000,000 revenue trigger for the
Series A-1 stock during the year 2009; (v) there is no change in control of the
Company and (vi) there is no stock split, recapitalization or restructuring of
the Company.
Maximum Number of
DATE Shares to be Issued
---- -------------------
Common Stock
Outstanding at
September 24, 2003 17,393,886
September 24, 2003 - 1,292,016
May 30, 2004
May 30, 2004 6,269,674
December 31, 2004 25,000
January 1, 2005 -
December 31, 2005 10,764,674
January 1, 2006 -
December 31, 2006 9,477,174
January 1, 2007 -
December 31, 2007 7,477,174
May 30, 2008 6,269,674
May 30, 2009 11,125,063
January 1, 2010 -
December 31, 2010 6,284,674
December 31, 2011 100,000
Maximum total outstanding
shares at December 31, 2011 76,479,009
22
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary financial data for the six-month
period ended June 30, 2003 and the four previous fiscal years ended December 31,
2002. The summary financial data set forth below with respect to our statements
of operations for the fiscal years ended December 31, 1999 and 1998 and the
balance sheet data as at December 31, 1999 and 1998 was derived from our
consolidated financial statements which are not included in this report. The
following summary financial data should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report.
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
JUNE 30, 2003 JUNE 30, 2002(1) 2002 2001 2000 1999 (1) 1998 (1)
-------------- -------------- ------------ -------------- -------------- --------------- -------------
Net Sales $14,953,438 $11,743,440 $24,312,245 $18,435,446 $11,391,326 $ 9,946,348 $ 8,663,881
Net income $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764 $ 34,407 $ 60,269
Income per
common share:
Basic $ 0.08 $ 0.07 $ 0.13 $ 0.06 $ 0.04 $ 0.01 $ 0.01
Diluted $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ 0.00 $ 0.00
Balance Sheet Data
Total Assets $20,338,795 $10,904,361 $11,198,347 $ 9,645,807 $ 7,390,015 $ 6,341,472 $ 5,867,048
Long-term
obligations $ 267,056 $ 3,400,959 $ 3,335,754 $ 3,591,480 $ 3,289,118 $ 3,474,682 $ 3,467,251
Cash dividend per
common share 0 0 0 0 0 0 0
(1) Unaudited.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Interpharm, Inc. is engaged in the business of developing, manufacturing
and marketing generic over-the-counter and prescription strength pharmaceutical
products. Approximately 65% of our sales are made under our own label. The
remaining 35% are to wholesalers and distributors which sell our products under
their own labels.
We market our products primarily to wholesalers, drug distributors,
repackagers, and other manufacturers through our internal sales staff as well as
independent sales representatives. Some of our wholesalers and distributors
purchase products that are warehoused for drug chains, independent pharmacies,
state and federal governmental agencies and managed healthcare organizations.
Sales are recognized when the product is shipped and appropriate provisions are
made for returns. Consistent with industry practice, we have a returned goods
policy which is described in "Business," above.
During the six-month period ended June 30, 2003 and the 12-month periods
ended December 31, 2002 and 2001, we did not experience returns of material
quantities of any of the products we sell. Therefore, we do not believe that we
are subject to a material risk attributable to returns.
We have been faced with increased demand for our existing products from our
existing customers. These customers have expressed satisfaction with the quality
of our products, our prices, and our reliability. Accordingly, we have developed
and implemented a plan to upgrade our production capacity and are exploring
adding an additional production facility. During the 12-month period ended
December 21, 2002, we spent approximately $1,200,000 on production equipment and
leased an additional 38,000 square feet of space in the building we currently
occupy. During the six-month period ended June 30, 2003, we spent $1,031,403 on
production equipment.
Although our growth in the recent past has been attributable primarily to
increased orders from our existing customers, we are also actively seeking to
create strategic alliances with companies whose strengths would compliment ours.
To that end, we have, in July and August 2003, launched two of four products
that we are manufacturing for URL/Mutual, on a contract basis. We believe that
our future growth is dependent upon other mutually beneficial arrangements with
companies such as URL/Mutual, as well as obtaining new clients and aggressively
increasing our product line.
24
RESULTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002
(All June 30, 2002 financial information is unaudited)
Financial Highlights
o Net sales increased 27.33% or $3.21 million to $14.95 million from $11.74
million.
o Gross profit increased 27.02% or $0.58 million to $2.74 million from $2.16
million.
o Operating income increased 15.59% or $167,600 to $1.24 million from $1.07
million.
o Net income increased 18.47% or $112,843 to $723,645 from $610,802.
NET SALES AND GROSS PROFIT
Net sales for the six month period ended June 30, 2003 were $14.95 million
compared to $11.74 million for the six-month period ended June 30, 2002, an
increase of 27.33% or $3.21 million. The increase in sales is primarily
attributable to increased orders from our existing customers resulting from our
increased production capacity. We launched production of Naproxen in December
2001. We have experienced an increase in our sales of Naproxen which is
primarily the result of customer awareness of our entry into this market and
their willingness to increase orders for Naproxen as they do for Ibuprofen. The
increase in net sales was not attributable to any change in prices which, for
our entire product line, remained stable. Gross profit for the six months ended
June 30, 2003 was $2.74 million.
During the six months ended June 30, 2003, two customers accounted for
approximately 50% of total sales.
COST OF SALES
Cost of sales increased $2.63 million to $12.21 million for the six-month
period ended June 30, 2003, or 27.41% from $9.59 million for the six-month
period ended June 30, 2002, primarily due to increased production and sales.
Approximately $1.90 million, or 72.23% of this increase is attributable to the
cost of raw materials, increased quantities of which were necessary due to
increased production. Raw material prices were constant during the period.
Approximately $386,000, or 14.69%, was for increased labor costs, including
payroll taxes and benefits. Approximately $242,000, or 9.19% is attributable to
increased costs of packaging, lab and factory supplies.
We continued to increase our production capabilities to satisfy increasing
demand from existing customers. The increase in production is attributable to
our continued efforts to grow Naproxen, as well as increased production of
Ibuprofen.
RESEARCH AND DEVELOPMENT
Research and development expenses for the six-month period ended June 30,
2003 were $185,601, or 1% of net sales, compared to $148,850, or 1% of net sales
for the same period in 2002, an increase of $36,751. Research and development
expenses were used primarily for materials and biostudies for new drugs
currently in development. We believe that research and development expenses will
represent a substantially larger percentage of our net sales in the future as we
seek to expand our product line.
25
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $1.27 million, in the
six-month period ended June 30, 2003, or 8.52% of net sales, compared to $0.90
million, or 7.63% of net sales, for the same period in 2002.
Selling, general and administrative expenses for the six-month period ended
June 30, 2003 were primarily made up of salaries, including payroll taxes and
benefits ($319,621), selling commissions ($90,606), freight expenses ($197,239),
legal, accounting and other professional services ($251,567), insurance expense
($71,403), bad debts ($40,200), and utilities ($39,724). Salaries increased
$40,110, or 14.35% from the six month period ended June 30, 2002 due to
increases in staff to accommodate increased production. Legal, accounting and
other professional services increased $204,072, or 429.67% from the six month
period ended June 30, 2002. This increase is attributable to costs associated
with the acquisition of Interpharm, Inc. by ATEC and the increased legal and
accounting expenses resulting from being a public company. No sales were made to
any customer whose balance was written off during the six month period ended
June 30, 2003
OPERATING INCOME
Operating income for the six-month period ended June 30, 2003 increased
$167,600 to $1.24 million as compared to $1.07 million, or 15.59% as compared to
the same period ended June 30, 2002. The six-month period ended June 30, 2003
included an increase of approximately $204,072 of legal, professional and
accounting costs, as compared to the same period in 2002. These increased
expenses are the result of the acquisition of Interpharm, Inc., by ATEC which
was consummated on May 30, 2003, and the legal and accounting fees associated
with being a public company. For the six-month period ended June 30, 2002, there
were no such fees.
INCOME TAXES
The effective tax rate for the six-month period ended June 30, 2003 was 35%
compared to 34% for 2002. Our deferred tax asset was primarily attributable to
New York State investment tax and employment incentive tax credits. The tax
credits utilized are limited to the state taxes computed on the minimum taxable
income base. These tax credits also expire in 15 years if not utilized. We
estimated a reserve for the deferred tax asset based upon prior years' actual
credits utilized and projected credits to be utilized on future taxable income.
The valuation allowance reserve has decreased due to our increased taxable
income which has utilized more credits and our estimate of future growth which
has reduced the estimated credits that will not be utilized.
26
LIQUIDITY AND CAPITAL RESOURCES
Since Interpharm, Inc.'s inception, it has financed its operations and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit, and loans from its stockholders. For the past
several years prior to its acquisition by ATEC, cash provided from Interpharm,
Inc.'s operations has been the primary source of funds to operate its business.
Cash flows from operations were $200,432 during the six-month period ended June
30, 2003. As a result of Interpharm, Inc.'s cash flows from operations during
the six-month period ended June 30, 2003 and the sale of ATEC's computer
operations on May 30, 2003, working capital increased $2.9 million to $5.2
million from $2.3 million at December 31, 2002. We believe that Interpharm,
Inc.'s working capital and cash provided by operating activities are sufficient
to meet its operating needs for the next twelve months.
Net cash used in investing activities for the six-month period ended June
30, 2003 was approximately $1.031 million related to the purchase of production
equipment.
During the six-month period ended June 30, 2003, we generated approximately
$3,061,000 including approximately $2,068,000 (net of $190,000 of costs) from
the reverse merger with ATEC and $1,100,000 of proceeds from our bank credit
line. The exercise of 2,187,863 options from July 1, 2003 to September 12, 2003
resulted in cash proceeds to us of $2.7 million. These options were outstanding
prior to the closing of the transaction with ATEC. In addition, promissory notes
in the amount of $1,524,092 from the purchaser of ATEC's computer business were
collected subsequent to June 30, 2003.
In August 2003, we increased our credit lines from $3.5 million (at
December 31, 2002) to $7 million. In addition, we retired approximately $3.31
million in related party loans to Interpharm in exchange for our Series A-1
Preferred Stock. We believe that our increased liquidity will afford us the
opportunity to increase our Research and Development expenditures on a more
aggressive pace than in previous years.
At June 30, 2003, we have approximately $7,680,000 in Federal net operating
loss carryforwards ("NOLs") available to reduce future taxable income. These
NOLs could result in savings of up to $3,000,000 in future income tax payments
(although there will be no effect on income tax expenses).
In addition, the exercise of 2,251,382 employee stock options and warrants
from July 1, 2003 to September 24, 2003 resulted in additional future tax
deductions approximating $9,000,000, which could result in cash savings of up to
$3,000,000.
Accounts Receivable
Our accounts receivable at June 30, 2003 was $4.9 million as compared to
$4.2 million at December 31, 2002. This increase is primarily attributable to
the increase in sales for the six-month period ended June 30, 2003. The average
number of days oustanding for our accounts receivable for the six-month period
ended June 30, 2003 consistently ranged from 54 to 59 days.
Inventory
In late 2000 and early 2001, Interpharm, Inc. commenced a program to
increase inventory production levels to meet demand created by increasing sales.
At June 30, 2003, our inventory increased to $4.6 million from $3.4 million at
December 31, 2002 which is a level we believe to be sufficent to meet current
demand.
27
Accounts Payable
The accounts payable, accrued expenses and other liabilities increased
approximately $1,156,000, and amounts due on our working capital credit line
increased $1,100,000 from December 31, 2002. This increase is primarily
attributable to increased inventory production to meet demand.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2003 were $2.34 million as compared
to $105,789 at December 31, 2002, an increase of $2.23 million. This increase is
primarily attributable to the proceeds from the sale of ATEC computer
operations, Interpharm, Inc.'s cash flow from operating activities and net bank
borrowings of $993,875. Offsetting these events were equipment purchases of
$1,031,403 during the six month period ending June 30, 2003.
We believe that one of the most important factors in our ability to
continue to grow our business will be our ability to launch new products. To
that end, we plan to devote substantially greater resources to our research and
development efforts than we have in previous years. In addition, we plan to
continue to devote substantial resources to increasing our production capacity
through the purchase of new equipment and otherwise improving our production
facility. While we anticipate that our cash flow and current credit arrangements
will be sufficient for at least the next 12 to 18 months, we may choose to raise
additional funds or seek other financing arrangements to facilitate more rapid
expansion, to develop new products at a faster pace, or to acquire or invest in
complimentary businesses, technologies, services or products.
From time to time in the past, Interpharm, Inc.'s shareholders, directors,
and officers had made loans to it for working capital. As of December 31, 2002,
each of theses loans was paid by Interpharm, Inc. with the exception of a loan
with a $3 million principal balance from Dr. Maganlal K. Sutaria to Interpharm,
Inc. and a $311,375 loan from a shareholder. Both loans were converted into
Series A-1 preferred stock on May 30, 2003.
28
OUR OBLIGATIONS
As of June 30, 2003, our obligations and the periods in which they are
scheduled to become due are set forth in the following table:
DUE IN
LESS DUE DUE DUE
THAN 1 IN 1-3 IN 4-5 AFTER 5
OBLIGATION TOTAL YEAR YEARS YEARS YEARS
--------------------------- --------------- ------------------ ---------------- -------------- ---------------
Line of credit (1) $ 2,064,793 $ 2,064,793 $ -- $ -- $ --
Bank notes payable (1) 461,762 224,241 237,521 -- --
Operating leases (2) 8,282,908 627,636 1,735,272 960,000 4,960,000
----------- ----------- ----------- ----------- -----------
Total cash
obligations $10,809,823 $ 2,917,030 $ 1,972,793 $ 960,000 $ 4,960,000
=========== =========== =========== =========== ===========
(1) See "Bank Loans and Lines of Credit," below.
29
- Minimum debt service ratio of at least 1.2 : 1, on an annual basis;
- Maximum debt to net worth ratio of not more than 1.0 : 1, on an annual
basis;
- Maintain a tangible net worth of at least $4,000,000 as of June 30, 2003
with an increase of tangible net worth of not less than $50,000 for each
fiscal year end, thereafter.
- Interpharm is also required to provide financial statements and other
financial information on a regular basis.
As of June 30, 2003 and December 31, 2002 and 2001, we were in compliance with
all of the above covenants.
BANK LOANS AND LINES OF CREDIT
We have the following loans and credit lines outstanding as of June 30,
2003, each of which is guaranteed by Raj Sutaria, Mona Rametra, Perry Sutaria,
and Bhupatlal Sutaria:
1. HSBC Advised Secured Line of Credit Facility totaling $2.38 million. The
interest rate on this credit line is, at the Company's option, equal to either
(i) LIBOR plus 2.25%, or (ii) HSBC's prime rate plus (4.25% at June 30, 2003).
The line of credit is due on demand. The facility is reviewed by the bank at
least annually and automatically expires unless extended in writing. The line of
credit is scheduled to be reviewed by November 30, 2003.
2. HSBC Non-Revolving Secured Facility for Equipment Purchases for
$483,542. This facility was revised on August 6, 2003 to provide for a $2
million line of credit. Each advance under the Equipment Purchase Line cannot
exceed 90% of the invoice amount of the new equipment. Each advance is converted
into a separate note that is fully amortizing in up to 60 equal monthly
installments of principal and interest. Interest on the notes payable is, at the
Company's option, (i) a fixed rate equal to HSBC's cost of funds plus 2.25%,
(ii) LIBOR plus 2.25% or (iii) HSBC's prime rate. At June 30, 2003, there were
four separate notes outstanding with current aggregate monthly installments
totaling $24,597. During the first quarter of fiscal 2004, all of the notes
payable were paid in full.
In April, 2003, Sutaria Family Realty, LLC refinanced its mortgage on our
leased building at 75 Adams Avenue in Happauge. In connection with the
refinancing, a guarantee of the mortgage, previously given by Interpharm, Inc.,
was eliminated. However, the owners of Sutaria Family Realty, LLC continue to
guarantee our loans and lines of credit.
LEASES
We lease an entire building in Hauppauge, New York, pursuant to a
non-cancellable lease expiring in October, 2019, which houses our manufacturing,
warehousing and some executive offices. The leased building is approximately
100,000 square feet and is located in an industrial/office park. The current
annual lease payments to the landlord, Sutaria Family Realty, LLC, are $480,000.
Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj
Sutaria.
30
Upon a change in ownership of the Company, and every three years thereafter, the
annual base rent will be adjusted to fair market value, as determined by an
independent appraisal. There are no tenants in the building other than us.
We also lease approximately 23,175 square feet of office space at 69 Mall
Drive in Commack, New York for some of our executive offices. The lease for this
office space expires in 2005. The annual lease payments are approximately
$187,000 and we have sublet 18,500 square feet for $164,000 per year.
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001
Financial Highlights
o Net sales increased 32% or $5.9 million to $24.3 million from $18.4
million.
o Gross profit increased 27% or $.9 million to $4.4 million from $3.5
million.
o Operating income increased 80% or $.8 million to $1.8 million from $1.0
million.
o Net income increased 104% or $535,854 to $1,050,419 from $514,565.
NET SALES AND GROSS PROFIT
Net sales for the fiscal year ended December 31, 2002 were $24.3 million
compared to $18.4 million for the fiscal year ended December 31, 2001, an
increase of $5.9 million. Of this 32% increase in net sales approximately $5.1
million is attributable to increased orders from existing customers spread
evenly across Interpharm, Inc.'s product lines and resulting from Interpharm,
Inc.'s increased production capacity and $800,000 is attributable to the
introduction of Naproxen to Interpharm, Inc.'s product line. The increase in net
sales was not attributable to any change in prices which, for all products in
Interpharm, Inc.'s product line, remained stable from the fiscal year ended
December 31, 2001 to the year ended December 31, 2002. Gross profit for the year
ended December 31, 2002 was $4.4 million, an increase of 22% or .9 million from
the $3.5 million for the prior year.
During the year ended December 31, 2002, two Interpharm, Inc. customers
accounted for approximately 48% of Interpharm, Inc.'s total sales.
COST OF SALES
Cost of sales increased to $19.9 million in the fiscal year ended December
31, 2002, or 34% from $14.9 million in the prior year due to increased
production. Approximately $3.7 million, or 73% of this increase is primarily raw
material purchases and approximately $1.0 million, or 12%, was for increased
labor costs. Raw material prices were constant during the period.
31
Interpharm, Inc. increased its production to satisfy existing demand from
existing customers which have additional purchasing capacity. The increase in
production is attributable to the introduction of Naproxen as well as increased
production of Ibuprofen and Iso Cap, the production of which increased 25% and
30% respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses for the fiscal year ended December 31,
2002 were $415,618, or 2% of net sales, compared to $110,000, or 1% of net sales
in 2001, an increase of $305,618. Research and development expenses were used
primarily for materials and biostudies for new drugs currently in development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $2.1 million, in the year
ended December 31, 2002, or 9% of net sales, compared to $2.0 million, or 11% of
net sales, for 2001.
Selling, general and administrative expenses for the fiscal year ended
December 31, 2002 were primarily made up of salaries ($492,000), selling
commissions ($164,000) freight expenses ($370,000), legal, accounting and other
professional services ($328,000), repairs and maintenance costs ($74,000) and
insurance expense ($23,000). Salaries increased $37,000 due to increases in
staff to accommodate increased production. In addition, bad debt expense
decreased by $214,000 due to the write-off of one customer balance in the
preceding year and write-offs occurring during the year ended December 31, 2002
were $47,000. No sales were made to the customer whose balance was written off
in the fiscal year ended December 31, 2002.
INCOME TAXES
The effective tax rate for the fiscal year ended December 31, 2002 was 32%
compared to 29% for 2001. The increase in the effective tax rate for 2002 was
primarily due to a decrease in the net deferred tax asset valuation allowance in
the 2001 fiscal period. The deferred tax asset was primarily attributable to New
York State investment tax and employment incentive tax credits. The tax credits
utilized are limited to the state taxes computed on the minimum taxable income
base. These tax credits also expire in 15 years if not utilized. Management has
estimated a reserve for the deferred tax asset based upon prior years' actual
credits utilized and projected credits to be utilized on future taxable income.
The valuation allowance reserve has decreased due to Interpharm, Inc.'s
increased taxable income which has utilized more credits and management's
estimate of future growth which has reduced the estimated credits that will not
be utilized.
32
Liquidity and Capital Resources - December 31, 2002
Cash flows from operations were $1,747,585 during the fiscal year ended
December 31, 2002, $906,343 during year ended December 31, 2001 and $353,293
during 2000. As a result of Interpharm, Inc.'s cash flows from operations during
fiscal 2002, working capital increased $.2 million to $2.3 million from $2.1
million in 2001.
Net cash used in investing activities for the fiscal year ended December
31, 2002, 2001 and 2000 were $1,203,221, $964,259 and $175,583, respectively.
These were all for the purchase of production equipment except for $19,011 in
2002 for the purchase of marketable securities. In the year ended 2002,
Interpharm, Inc. used $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. In the year ended 2001, Interpharm, Inc. removed
$313,166 of net equipment from service.
Accounts Receivable
The accounts receivable increase from December 31, 2001 to December 31,
2002 is primarily attributable to the increase in sales throughout 2002. This
increase resulted in an increased accounts receivable balance at December 31,
2002.
The accounts receivable days outstanding for the periods December 31, 2001
through December 31, 2002 consistently ranged from 54-59 days.
Inventory
During the later part of 2000 and early 2001 Interpharm, Inc. commenced a
program to increase inventory production levels to meet the demand for
increasing sales. Due to the increase in sales at the end of 2001 Interpharm,
Inc.'s inventory had decreased. During 2002 Interpharm, Inc. had increased
production capacity to produce more inventory to meet future demand resulting in
a more optimal level of inventory at December 31, 2002.
The inventory turnover for the periods ended December 31, 2001 through
December 31, 2002 has consistently improved with a decrease in number days sales
in inventory from 58 days to 50 days.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increase from
December 31, 2001 to December 31, 2002 is primarily attributable to increased
inventory production to meet future sales demands.
Cash and Cash Equivalents
The decrease in cash and cash equivalents from December 31, 2001 to
December 31, 2002 of $478,069 is primarily attributable to $1,184,210 in
equipment purchases and $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. These amounts were partially offset by $1,747,535
in net cash provided by operating activities.
33
From time to time in the past, Interpharm, Inc.'s shareholders, directors
and officers had made loans to it for working capital. As of December 31, 2002,
each of these loans was paid by Interpharm, Inc. with the exception of a loan
with a balance of $304,750 from Mona Sutaria and a loan with a $3 million
principal balance from Dr. Maganlal K. Sutaria to Interpharm, Inc. The
$3,000,000 loan reflected in Interpharm, Inc.'s December 31, 2002 financial
statements has a maturity date of January 1, 2012. Repayment of this loan was
subordinated to Interpharm, Inc.'s bank debt.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
Financial Highlights
o Net sales increased 62% or $7 million to $18.4 million from $11.4
million
o Gross profit increased 58% or $1.3 million to $3.5 million from $2.2
million
o Operating income increased 20% or $172,679 to $1,035,957 from $863,278
o Net earnings increased 52% or $176,801 to $514,565 from $337,764
NET SALES AND GROSS PROFIT
Net sales for 2001 were $18.4 million compared to $11.4 million for fiscal
2000, an increase of $7 million or 62%. In 2001, Interpharm, Inc. increased its
production capacity to satisfy demand from existing customers with the capacity
to make additional purchases. Once Interpharm, Inc.'s production capacity was
increased, it received a corresponding increase in orders from these customers.
Gross profit for 2001 was $3.5 million, or 19% of net sales, compared to
$2.2 million, or 19% of net sales, for fiscal 2000. This increase of $1.3
million, or 58%, was also attributable to increased production of Interpharm,
Inc.'s generic products.
The increase in net sales was not attributable to any change in prices
which, for all products in Interpharm, Inc.'s product line, remained stable
between 2000 and 2001.
COST OF SALES
Cost of sales increased from $9.2 million in 2000 to $14.9 million in 2001,
an increase of $5.7 million or 62% due to increased production. $2.6 million, or
46%, of this increase was attributable to raw material purchases, $1.9 million,
or 33%, was attributable to manufacturing overhead, $.2 million, or 4%, was
attributable to increases in the purchase of packing supplies and $.1 million,
or 2%, was attributable to increased labor costs. Raw material prices were
constant during the period.
34
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 2001 were $110,000, or 1% of
net sales, compared to $0, in fiscal 2000. This increase was largely
attributable to the new drugs currently in development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.0 million, or 11% of
net sales, for fiscal 2001, compared to $1.3 million, or 11% of net revenues,
for fiscal 2000. For fiscal 2001, selling general and administrative expenses
were primarily made up of salaries ($456,000), freight expenses ($248,000),
commissions ($166,000), legal, accounting and other professional services
($199,000), repairs and maintenance expenses ($89,000) and, a bad debt of
$297,000 for one customer, the other 50% owner of Interpharm, Inc.'s Saturn
subsidiary. The bad debt and an increase in salaries of $218,000 relating to the
hiring of additional personnel in order to increase production comprised most of
the increase in selling, general and administrative expenses from 2000 to 2001.
INCOME TAXES
The effective tax rate for fiscal 2001 was 29% compared to 39% for fiscal
2000. The decrease in the effective tax rate was due to the decrease in the tax
effect of permanent differences, primarily due to the minority owner's share of
the loss of Interpharm, Inc.'s subsidiary during 2000. At December 31, 2001,
Interpharm, Inc. has net deferred tax assets of $298,000 primarily related to
New York State investment tax credits of approximately $268,500 and cumulative
losses in excess of its subsidiary basis. The net deferred tax asset has been
reduced by a valuation allowance of $151,000 because Interpharm, Inc. may not be
able to utilize all of these deferred tax assets prior to their expiration.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that Interpharm
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, Interpharm evaluates
judgments and estimates made, including those related to revenue recognition,
inventories, income taxes and contingencies including litigation. Interpharm
bases its judgments and estimates on historical experience and on various other
factors that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing its
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
35
REVENUE RECOGNITION
Revenues from the sale of Interpharm products are recognized upon shipment
of the product. Revenues are recorded net of provisions for rebates,
charge-backs, discounts and returns, which are established at the time of sale.
Estimates for rebates, charge-backs, and discounts are calculated based on
actual experience and also cover chargebacks on sales to intermediary wholesale
prime vendors for the supply of Ibuprofen to the Department of Veterans Affairs.
We purchase raw materials from a supplier, which is then used in the
manufacturing of completed goods and sold back to the supplier, by direct drop
shipment to the supplier's customers. The raw materials are also used in the
manufacturing of products for other customers. We also (i) have the general
inventory risk by taking title to all of the raw material purchased, (ii)
establish the selling price for the finished product and, (iii) significantly
change the raw materials into the finished product under our specifications and
formulas. These factors among others, qualify us as the principal under the
indicators set forth in EITF 99-19, Reporting Revenue Gross as a Principal vs.
Net as an Agent. If the terms and substance of the arrangement change, such that
we no longer qualify to report these transactions on a gross reporting basis,
our net income and cash flows would not be affected. However, our sales and cost
of sales would both be reduced by a similar amount.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record allowances for doubtful accounts based upon customer specific
analysis and assessment of past-due balances. Additional allowances for doubtful
accounts may be required if there is an increase in past-due balances or for
customer specific circumstances. The allowance for doubtful accounts was $47,776
at June 30, 2003 and December 31, 2002 and 2001.
INVENTORY
Our inventories are valued at the lower of cost or market, determined on a
first-in, first -out basis, and include the cost of raw materials and
manufacturing. We continually evaluate the carrying value of our inventories and
when factors such as expiration dates and spoilage indicate that impairment has
occurred, either a reserve is established against the inventories' carrying
value or the inventories are disposed of and completely written off in the
period incurred.
36
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for Interpharm in the December 31, 2002 financial statements. We do
not expect the adoption the initial recognition requirements to FIN 45 will have
a significant impact on our consolidated financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
37
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are currently evaluating the
effect that the adoption of FIN 46 will have on our results of operations and
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. We believe that we are
currently in substantial compliance with the requirements of SFAS No. 150.
ISSUE AND UNCERTAINTIES
RISK OF PRODUCT LIABILITY CLAIMS
The testing, manufacturing and marketing of pharmaceutical products subject
us to the risk of product liability claims. We believe that we maintain an
adequate amount of product liability insurance, but no assurance can be given
that such insurance will cover all existing and future claims or that we will be
able to maintain existing coverage or obtain additional coverage at reasonable
rates.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We do not use any derivative financial instruments to hedge our exposure to
adverse fluctuations in interest rates, fluctuations in commodity prices or
other market risks, nor do we invest in speculative financial instruments.
Borrowings under our lines of credit are indexed to the prime rate.
Due to the nature of our borrowings and short-term investments, we have
concluded that there is no material risk exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the previous two fiscal years, and the subsequent interim period,
Interpharm, Inc.'s accountant has not resigned, declined to stand for
re-election and was not dismissed. During the previous two fiscal years, and the
subsequent interim period, there were no material disagreements with
Interpharm, Inc.'s accountant with respect to any matter.
Following the acquisition of Interpharm, Inc., on June 9, 2003, we
dismissed Weinick Sanders Leventhal & Co., LLP ("WSLCO") as our independent
accountant. WSLCO had been previously engaged as the principal accountant to
audit ATEC's financial statements. The reason for the termination was the
acquisition of Interpharm, Inc., which is now our primary business unit and
which has been audited by the firm of Marcum & Kliegman LLP. We believe that it
is in our best interests to have Marcum & Kliegman LLP continue to work with us.
WSLCO's report on our financial statements for the past two years did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by our Board of
Directors and approved by the Audit Committee of our Board of Directors.
During our two most recent fiscal years, and the subsequent interim
periods, prior to June 9, 2003, there were no disagreements with WSLCO on any
matter of accounting principles or practices, financial statement disclosure,
auditing scope, or procedure, which disagreements, if not resolved to the
satisfaction of WSLCO, would have caused it to make reference to the subject
matter of the disagreement in connection with its reports.
On June 11, 2003, we retained Marcum & Kliegman LLP as our new independent
accountant. Marcum & Kliegman LLP is located at 130 Crossways Park Drive,
Woodbury, New York 11797.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed,
39
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management to allow timely decisions regarding required disclosure. Management
necessarily applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding management's control objectives.
At the conclusion of the period ended June 30, 2003, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer, Chief Financial Officer and
General Counsel, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chairman and
Chief Executive Officer, Chief Financial Officer and General Counsel concluded
that our disclosure controls and procedures were effective in alerting them in a
timely manner to information relating to the Company required to be disclosed in
this report but adopted additional disclosure controls and procedures to improve
the quality and timeliness of disclosure during our transition from a private to
a public company.
CHANGES IN INTERNAL CONTROLS
At the conclusion of the period ended June 30, 2003, our Chairman and Chief
Executive Officer, Chief Financial Officer and General Counsel reviewed our
internal controls and procedures. Subsequent to the date of their evaluation as
described above, the following changes have been made: We have taken efforts to
implement additional segregation of duties within our accounting department we
are also investigating a more efficent and effective inventory costing system.
No significant deficiencies or material weaknesses have been identified.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current Directors
and Officers and the position held by them:
Name Age Position
Dr.Maganlal K Sutaria 66 Chairman of the Board of
Directors
Chief Executive Officer and
Director
Bhupatlal K. Sutaria 57 President, Treasurer and
Director
James J. Charles 60 Chief Financial Officer
40
Munish K. Rametra 33 General Counsel and Secretary
Surinder Rametra 63 Director of Corporate
Development and Director
Praveen Bhutani 55 Director
David C. Reback 60 Director
Stewart Benjamin 38 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders or until their successors
have been elected and qualified.
DR. MAGANLAL K. SUTARIA. Dr. Sutaria is a Cardiovascular surgeon and has
served as the Chairman of Interpharm, Inc.'s Board of Directors since 1989. Dr.
Sutaria received his medical degree from the Medical College, Ahmedabad, Gujarat
University in 1961. Dr. Sutaria has served as an Assistant Professor of Surgery
at the State University of New York at Stony Brook. Dr. Sutaria has been a
Director since May 29, 2003 and is Chairman of our Board of Directors.
BHUPATLAL K. SUTARIA. Mr. Sutaria has served as the President of Interpharm
Inc. since 1990. Prior to joining Interpharm, Inc., Mr. Sutaria was an
entrepreneur involved in several businesses. Mr. Sutaria received a Bachelor's
degree in Chemistry from Saurashpra University in India in 1972 and a Masters of
Business Administration degree from the University of Palm Beach in 1974. Mr.
Sutaria is the brother of Dr. Maganlal K. Sutaria. Mr. Sutaria has been a
Director since May 29, 2003.
JAMES J. CHARLES. Mr. Charles was appointed Chief Financial Officer of ATEC
in January 1999. Prior to his appointment, Mr. Charles was a financial
consultant to several public companies for the period of 1994-1998. Mr. Charles
was also the Chief Financial Officer of a printing company from 1991-1994 and a
partner at Ernst & Young from 1966-1991.
MUNISH K. RAMETRA. Mr. Rametra was an associate for the law firm of
Sullivan and Cromwell from 1995 to 1999. From 1999 to 2003, Mr. Rametra acted as
a financial and legal consultant to several companies. He was appointed our
general counsel and Secretary on May 29, 2003. Mr. Rametra attended the Stern
School of Business at New York University and New York University School of Law.
SURINDER RAMETRA was appointed the Chief Executive Officer and Chairman of
the Board of Directors of ATEC. in June 1994. He resigned as Chief Executive
Officer in January 2002. Prior to June 1994 Mr. Rametra was president of one of
our subsidiaries. Mr. Rametra received a Bachelor's degree in Mechanical
Engineering from the Punjab Engineering College, India and a Master's degree in
Industrial Engineering from the Indian Institute of Technology in 1965 and 1969
respectively. In 1976, Mr. Rametra received a Masters of Business Administration
Degree in Finance from New York University.
41
PRAVEEN BHUTANI has served as a Director since May 2001. Mr. Bhutani was
the founder of Ultra Spec Cables, Inc., a cable manufacturing company and The
Options Group, Inc., a placement company. He has served both companies as the
Chief Executive Officer since 1992. Prior to 1992 he held various executive
positions. Mr. Bhutani has Bachelor and Masters degrees in finance from the
Delhi College, Delhi, India.
DAVID C. REBACK has served as a Director since in November 1997. Since
1969, Mr. Reback has been a partner with Reback & Potash, LLP, a law firm
specializing in litigation, appellate matters and real estate. Mr. Reback
received a B.A. from Syracuse University, and in 1965 he received a Juris
Doctor's degree from Syracuse University College of Law.
STEWART BENJAMIN has served as a Director since May 2001. Mr. Benjamin is a
certified public accountant in the State of New York. From January 1996 to the
present, Mr. Benjamin has been self-employed as a sole practitioner under the
name of Stewart H. Benjamin, CPA, P.C. From 1985 through December 1995, Mr.
Benjamin was employed as a staff accountant in both private industry and local
public accounting firms. Mr. Benjamin received a Bachelor of Business
Administration degree from Pace University in 1985.
To our knowledge, except as set forth below, based solely on a review of
such materials as are required by the Securities and Exchange Commission, none
of our officers, directors or beneficial holders of more than ten percent of our
issued and outstanding shares of Common Stock has failed to timely file with the
Securities and Exchange Commission any form or report required to be so filed
pursuant to Section 16(a) of the Securities Exchange Act of 1934 during the
fiscal year ended June 30, 2003.
1. Ashok Rametra - Form 4 dated July 11, 2003
2. Praveen Bhutani - Form 4 dated July 11, 2003
3. Ashok Rametra - Form 4 dated August 21, 2003
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table for the years ended June 30, 2003, 2002 and
2001 is provided herein. This table provides compensation information on behalf
of the Chief Executive Officer and other officers who earn in excess of
$100,000.
42
SUMMARY COMPENSATION TABLE
For the Years Ended June 30, 2003, 2002 and 2001
Annual Compensation Awards Payouts
ANNUAL COMPENSATION LONG TERM COMPENSATION
Awards Payouts
Name Other Restricted Securities
and Annual Stock Underlying All
Principal Year Compen- Awards Options/ LTIP Other
Position Position Ended Salary($) Bonus($) sation($) $ SARS Payouts Compensation
-------- -------- ----- --------- -------- --------- - ---- ------- ------------
Surinder Former 6/30/2003 $150,000 14,157 (1) 0 700,000 0 0
Rametra(9) Chairman*
6/30/2002 $159,615 14,367 (2) 0 750,000 0 0
6/30/2001 $108,915 8,464 (3) 0 1,250,000 0 0
Ashok Rametra Former 6/30/2003 $210,520 14,134 (4) 0 0 0 0
President 6/30/2002 $181,731 10,772 (5) 0 750,000 0 0
6/30/2001 $215,077 $50,000 10,766 (6) 0 1,000,000 0 0
Balwinder Former CEO* 6/30/2003 $228,360 2,829 (7) 0 0 0 0
Singh
Bathla 6/30/2002 $64,038 3,900 (8) 0 0 0 0
Maganlal K. Chairman/ 6/30/2003 $150,000 1,300 (10) 0 1,200,000 0 0
Sutaria (9) CEO
Bhupatlal K. President 6/30/2003 $150,000 1,100 (10) 0 800,000 0 0
Sutaria (9)
Raj Sutaria Vice 6/30/2003 $140,000 1,000 (10) 0 750,000 0 0
(9) President
of Interpharm,
Inc.
Munish K. General 6/30/2003 $100,000 1,000 (10) 0 450,000 0 0
Rametra (9) Counsel/
Secretary
* Surinder Rametra was the Company's Chief Executive Officer during the fiscal
years ended June 30, 2001 and part of 2002. Mr. Bathla became Chief Executive
Officer in January, 2002.
(1) Major Medical $6,357, Leased Auto $7,800
(2) Major Medical $6,567, Leased Auto $7,800
(3) Major Medical $3,531, Leased Auto $4,933
(4) Major Medical $6,426, Leased Auto $7,708
(5) Major Medical $3,058, Leased Auto $7,708
(6) Major Medical $3,064, Leased Auto $7,708
(7) Major Medical $2,829 (8) Leased Auto $3,900
(9) Annual compensation based on employment agreements effective June 1, 2003
following the acquisition of Interpharm, Inc. on May 30, 2003.
(10) Leased auto.
OPTION GRANT TABLE. The following table sets forth certain information
regarding the stock options granted during the fiscal year ended June 30, 2003,
by us to the individuals named in the above Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR*
Percentage
Number of of Total
Securities Options/
Underlying SARs
Options/ Granted to Exercise Grant
SARs Employees of Base Expira- Date
Granted in Fiscal Price tion Present
Name (#) Year (#/Sh) Date Value ($)
----------------------------------------------------------------------------------------------------
Surinder Rametra (1) 700,000 13.8% $0.682 2013 $406,000
Dr. Maganlal K. Sutaria (1) 1,200,000 23.6% $0.682 2013 $696,000
Bhupatlal K. Sutaria (1) 800,000 15.8% $0.682 2013 $464,000
Raj Sutaria (1) 750,000 14.8% $0.682 2013 $435,000
Munish Rametra (1) 450,000 8.9% $0.682 2013 $261,000
* Option grants listed herein are all grants made after the effective date of
the reverse merger transition with ATEC.
(1) 25% of the options are to vest at the later of January 1, 2005 or the
date on which our Series K Convertible Preferred Stock becomes convertible into
common stock ("the Conversion"), and an additional 25% will vest on each
following December 31 beginning in the same year as the first 25% vests;
provided, however, that if the Conversion does not occur before December 31,
2007, all options shall vest on that date. The option grant is subject to
ratification by our shareholders at the next annual meeting of the shareholders
held after the date of the option grants for which management has already
received sufficient proxies to carry the ratification. The options are subject
to forfeiture in the event of a termination of employment. The term of the
options is 10 years from the date they are granted.
44
YEAR END OPTION TABLE. The following table sets forth certain
information regarding the stock options held as of June 30, 2003, by the
individuals named in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End (#) At Fiscal Year End (4)
Shares Value
Acquired on Realized($)
exercise (#)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Surinder Rametra (1) 357,142 1,046,426 3,047,000 700,000(5) 6,299,500 2,344,000
Ashok Rametra (2) 0 0 1,345,000 750,000 5,713,500 0
Balwinder Singh 0 0 100,000 -- 0 0
Bathla(3)
Maganlal K. Sutaria 0 0 0 1,200,000(5) 0 3,516,000
Bhupatlal Sutaria 0 0 0 800,000(5) 0 2,344,000
Raj Sutaria 0 0 0 750,000(5) 0 2,197,500
Munish K. Rametra 0 0 0 450,000(5) 0 1,318,500
(1) Represents options to acquire: (i) 7,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 500,000 shares at $5.50 per share
exercisable through March 28, 2008; (iii) 250,000 shares at $4.67 per
share exercisable through September 27, 2008; (iv) 140,000 shares at $4.26
per share exercisable through June 29, 2009; (v) 150,000 shares at $1.993
per share exercisable through November 7, 2009; (vi) 1,250,000 shares at
$.56 per share exercisable through April 23, 2011 and 750,000 shares at
$.50 per share exercisable through November 16, 2011 and 700,000 shares at
$0.682 per share exercisable through May 30, 2113.
(2) Represents options to acquire: (i) 10,000 shares at $3.44 per share
exercisable through August 8, 2007; (ii) 35,000 shares at 3.7125 per share
exercisable through October 8, 2008; (iii) 100,000 shares at $6.80 per
share exercisable through December 14, 2008; (iv) 200,000 shares at $1.993
per share exercisable through November 7, 2009 and (v) 1,000,000 shares at
$.563 per share excisable through November 14, 2010 and 750,000 shares at
$.50 per share exercisable through November 16, 2011.
(3) Represents options to acquire 100,000 shares at $3.75 per share
exercisable through December 19, 2006.
(4) Computation based on $2.93, which was the June 30, 2003, closing price for
our common stock.
(5) Options are exercisable at $0.682 per share. These options have the
following vesting provisions: 25% of the options are
to vest at the later of January 1, 2005 or the date on which Interpharm's
45
Series K Convertible Preferred Stock becomes convertible into common stock
(the "Conversion") and an additional 25% will vest on each following
December 31 beginning in the same year as the first 25% vests; provided,
however, that if the conversion does not occur before December 31, 2007,
all options shall vest on that date. The option grants are subject to
ratification by our shareholders at the next annual meeting for which
management has already received sufficient proxies to carry the
ratification. The options are subject to forfeiture in the event of a
termination of employment. The term of the options is 10 years from the
date they are granted.
EMPLOYMENT CONTRACTS
Following the acquisition of Interpharm, Inc., on May 30, 2003, we entered
into employment contracts with the executive officers named in the charts above.
The following table lists the terms of the agreements. We have annexed our
template employment agreement to this report as Exhibit 10.3.
Salary
Cell Phone Auto Upon Termination
Salary Reimbursement Allowance Vacation Disability Date
------------------------------------------------------------------------------------------
Dr. Maganlal Sutaria $150,000 full $1,300 6 weeks 50% for December 31, 2007
3 mo.
Bhupatlal Sutaria $150,000 full $1,100 4 weeks 50% for December 31, 2007
3 mo.
Raj Sutaria* $140,000 full $1,000 4 weeks 50% for December 31, 2007
3 mo.
Surinder Rametra $150,000 full $1,000 6 weeks 50% for December 31, 2007
3 mo.
Munish K Rametra $100,000 full $1,000 4 weeks 50% for December 31, 2007
3 mo.
* Employee of Interpharm, Inc. only.
Each of the above agreements also provides for the following:
- termination with or without cause and, upon termination, the employee is
entitled to receive only any accrued salary and vacation pay;
- confidentiality and non-competition clauses which remain effective
following the termination of employment;
- Salary increases and bonus payments at the sole discretion of the Board
of Directors.
46
BOARD OF DIRECTORS COMPENSATION
Compensation of Directors
All Directors are entitled to reimbursement of reasonable travel and
lodging expenses related to attending meetings of the board of directors and any
committee on which they serve. On January 9, 2001, our stockholders approved the
receipt by our non-employee directors of up to $5,000 for attendance at each
quarterly meeting of the board of directors, plus up to $1,000 for attendance at
each committee meeting. Non-employee directors are also eligible to participate
in and receive stock options under our 2000 Flexible Stock Plan. Directors who
are employees receive no fees for attending meetings of the Board of Directors
or any committee on which they serve.
During the fiscal year ended June 30, 2003 no Director received any fees
for attending meetings.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
In August 1994, the Board of Directors established a Compensation
Committee, which is responsible for decisions regarding salaries, stock option
grants and other matters regarding executive officers and key employees. During
fiscal 2003, Ashok Rametra, David C. Reback and Praveen Bhutani were members of
the Compensation Committee. In the opinion of the Board of Directors, Mr. Reback
and Mr. Bhutani are independent of management and free of any relationship which
would interfere with their exercise of independent judgment as a member of our
Compensation Committee. Mr. Rametra was not independent based on his status as
both an employee and executive officer of ATEC. Mr. Rametra was not nominated
for re-election as a Director at our last annual meeting on May 29, 2003 and is
therefore, no longer a member of our Compensation Committee. At May 29, 2003,
Mr. Rametra was replaced on the compensation committee by Stewart Benjamin, who,
like Messrs. Reback and Bhutani, is an Independent Director.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of Interpharm
Holdings, Inc. (the "Company") is charged with developing and administering a
compensation policy for senior management that contains appropriate performance
incentives and equity-linked components, and reviewing annually the performance
of the executive officers of the Company.
The Compensation Committee also administers the stock option and
stock incentive plans and approves grants of stock options and other incentives
under those plans.
Compensation programs for executive officers are designed to attract,
retain and motivate employees who will contribute to the achievement of
corporate goals and objectives. Elements of executive compensation include
salaries, bonuses and awards of stock options, with the last two being variable.
The Committee's current policy is to try to limit cash compensation and to
replace it with option based compensation in order to make more cash available
for Company operations and further incentivize management.
47
In making its decisions or recommendations, the Committee has takes
into account factors it deems relevant to the specific compensation component
being considered, including: compensation paid by other business organizations
of comparable size in the same industry and related industries; profitability;
the attainment of annual individual and business objectives; an assessment of
individual contributions relative to others; and historic compensation awards.
The Committee considered the factors described above in determining
Dr. Sutaria's total compensation. Specifically, the Committee and the Board
recognized that Dr. Sutaria's contributions in the past growth of Interpharm,
Inc. and his continued importance going forward. While Dr. Sutaria's cash
compensation is the highest of any employee of the Company, at $150,000, it is
significantly less than that earned by CEO's of comparable companies. In
consideration of this, the Committee awarded Dr. Sutaria 1,200,000 options to
purchase common stock which it believes to be fair compensation and adequate
incentive to meet the Company's long-term goals.
THE COMPENSATION COMMITTEE
/s/ David Reback
David Reback
/s/ Praveen Bhutani
Praveen Bhutani
/s/ Stewart Benjamin
Stewart Benjamin
PERFORMANCE GRAPH
Prior to May 30, 2003, the Company was in the computer/systems
integration business. On May 30, 2003, that business was sold and Interpharm,
Inc. was acquired. Item 402 of Regulation S-K requires that registrants provide
a line graph comparing the yearly percentage change in the registrant's
cumulative total shareholder return on a class of common stock registered under
Section 12 of the Exchange Act with the cumulative total return of a broad
equity market index. We believe that historical stock prices prior to May 30,
2003 are not representative of our current business and a comparison of our
stock price between May 30, 2003 and June 30, 2003 to an index would not be
meaningful and could be misleading. Accordingly, we have omitted this
information.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth as of September 12, 2003, certain
information with respect to the beneficial ownership of the voting securities by
(i) any person (ii) each Director, (iii) each executive officer named in the
Summary Compensation table above and (iv) all executive officers and directors
as a group. The table also sets forth the respective general voting power of
such persons taking into account the voting power of our common stock and
preferred stock combined.
48
Name and Amount and
Address of Title of Nature of Beneficial Percent of
Beneficial Owner Class Ownership Class
----------------------------------------------------------------------------------------------------------
Maganlal K. Sutaria(2) Common Stock 43,500 *
69 Mall Drive
Commack, NY 11725
Raj Sutaria(3) Common Stock 2,152,912 9.84%
75 Adams Avenue
Hauppauge, NY 11788 Series K Preferred 717,637
Bhupatlal K. Sutaria(4) Common Stock 4,000 *
75 Adams Avenue
Hauppauge, NY 11788
Munish K. Rametra and Mona Rametra (5) Common Stock 1,253,059 5.97%
69 Mall Drive
Commack, NY 11725 Series K Preferred 410,079
Surinder Rametra (6) Common Stock 4,254,182 9.22%
69 Mall Drive
Commack, NY 11725
James Charles (7) Common Stock 561,541 2.77%
69 Mall Drive
Commack, NY 11725
Praveen Bhutani(8) Common Stock 208,410 1.05%
69 Mall Drive
Commack, NY 11725
David Reback (9) Common Stock 36,000 *
69 Mall Drive
Commack, NY 11725
Stewart Benjamin(10) Common Stock 10,000 *
69 Mall Drive
Commack, NY 11725
49
Ravi Sutaria Common Stock 1,537,794 7.23%
75 Adams Avenue
Hauppauge, NY 11788 Series K Preferred 512,598
Perry Sutaria(12) Common Stock 1,249,402 5.95%
75 Adams Avenue
Hauppauge, NY 11788
Ashok Rametra (11) Common Stock 2,482,242 3.58%
1762 Central Avenue
Albany, NY 12205
All Directors and Officers 7,579,800 37.4%
Officers as a group - common stock (9 persons)
----------------
* Less than 1%
(1) Computed based upon a total of 17,393,886 shares of common stock, 2,050,393
shares of Series K Preferred Stock outstanding as of September 12, 2003 and
290,094 shares of common stock into which the Series, A, B and C Preferred
stock are convertible.
(2) The foregoing figure reflects the ownership of 43,500 shares of common
stock and does not include non-vested options to acquire 1,200,000 shares
of common stock, 350,000 non-vested options held by his spouse and
1,873,900 shares of Series A-1 Preferred Stock held by a annuity he
controls.
(3) The foregoing figure does not include non-vested options to acquire 750,000
shares of common stock or his beneficial interest in Series A-1 Preferred
Stock held by a trust of which he is a beneficiary.
(4) The foregoing figure does not include non-vested option to acquire 800,000
shares of common stock and 400,000 non-vested options held by his spouse.
(5) The foregoing does not include non-vested option to acquire 450,000 shares
of common stock or Mona Rametra's beneficial interest in Series A-1
Preferred Stock held by her and by a trust of which she is a beneficiary
(6) The foregoing figure reflects the ownership of 707,182 shares of common
stock by Mr. Rametra and 200,000 shares by Mr. Rametra's spouse and 11,000
shares jointly. In addition, the foregoing assumes the exercise by Mr.
Rametra of options to acquire 3,547,000 shares of common stock. Mr. Rametra
disclaims beneficial ownership of the shares of the Company's stock owned
by other members of the Rametra family, including independent children.
Excludes non-vested options to purchase 700,000 shares of common stock.
Also does not include 2,250,000 options which, by agreement with us, are
not exercisable until a future date.
(7) The foregoing figure reflects ownership of 166,541 shares of common stock
by Mr. Charles and assumes the exercise of options to acquire 395,000
shares of common stock. Excludes non-vested options to purchase 50,000
shares of common stock.
(8) The foregoing figure reflects ownership of 198,110 shares of common stock
by Mr. Bhutani and assumes the exercise of options to acquire 10,000 shares
of common stock. Excludes non-vested options to acquire 10,000 shares of
common stock.
50
(9) The foregoing figure reflects ownership of 1,000 shares of common stock and
assumes the exercise of options for the purchase of 35,000 shares of common
stock. Excludes non-vested options to acquire 10,000 shares of common
stock.
(10) The foregoing figure reflects options for the purchase of 10,000 shares of
common stock and excludes non-vested options to acquire 10,000 shares of
common stock.
(11) The foregoing figure reflects the ownership of 200,146 shares of common
stock by Mr. Rametra and 387,096 common shares owned by Mr. Rametra's
spouse and children. The foregoing amount also assumes the exercise by Mr.
Rametra of options to acquire 2,395,000 shares of the common stock. Mr.
Rametra disclaims beneficial ownership of shares of the Company owned by
other members of his family. Does not include 1,750,000 options which, by
agreement with us, are not exercisable until a future date.
(12) Does not include his beneficial interest in Series A-1 Preferred stock held
by a trust of which he is a beneficiary.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS FROM SHAREHOLDERS, OFFICERS AND DIRECTORS OR THEIR AFFILIATES
Dr. Maganlal K. Sutaria, from time to time made loans to Interpharm,
Inc., which on May 29, 2003, totaled $3,000,000. Those loans were transferred to
the Sutaria Family Grantor Annuity Trust I and a Private Annuity set up by Dr.
Sutaria and his wife. On May 29, 2003, our Board of Directors approved the
conversion of the loan into our Series A-1 convertible preferred stock.
Mona Rametra, from time to time, made loans to Interpharm, Inc.
totaling $311,375 at May 29, 2003. On May 29, 2003, our Board of Directors
approved the conversion of these loan into our Series A-1 convertible
preferred stock.
On December 31, 2001 and 2002, Perry Sutaria, Raj Sutaria, Ravi
Sutaria and Mona Rametra, advanced a total of $300,000 to Interpharm, Inc. The
advances bear interest at 5% per annum and have no definitive repayment terms.
LEASE
Our 100,000 square foot facility at 75 Adams Avenue in Hauppauge, New
York is owned by Sutaria Family Realty, LLC which is owned by Perry Sutaria, Raj
Sutaria and Mona Rametra.
No third party assessment or appraisal of the lease was made at the
time it was entered into or at any subsequent time. Interpharm, Inc. is
obligated to pay minimum annual rent of $480,000, plus property taxes,
insurance, maintenance and other expenses related to the leased facility. Upon a
change in ownership of the Company, and every three years thereafter, the annual
rent will be adjusted to fair market value, as determined by an independent
third party.
GUARANTEES
Raj Sutaria (Shareholder/Officer), Bhupatlal K. Sutaria
(Officer), Perry Sutaria (Shareholder) and Mona Rametra
(Shareholder) have provided unconditional joint and several
guarantees of payment by with respect to our credit facility
with HSBC.
51
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Not Applicable.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Interpharm Holdings, Inc., are
included:
(2) OTHER SCHEDULES
All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K in the quarter ended June
30, 2003:
REPORT DATE ITEM REPORTED
June 13, 2003 The acquisition of Interpharm, Inc., change of the name of
the Company to Interpharm Holdings, Inc., the sale of the
Company's computer operations and a change in the Company's
certifying accountant.
(c) EXHIBITS
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of the Company; (1)
3.2 Certificate of Amendment of Certificate of Incorporation, filed
October 21, 1992; (1)
3.3 By-laws of the Company; (1)
52
3.4 Certificate of Amendment of Certificate of Incorporation, filed
December 22, 1992; (1)
3.5 Form of Certificate of Powers, Designations, Preferences and Rights
of the Series A 10% Cumulative Convertible Preferred Stock; (1)
3.6 Certificate of Powers, Designations, Preferences and Rights of the
Series K
Convertible Preferred Stock; (1)
3.7 Certificate of Powers, Designations, Preferences and Rights of the
Series A-1 Convertible Preferred Stock; (1)
4.7 Form of Common Stock Certificate; (1)
4.9 Form of Preferred Stock Certificate; (1)
10.1 November 25, 2002 Capital Stock Exchange Agreement; (2)
10.2 January 24, 2002 agreement between Interpharm, Inc. and URL/Mutual;
10.3 Form of Employment Agreements for Interpharm Holdings, Inc.
employees;
10.4 December 5, 2002 Department of Veterans Affairs acceptance of
Interpharm, Inc.'s bid to supply Ibuprofen Tablets;
21.1 List of Subsidiaries;
23.1 Consent of Marcum & Kliegman, LLP;
31.1 Certification of Dr. Maganlal K. Sutaria pursuant to Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002;
31.2 Certification of James Charles pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002;
99.1 Form of Incentive Stock Option Agreement;
99.2 Form of Non-Qualified Stock Option Agreement.
(1) Incorporated by reference from Registration Statement on Form SB-2
(registration no. 33-54356) filed by the Company with the Securities and
Exchange Commission on November 9, 1992.
(2) Annexed to our Form 8-K filed on November 26, 2002 as Exhibit 2.1 and
incorporated herein by reference;
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERPHARM HOLDINGS, INC.
By: /S/ DR. MAGANLAL K. SUTARIA
-------------------------------------
Dr. Maganlal K. Sutaria,
Chief Executive Officer and Chairman
of the Board of Directors
Dated: September 29, 2003
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/S/ JAMES J. CHARLES September 29, 2003
---------------------------------------------------
James J. Charles, Chief Financial Executive Officer
/S/ BHUPATLAL K. SUTARIA September 29, 2003
---------------------------------------------------
Bhupatlal K. Sutaria, President, Treasurer and
Director
/S/ SURINDER RAMETRA September 29, 2003
---------------------------------------------------
Surinder Rametra, Director of Corporate Development
and Director
/S/ PRAVEEN BHUTANI September 29, 2003
---------------------------------------------------
Praveen Bhutani, Director
/S/ STEWART BENJAMIN September 29, 2003
---------------------------------------------------
Stewart Benjamin, Director
/S/ DAVID REBACK September 29, 2003
---------------------------------------------------
David Reback, Director
54
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Comprehensive Income F-6
Consolidated Statements of Cash Flows F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9
INDEPENDENT AUDITORS' REPORT
To the Audit Committee of
Interpharm Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Interpharm
Holdings, Inc. and Subsidiaries (the "Company") as of June 30, 2003, December
31, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity, comprehensive income and cash flows for the six month
period ended June 30, 2003 and for each of the years in the three year period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 consolidated financial position of
Interpharm Holdings, Inc. and Subsidiaries as of June 30, 2003, December 31,
2002 and 2001, and the consolidated results of its operations and its cash flows
for the six month period ended June 30, 2003 and for each of the years in the
three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
-------------------------
Woodbury, New York
September 26, 2003
F-1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
June 30, December 31,
------------ ------------------------
2003 2002 2001
------------ --------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 2,336,203 $ 105,789 $ 583,858
Marketable securities, at fair market value 48,462 35,993 20,316
Accounts receivable, less allowance for doubtful
accounts of $47,776 at June 30, 2003, December 31, 2002
and 2001 4,930,109 4,158,141 3,896,723
Notes receivable, current 1,000,000 -- --
Inventories 4,583,205 3,389,099 2,169,114
Prepaid expenses and other current assets 224,149 71,478 147,673
Deferred tax assets 23,500 60,000 51,500
----------- ----------- -----------
Total Current Assets 13,145,628 7,820,500 6,869,184
Property and equipment, net 4,085,302 3,358,968 2,669,744
Notes receivable, long-term 524,092 -- --
Deferred tax assets 2,537,900 7,500 95,500
Deposits 45,873 11,379 11,379
----------- ----------- -----------
TOTAL ASSETS $20,338,795 $11,198,347 $ 9,645,807
=========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
------------- ----------------------------
2003 2002 2001
------------- -------------- -----------
CURRENT LIABILITIES
Lines of credit, bank $ 2,064,793 $ 964,793 $ 943,000
Current maturities of bank notes payable 224,241 263,383 244,112
Accounts payable, accrued expenses, and other
liabilities 5,314,341 4,014,525 2,674,812
Due to related parties -- 304,750 924,346
------------ ------------ ------------
Total Current Liabilities 7,603,375 5,547,451 4,786,270
------------ ------------ ------------
OTHER LIABILITIES
Bank notes payable, less current maturities 237,521 335,754 591,480
Other liabilities 29,535 -- --
Due to related party -- 3,000,000 3,000,000
------------ ------------ ------------
Total Other Liabilities 267,056 3,335,754 3,591,480
------------ ------------ ------------
TOTAL LIABILITIES 7,870,431 8,883,205 8,377,750
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares
authorized; issued and outstanding - 7,300,876, 2,050,393
and 2,050,393, respectively; aggregate liquidation preference
of $5,494,080 352,021 20,504 20,504
Common stock, $.001 par value, 70,000,000 shares
authorized; shares issued - 15,671,649, 6,151,178
and 6,151,178, respectively 156,717 61,512 61,512
Additional paid-in capital 12,076,237 2,287,984 2,287,984
Accumulated other comprehensive income (loss) 11,579 (891) 2,443
Retained earnings (accumulated deficit) 669,678 (53,967) (1,104,386)
Treasury stock at cost, 624,145 shares at June 30, 2003 (797,868) -- --
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,468,364 2,315,142 1,268,057
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 20,338,795 $ 11,198,347 $ 9,645,807
============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, Year Ended December 31,
----------------------------------------------------------------------------
2003 2002 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(Unaudited)
SALES, Net $ 14,953,438 $ 11,743,440 $ 24,312,245 $ 18,435,446 $ 11,391,326
COST OF SALES (including related party
rent expense of $204,000 for the six
months ended June 30, 2003 and 2002 and
$408,000, $399,500 and $270,640 for the
years ended December 31, 2002, 2001 and
2000, respectively) 12,214,822 9,587,344 19,872,936 14,939,725 9,181,985
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 2,738,616 2,156,096 4,439,309 3,495,721 2,209,341
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,274,445 896,276 2,107,694 1,966,098 1,298,303
Loss on disposal of property and equipment -- -- -- 313,166 --
Related party rent expense 36,000 36,000 72,000 70,500 47,760
Research and development 185,601 148,850 415,618 110,000 --
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,496,046 1,081,126 2,595,312 2,459,764 1,346,063
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 1,242,570 1,074,970 1,843,997 1,035,957 863,278
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Related party interest expense (69,125) (94,063) (188,125) (188,126) (188,126)
Interest expense (63,299) (52,542) (102,103) (119,434) (123,325)
Interest income 8,166 63 452 3,568
------------ ------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (124,258) (146,605) (290,165) (307,108) (307,883)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,118,312 928,365 1,553,832 728,849 555,395
PROVISION FOR INCOME TAXES 394,667 317,563 503,413 214,284 217,631
---------------------------------------------- ------------ ------------ ------------ ------------ ------------
NET INCOME $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764
============ ============ ============ ============ ============
EARNINGS PER SHARE
Basic earnings per share $ 0.08 $ 0.07 $ 0.13 $ 0.06 $ 0.04
============ ============ ============ ============ ============
Diluted earnings per share $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ 0.01
============ ============ ============ ============ ============
Basic weighted average shares outstanding 7,721,524 6,151,178 6,151,178 6,151,178 6,151,178
============ ============ ============ ============ ============
Diluted weighted average shares and
equivalent shares outstanding 41,664,357 35,935,062 35,935,062 35,935,062 35,935,062
============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
INTERPHARM HOLDINGS, INC. AND SUBISIDARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2003 and
For the Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------------------------------------------
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Capital Income (Loss)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - January 1, 2000 -- -- $ 4,000,000 $ 4,000 $ 2,366,000 $ (10,748)
Exchange of Interpharm, Inc.
common stock -- -- (4,000,000) (4,000) 4,000 --
Retroactive recapitalization -
issuance of stock to owners
of Interpharm, Inc. 2,050,393 20,504 6,151,178 61,512 (82,016) --
Unrealized loss on marketable
securities, net -- -- -- -- -- (3,781)
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2000 2,050,393 20,504 6,151,178 61,512 2,287,984 (14,529)
Unrealized gain on marketable
securities, net -- -- -- -- -- 16,972
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2001 2,050,393 20,504 6,151,178 61,512 2,287,984 2,443
Unrealized loss on marketable
securities, net -- -- -- -- -- (3,334)
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2002 2,050,393 20,504 6,151,178 61,512 2,287,984 (891)
Outstanding equity securities
of ATEC Group, Inc. 395,094 282,963 9,495,471 94,955 6,494,432 --
Conversion of related party notes
payable to Series A-1
preferred stock 4,855,389 48,554 -- -- 3,262,821 --
Shares issued for option exercised -- -- 25,000 250 31,000 --
Unrealized gain on marketable
securities, net -- -- -- -- -- 12,470
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - June 30, 2003 7,300,876 $ 352,021 15,671,649 $ 156,717 $ 12,076,237 $ 11,579
============ ============ ============ ============ ============ ============
Retained Total
Earnings/ Treasury Stock Stockholders'
(Deficit) Shares Amount Equity
--------- ------ ------ ------
BALANCE - January 1, 2000 $ (1,956,715) -- $ -- $ 402,537
Exchange of Interpharm, Inc.
common stock -- -- -- --
Retroactive recapitalization -
issuance of stock to owners
of Interpharm, Inc. -- -- -- --
Unrealized loss on marketable
securities, net -- -- -- (3,781)
Net income 337,764 -- -- 337,764
------------ ------------ ------------ ------------
BALANCE - December 31, 2000 (1,618,951) -- -- 736,520
Unrealized gain on marketable
securities, net -- -- -- 16,972
Net income 514,565 -- -- 514,565
------------ ------------ ------------ ------------
BALANCE - December 31, 2001 (1,104,386) -- -- 1,268,057
Unrealized loss on marketable
securities, net -- -- -- (3,334)
Net income 1,050,419 -- -- 1,050,419
------------ ------------ ------------ ------------
BALANCE - December 31, 2002 (53,967) -- -- 2,315,142
Outstanding equity securities
of ATEC Group, Inc. -- 624,145 (797,868) 6,074,482
Conversion of related party notes
payable to Series A-1
preferred stock -- -- -- 3,311,375
Shares issued for option exercised -- -- -- 31,250
Unrealized gain on marketable
securities, net -- -- -- 12,470
Net income 723,645 -- -- 723,645
------------ ------------ ------------ ------------
BALANCE - June 30, 2003 $ 669,678 624,145 $ (797,868) $ 12,468,364
============= ============ =========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
--------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, Year Ended December 31,
---------------------------------------------------------------------
2003 2002 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
NET INCOME $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on marketable
securities, net 12,470 (3,677) (3,334) 16,972 (3,781)
----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE
INCOME $ 736,115 $ 607,125 $ 1,047,085 $ 531,537 $ 333,983
=========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, Year Ended December 31,
--------------------------------------- -------------------------------
2003 2002 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net
income to net
cash provided by operating
activities:
Depreciation and amortization 317,034 221,253 494,986 378,208 405,254
Deferred tax expense (benefit) 116,100 58,000 79,500 (32,000) (26,200)
Accrued interest on related party
loans 6,625 94,063 188,125 188,126 188,126
Provision for doubtful accounts 40,200 -- 47,165 261,641 40,200
Loss on disposal of property and
equipment -- -- -- 313,166 --
Changes in operating assets and
liabilities:
Accounts receivable (812,167) (417,855) (308,583) (2,465,379) (140,561)
Inventories (1,194,106) (471,685) (1,219,985) 439,690 (838,594)
Prepaid expenses and other current
assets (152,671) (42,306) 76,195 (13,305) 17,041
Accounts payable, accrued
expenses and other liabilities 1,155,772 679,806 1,339,713 1,321,631 370,263
----------- ----------- ----------- ----------- -----------
TOTAL ADJUSTMENTS (523,213) 121,276 697,116 391,778 15,529
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 200,432 732,078 1,747,535 906,343 353,293
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of marketable securities -- (19,011) (19,011) -- --
Purchases of property and equipment (1,031,403) (730,859) (1,184,210) (964,259) (175,583)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES $(1,031,403) $ (749,870) $(1,203,221) $ (964,259) $ (175,583)
----------- ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
--------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, Year Ended December 31,
-----------------------------------------------------------------------
2003 2002 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(Unaudited)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from line of credit, bank $ 1,100,000 $ 21,793 $ 21,793 $ -- $ 8,000
Proceeds from bank notes payable -- -- -- 644,000 --
Repayments of bank notes payable (137,375) (120,247) (236,455) (215,002) (108,337)
Due to related parties -- (24,000) (807,721) (214,500) --
Cash received in reverse merger
transaction, net of $190,051 of
transaction costs paid 2,067,510 -- -- -- --
Proceeds from option exercise 31,250 -- -- -- --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 3,061,385 (122,454) (1,022,383) 214,498 (100,337)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS 2,230,414 (140,246) (478,069) 156,582 77,373
CASH AND CASH
EQUIVALENTS - Beginning 105,789 583,858 583,858 427,276 349,903
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS - Ending $ 2,336,203 $ 443,612 $ 105,789 $ 583,858 $ 427,276
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 125,799 $ 52,542 $ 412,230 $ 332,135 $ 120,186
Income Taxes $ 348,302 $ 227,728 $ 405,047 $ 184,905 $ 41,580
Non-cash investing and financing activities:
Conversion of related party notes
payable to Series A-1 preferred stock $ 3,311,375 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Reverse merger (Note 1)
Cash received, net of $190,051 of
transaction costs paid $ 2,067,510 $ -- $ -- $ -- $ --
Property and equipment 11,965 -- -- -- --
Notes receivable 1,524,092 -- -- -- --
Deposits 34,494 -- -- -- --
Deferred tax assets 2,610,000 -- -- -- --
Accounts payable (144,044) -- -- -- --
Other liabilities (29,535) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net assets obtained in reverse
merger transaction $ 6,074,482 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Interpharm Holdings, Inc. and Subsidiaries (the "Company") through its
wholly-owned subsidiary, Interpharm, Inc. ("Interpharm, Inc.") is in the
business of developing, manufacturing and marketing generic prescription
strength and over-the-counter pharmaceutical products for wholesale
distribution throughout the United States. The majority of the Company's
sales have been derived from sales of Ibuprofen tablets in both
over-the-counter and prescription strength.
All references below to the six-months ended June 30, 2002 are unaudited.
REVERSE MERGER
On May 30, 2003, Interpharm, Inc. was acquired by ATEC Group, Inc.
("ATEC"), which simultaneously changed its name to Interpharm Holdings,
Inc. In this transaction, ATEC acquired all of the issued and outstanding
shares of Interpharm, Inc. in exchange for both ATEC common stock and
Series K Convertible Preferred Stock, which totaled approximately 48% of
ATEC's voting securities after the transaction was consummated.
ATEC issued to the stockholders of Interpharm, Inc. a total of 6,151,178
shares of common stock and 2,050,393 shares of preferred stock in exchange
for all outstanding shares of Interpharm, Inc. In addition, Interpharm,
Inc. assumed the equity structure of ATEC, which comprised of 9,495,471
shares of common stock, less 624,145 shares of treasury stock and four
classes of preferred stock totaling 395,094 shares. For additional
information concerning these equity securities, please see Note 12.
The acquisition of ATEC has been recorded based on the fair value of ATEC's
net tangible assets, which consist primarily of cash, property and
equipment, notes receivable, deposits and a deferred tax asset with an
aggregate value of $6,074,482 (net of transaction costs of $190,051). Since
this transaction is in substance, a recapitalization of Interpharm, Inc.
and not a business combination, pro forma information is not presented. The
recapitalization has been given retroactive effect in the accompanying
financial statements. The accompanying consolidated financial statements
represent those of Interpharm, Inc. for all periods prior to the
consummation of the reverse merger.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Interpharm
Holdings, Inc. and its wholly-owned subsidiaries. The results of ATEC are
included in the consolidated financial statements commencing May 30, 2003.
On June 6, 2003, the minority owner of Interpharm, Inc.'s 50% owned
subsidiary transferred its interest to Interpharm, Inc. in exchange for the
forgiveness of a $40,000 advance due from the minority owner. As a result,
the subsidiary became wholly-owned by the Company. This subsidiary has been
consolidated for all periods presented.
F-9
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
CHANGE OF FISCAL YEAR
The Company changed its fiscal year end from December 31st to June 30th. To
accomplish this change, the Company is issuing audited financial statements
for the six months ended June 30, 2003.
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of product. The Company
records a provision for allowances, returns and other sales credits based
upon a review of specific accounts and historical experience. Such
provision for allowances, returns and credits has been recorded as a
reduction of sales in the consolidated statements of income.
The Company purchases raw materials from a supplier, which are manufactured
into finished goods and sold back to such supplier as well as to other
customers. The Company can, and does, purchase raw materials from other
suppliers. Pursuant to Emerging Issues Task Force No. 99-19, "Reporting
Revenue Gross as a Principal Versus Net as an Agent," the Company recorded
sales to, and purchases from, this supplier on a gross basis. Sales and
purchases were recorded on a gross basis since the Company (i) has a risk
of loss associated with the raw materials purchased, (ii) converts the raw
material into a finished product based upon Company developed
specifications, (iii) has other sources of supply of the raw material, and
(iv) has credit risk related to the sale of such product to the supplier.
For the six month periods ended June 30, 2003 and 2002 and for the years
ended December 31, 2002, 2001 and 2000, the Company purchased raw materials
from the supplier totaling approximately $2,625,000, $3,693,000,
$6,805,000, $2,189,000 and $1,725,000, respectively and sold finished goods
to such supplier totaling approximately $5,490,000, $5,290,000,
$10,745,000, $3,601,000 and $0.
EARNINGS PER SHARE
Basic earnings per share ("EPS") of common stock is computed by dividing
net income available to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted EPS
reflects the amount of earnings for the period available to each share of
common stock outstanding during the reporting period, giving effect to all
potentially dilutive shares of common stock from the potential exercise of
stock options and warrants and conversions of convertible preferred stocks.
The effect of the recapitalization of Interpharm, Inc. has been given
retroactive application in the earnings per share calculation. The common
stock issued and outstanding with respect to the pre-merger ATEC Group,
Inc. has been included since the effective date of the reverse merger. The
Company has used the two-class method to calculate the effect of the
participating Series K Convertible Preferred Stock on the calculation of
Basic EPS. The if-converted method has been used to calculate the effect of
the participating Series K Convertible Preferred Stock on diluted EPS.
F-10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The computation of diluted EPS does not assume conversion, exercise or
contingent issuance of securities that would have an antidilutive effect on
EPS (i.e. improving earnings per share). The dilutive effect of outstanding
options and warrants and their equivalents are reflected in dilutive EPS by
the application of the treasury stock method. Options and warrants will
have a dilutive effect only when the average market price of the common
stock during the period exceeds the exercise price of the options or
warrants.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out basis) or
market value. Losses from the write-down of damaged, nonusable, or
otherwise nonsalable inventories are recorded in the period in which they
occur.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred, costs of major additions and betterments
are capitalized. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation is eliminated from the
accounts and any resulting gain or loss is reflected in income.
DEPRECIATION AND AMORTIZATION
Depreciation is provided for on the straight-line method over the estimated
useful lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the
estimated useful lives of the improvements.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term investments with an original maturity of three months or less to
be cash equivalents.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," the Company reports comprehensive
income in addition to net income. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
F-11
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be fully recoverable. To determine if impairment exists, the
Company compares the estimated future undiscounted cash flows from the
related long-lived assets to the net carrying amount of such assets. Once
it has been determined that an impairment exists, the carrying value of the
asset is adjusted to fair value. Factors considered in the determination of
fair value include current operating results, trends and the present value
of estimated expected future cash flows.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires the determination of deferred tax assets and liabilities based on
the differences between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. The net deferred tax asset is adjusted
by a valuation allowance, if, based on the weight of available evidence, it
is more likely than not that some portion or all of the net deferred tax
asset will not be realized. The Company and its subsidiaries file a
consolidated Federal income tax return.
MARKETABLE SECURITIES
Marketable securities, which are classified as "available for sale," are
valued at fair market value. Unrealized gains or losses are recorded net of
income taxes as accumulated other comprehensive income or loss in
stockholders' equity, whereas realized gains and losses are recognized in
the Company's consolidated statements of income using the first-in,
first-out method. Other than temporary declines in the value of marketable
securities are also recognized as a loss in the consolidated statements of
income.
SHIPPING COSTS
The Company's shipping and handling costs are included in selling, general
and administrative expenses. For the six months ended June 30, 2003 and for
the years ended December 31, 2002, 2001 and 2000, shipping and handling
costs approximated $198,000, $370,000, $248,000 and $203,000, respectively.
RESEARCH AND DEVELOPMENT
Research and development is expensed as incurred.
CONCENTRATIONS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. At June 30, 2003, the Company has cash investments
totaling approximately $4,000,000 at two financial institutions.
Concentrations of credit risk with respect to accounts receivable are
disclosed in Note 14. The Company performs ongoing credit evaluations of
its customers' financial conditions and, generally, requires no collateral
from its customers. Unless otherwise disclosed, the fair values of
financial instruments approximates their recorded value.
F-12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
RECLASSIFICATION
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current period's financial statements. These reclassifications have no
effect on previously reported income.
STOCK BASED COMPENSATION
At June 30, 2003, the Company had two stock-based employee plans, which are
described more fully in Note 12. As permitted under SFAS No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure,"
which amended SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No.
44, "Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No.25. No stock-based employee compensation cost is
reflected in operations, as all options granted under those plans have an
exercise price equal to the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net income
and net income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation:
Six-Months
Ended
June 30, Year Ended December 31,
2003 2002 2001 2000
-------- ---------- ------- --------
Net income $723,645 $1,050,419 $514,565 $337,764
As reported
Less: Stock-based employee
compensation expense determined
under fair value-based method
for all awards 60,000 -- -- --
-------- ---------- ------- --------
Pro forma $663,645 $1,050,419 514,565 $337,764
======== ========== ======= ========
Basic net income per share
As reported $.08 $.13 $.06 $.04
==== ==== ==== ====
Pro forma $.07 $.13 $.06 $.04
==== ==== ==== ====
Diluted net income per share
As reported $.02 $.03 $.01 $.01
==== ==== ==== ====
Pro forma $.02 $.03 $.01 $.01
==== ==== ==== ====
F-13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
STOCK BASED COMPENSATION, continued
The fair values of Company common stock options granted to employees are
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (1) expected volatility of 124%, (2)
risk-free interest rate of 3.4% and (3) expected average lives of 5 years.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FIN 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires a company, at the time it issues a
guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002. Adoption of the disclosure requirements
were effective for interim and annual periods ending after December 15,
2002. The adoption of the initial recognition requirements of FIN 45 did
not have a significant impact on the Company's consolidated financial
position or results of operations.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. The provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company does
not expect the adoption of FIN 46 to have a significant impact on its
consolidated results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective for the first interim period
beginning after June 15, 2003. This Statement establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability.
The Company believes that it is currently in substantial compliance with
the requirements of SFAS No. 150.
F-14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - MARKETABLE SECURITIES
Management has classified its equity securities as available-for-sale
securities, which are reported at fair market value. The costs and fair
market value of marketable securities are as follows:
June 30, December 31,
--------------- -------------------------
2003 2002 2001
--------------- -------------------------
Cost $36,883 $36,883 $17,873
Unrealized gain (loss) 11,579 (890) 2,443
------- ------- --------
Fair market value $48,462 $35,993 $20,316
======= ======= =======
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable is shown net of allowance for doubtful accounts of
$47,776 at June 30, 2003, December 31, 2002 and 2001 respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
Six-Months
Ended June 30, Year ended December 31,
-------------- --------------------------
2003 2002 2001
-------------- -------------- -----------
Beginning balance $ 47,776 $ 47,776 $ 26,950
Provision for doubtful accounts 40,200 47,165 282,467
Charged to expenses (40,200) (47,165) (261,641)
-------- -------- ---------
Ending balance $ 47,776 $ 47,776 $ 47,776
======== ======== ==========
NOTE 4 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
--------------------------- -------------------------
2003 2002 2002 2001
------------ -------------- ------------- -----------
Finished goods $ 347,189 $ 211,403 $ 271,306 $ 172,660
Work in process 2,227,139 1,328,610 1,705,087 909,527
Raw materials 1,733,109 931,852 1,195,903 1,000,202
Packaging materials 275,768 168,934 216,803 86,725
---------- ----------- ----------- -----------
Total $4,583,205 $2,640,799 $3,389,099 $2,169,114
========== ========== ========== ==========
F-15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - INVENTORIES, continued
During the quarter ended December 31, 2002, the Company incurred a $202,000
loss from the write-down of damaged and unusable raw materials inventory.
NOTE 5 - NOTES RECEIVABLE
As part of the reverse merger (Note 1), the Company was to receive two
interest bearing notes: a $1,000,000 note payable over 12 months and a
$750,000 note payable over 36 months. As a result of a purchase price
adjustment made at closing, the notes were reduced by $225,908 to
$1,524,092 in the aggregate. Both notes were repaid in full in the
first quarter of fiscal 2004.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31, Estimated
2003 2002 2001 Useful Lives
---------- ---------- ----------------------
Machinery and equipment $3,454,147 $2,864,833 $1,893,446 5-7 Years
Furniture and fixtures 107,565 78,704 64,692 5 Years
Leasehold improvements 2,095,845 2,017,300 1,818,489 5-15 Years
Construction in progress (A) 346,648 -- --
---------- ---------- ----------
6,004,205 4,960,837 3,776,627
Less: accumulated
depreciation and amortization 1,918,903 1,601,869 1,106,883
---------- ---------- ----------
Property and Equipment,
net $4,085,302 $3,358,968 $2,669,744
========== ========== ==========
(A) Construction in progress represents costs of constructing a
manufacturing equipment line in the Company's current facility.
Depreciation and amortization expense for the six month period ended June
30, 2003 and for the years ended December 31, 2002, 2001 and 2000 was
$317,034, $494,986, $378,208 and $405,254, respectively.
F-16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the
following:
June 30, December 31,
--------------- ----------------------------
2003 2002 2001
--------------- ---------------- -----------
Trade accounts payable $4,927,448 $3,674,287 $2,423,579
Accrued expenses and other
current liabilities 386,893 340,238 251,233
----------- ----------- -----------
Total $5,314,341 $4,014,525 $2,674,812
========== ========== ==========
NOTE 8 - BANK DEBT
At June 30, 2003, the Company has a credit facility agreement with a bank
consisting of an advised secured line of credit totaling $2,380,000 and a
$483,542 non-revolving secured facility for equipment purchases ("Equipment
Purchase Line"). The credit facility was increased on August 6, 2003 to
consist of a $5,000,000 advised secured line of credit and a $2,000,000
non-revolving secured facility for equipment purchases. The credit facility
is collateralized by substantially all assets of the Company and personally
guaranteed by four of the Company's stockholders. In addition, the Company
must comply with certain financial covenants. A summary of the outstanding
balances is as follows:
June 30, December 31,
------------------------------------------
2003 2002 2001
------------------------------------------
Lines of credit (1) $2,064,793 $ 964,793 $ 943,000
Notes payable (2) 461,762 599,137 835,592
----------- ----------- -----------
Total $2,526,555 $1,563,930 $1,778,592
========== ========== ==========
(1) The line of credit bears annual interest at the Company's option equal
to either (i) LIBOR plus 2.25% or (ii) the bank's prime rate (4.25% at
June 30, 2003) and is due on demand. The line of credit is reviewed by
the bank, at least annually, and automatically expires unless extended
in writing. The line of credit is scheduled to be reviewed by November
30, 2003.
(2) Each advance under the Equipment Purchase Line cannot exceed 90% of
the invoice amount of the new equipment. Each advance is converted
into a separate note that is fully amortizing in up to 60 equal
monthly installments of principal and interest. The equipment purchase
line bears annual interest at the Company's option equal to either (i)
a fixed rate equal to the bank's cost of funds plus 2.25%, (ii) LIBOR
plus 2.25% or (iii) the bank's prime rate. At June 30, 2003, there
were four separate notes outstanding with current aggregate monthly
installments totaling $24,597. Such notes were to mature at various
dates through August 2006. During the first quarter of fiscal 2004,
all of the notes payable were paid in full.
F-17
NOTE 8 - BANK DEBT, continued
Scheduled annual maturities of notes payable were as follows:
For the Year
Ending June 30, Amount
----------------------------------------
2004 $224,241
2005 105,051
2006 112,087
2007 20,383
---------
Total $461,762
NOTE 9 - RELATED PARTY TRANSACTIONS
RELATED PARTY LEASE
The Company leases its business premises ("Premises") from an entity
controlled by three stockholders of the Company under a noncancelable lease
expiring in October 2019. The Company is obligated to pay minimum annual
rent of $480,000, plus property taxes, insurance, maintenance and other
expenses related to the Premises.
Upon a change in ownership of the Company, and every three years
thereafter, the annual rent will be adjusted to fair market value, as
determined by an independent third party.
Future annual minimum rental payments under this operating lease for each
of the next five (5) years thereafter and in the aggregate are as follows:
For the Year
Ending June 30, Amount
------------------- --------------------
2004 $ 480,000
2005 480,000
2006 480,000
2007 480,000
2008 480,000
Thereafter 5,440,000
----------
Total $7,840,000
==========
F-18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - RELATED PARTY TRANSACTIONS, continued
RELATED PARTY LEASE, continued The lease does not grant the Company the
option to purchase the Premises at any time during the lease term or at its
termination, nor will the Company share in any proceeds that may result
from sale or disposition of the Premises. Three of the stockholders of the
Company purchased the Premises by making cash payments in the amount of
$1,255,000 and by issuing $3,720,000 in mortgage notes. Repayment of the
mortgage notes has been guaranteed for the term of the mortgage primarily
by the three stockholders. Repayment of the mortgage notes was secondarily
guaranteed by the Company; however, on September 26, 2003, the bank agreed
to terminate the Company's guarantee.
DUE TO RELATED PARTIES
These balances represent the following:
The balance included in current liabilities, represented advances from one
Company stockholder at December 31, 2002 and three Company stockholders at
December 31, 2001. These advances bore interest at a rate of 5% per annum
and had no definitive repayment terms.
The $3,000,000 balance included in other liabilities at December 31, 2002
and 2001 represented advances made by the Chief Executive Officer with
interest payable at the rate of 5% per annum and an original maturity date
of January 1, 2012.
On May 30, 2003, $3,311,375 of these loans were converted into Series A-1
Preferred Stock (See Note 12).
NOTE 10 - INCOME TAXES
The income tax expense (benefit) is comprised of the following:
Six Months Year Ended
Ended June 30, December 31,
--------------------------------------------------
2003 2002 2001 2000
--------------------------------------------------
Current
Federal $243,255 $404,663 $240,635 $232,963
State 35,312 19,250 5,649 10,868
-------- --------- ---------- ---------
Total Current $278,567 $423,913 $246,284 $243,831
-------- -------- -------- --------
F-19
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES, continued
Six Months
Ended June 30, Year Ended December 31,
------------------------------------------------------
2003 2002 2001 2000
------------------------------------------------------
Deferred
Federal $119,500 $ 67,100 $ 4,000 $ 300
State (3,400) 12,400 (36,000) (26,500)
--------- --------- --------- ---------
Total Deferred 116,100 79,500 (32,000) (26,200)
-------- --------- --------- ---------
Income Tax Expense $394,667 $503,413 $214,284 $217,631
======== ======== ======== ========
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Six Months
Ended June 30, Year Ended December 31,
---------------------------------------------
2003 2002 2001 2000
---------------------------------------------
Statutory U.S. federal tax rate 34.0% 34.0% 34.0% 34.0%
State taxes 2.0 1.2 1.2 2.0
Permanent differences (0.7) (0.9) (0.6) 6.9
Change in valuation allowance (0.4) (1.5) (4.4) (4.3)
Other 0.4 (0.4) (0.8) 0.6
----- ----- ----- -----
Effective income tax rate 35.3% 32.4% 29.4% 39.2%
====== ====== ====== ======
The components of deferred tax assets and liabilities consist of the
following:
June 30, December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
DEFERRED TAX ASSETS, CURRENT PORTION
Capitalized inventory $ 7,000 $ 6,600 $ 3,500
Investment tax credits -- 30,000 48,000
Receivable allowance and reserves 16,500 16,500 --
Other -- 6,900 --
---------- -------- -----------
Deferred Tax Assets, current $23,500 $60,000 $51,500
======= ======= =======
F-20
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES, continued
June 30, December 31,
-------------------------------------------
2003 2002 2001
-------------------------------------------
DEFERRED TAX ASSETS, NON-CURRENT PORTION
Investment tax credits $ 302,000 $270,000 $ 219,500
Loss in excess of subsidiary basis 26,600 23,700 38,500
Other -- 11,000 --
Net operating loss carryforwards
(Federal and state) 3,067,300 -- --
---------- ---------- ------------
3,395,900 304,700 258,000
Valuation allowance (650,000) (155,000) (151,000)
---------- --------- ---------
Deferred Tax Assets, Non-Current 2,745,900 149,700 107,000
---------- --------- ---------
DEFERRED TAX LIABILITIES, NON-CURRENT
PORTION
Depreciation and amortization (208,000) (142,200) (11,500)
---------- --------- ---------
Deferred Tax Liabilities, Non-Current (208,000) (142,200) (11,500)
---------- --------- ----------
Deferred Tax Assets, Non-Current, net 2,537,900 7,500 95,500
---------- ---------- ----------
Total Deferred Tax Assets, Net $2,561,400 $ 67,500 $ 147,000
========== ========== =========
As part of the reverse merger transaction (Note 1), approximately
$7,680,000 of ATEC's Federal net operating loss carryforwards ("NOLs") are
available to the Company. During the six month period ended June 30, 2003,
the Company utilized approximately $122,000 of these NOLs. At June 30, 2003
the Company has remaining NOLs of approximately $7,558,000 to reduce future
taxable income. These losses expire through 2023 and may be subject to
substantial limitations pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership. As of June 30,
2003, the Company has determined that it is more likely than not, that
the Company will utilize these NOLs in the future.
At June 30, 2003, the Company has remaining State net operating loss
carryforwards approximating $6,635,000 which expire through 2023. The
Company fully reserved the State net operating loss carryforwards which the
Company does not anticipate utilizing, since the Company is not filing
consolidated state income tax returns.
F-21
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES, continued
In addition, at June 30, 2003, the Company has approximately $302,000 of
New York State investment tax credit carryforwards, expiring in various
years through 2018. These carryforwards are available to reduce future New
York State income tax liabilities. The Company has reserved approximately
50% of the investment tax credit carryforward.
NOTE 11 - EARNING PER SHARE
The calculations of basic and diluted EPS are as follows:
Six Months Ended
June 30, For the Year Ended December 31,
-------------------------------------------------------------------
2003 2002 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Numerator:
Net income $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764
Less: Preferred stock dividend 13,150 -- -- -- --
Less: Net income attributable to
Series K preferred
stockholders 86,765 152,701 262,605 128,641 84,441
----------- ----------- ----------- ----------- -----------
Numerator for basic EPS 623,730 458,101 787,814 385,924 253,323
Effect of dilutive securities:
Net income attributable to
Series K preferred stockholders 86,765 152,701 262,605 128,641 84,441
----------- ----------- ----------- ----------- -----------
Numerator for diluted EPS $ 710,495 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic EPS
Weighted average shares
outstanding 7,721,524 6,151,178 6,151,178 6,151,178 6,151,178
Effect of dilutive securities:
Convertible Series K
preferred stock 32,609,356 29,783,884 29,783,884 29,783,884 29,783,884
Convertible Series A, B, C and J
preferred stocks 19,879 -- -- -- --
Stock options 1,313,598 -- -- -- --
----------- ----------- ----------- ----------- -----------
Denominator for diluted EPS 41,664,357 35,935,062 35,935,062 35,935,062 35,935,062
=========== =========== =========== =========== ===========
Basic EPS $ .08 $ .07 $ .13 $ .06 $ .04
=========== =========== =========== =========== ===========
Diluted EPS $ .02 $ .02 $ .03 $ .01 $ .01
=========== =========== =========== =========== ===========
F-22
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - EARNING PER SHARE, continued
As of September 24, 2003, the total number of common shares outstanding and
the number of common shares potentially issuable upon exercise of all
outstanding stock options and conversion of preferred stocks (including
contingent conversions) is as follows:
Common stock outstanding - June 30, 2003 15,047,504
Common stock issued July 1 to September 24, 2003 2,346,382
Stock options outstanding - September 24, 2003 (a) 10,334,578
Common stock issuable upon conversion of preferred stocks:
Series A 1,526
Series A-1 (maximum contingent conversion)(b) 4,855,389
Series B 292
Series C 5,620
Series J --
Series K (maximum contingent conversion)(c) 43,887,718
----------
Total (d) 76,479,009
==========
(a) Of the 10,334,578 stock options outstanding at September 24, 2003,
1,259,578 options are exercisable immediately, 4,000,000 options are not
exercisable prior to the Trigger Date (see (c) below) and 5,075,000 options
are exercisable pursuant to a vesting schedule; the significant vesting
terms are as follows; 4,830,000 options vest over a three year period
ending December 31, 2007, and 245,000 options vest at various dates through
December 31, 2011.
(b) As described in Note 12, the Series A-1 shares are convertible only if the
Company reaches $150 million in annual sales or upon a merger,
consolidation, sale of assets or similar transaction.
(c) Beginning on the Trigger Date, which is the later of May 30, 2004 or a
Triggering Event (as defined in Note 12), and on each anniversary date
thereof, one seventh of the Series K shares will automatically convert into
common stock.
(d) Assuming no further issuance of equity instruments, or changes to the
equity structure of the Company, this total represents the maximum number
of shares of common stock that could be outstanding through December 31,
2011 (the end of the current vesting and conversion periods).
NOTE 12 - EQUITY SECURITIES
PREFERRED STOCKS
The Company's preferred stocks consist of the following:
Shares Issued
Shares and Liquidation
Authorized Outstanding Par Value Preference
---------- ----------- --------- ----------
JUNE 30, 2003:
Preferred Stocks:
*Series A cumulative
convertible 29,233 7,631 $ 763 $ 763,100
Series A-1 cumulative
convertible 5,000,000 4,855,389 48,554 3,311,375
*Series B convertible 12,704 1,458 145 14,580
*Series C convertible 350,000 281,005 281,005 1,405,025
*Series J convertible 105,000 105,000 1,050 --
Series K convertible 3,000,000 2,050,393 20,504 --
--------- --------- ----------- -----------
Total preferred 8,496,937 7,300,876 $ 352,021 $ 5,494,080
========= ========= =========== ===========
* Classes of preferred stock assumed in the ATEC reverse merger.
F-23
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - EQUITY SECURITIES, continued
PREFERRED STOCKS, continued
At June 30, 2003, the Company had six authorized series of preferred stock;
Series A Cumulative Convertible (par value $.10), Series A-1 Cumulative
convertible (par value $.01), Series B Convertible (par value $.10), Series
C Convertible (par value $1), Series J Convertible (par value $.01) and
Series K Convertible (par value $.01) (hereafter referred to as the "A",
"A-1", "B", "C", "J" and "K" shares, respectively).
The A shares have an annual dividend rate of 10% of the par value, which is
cumulative. They are senior to all other series or classes of capital
stock. The B shares have a non-cumulative stated annual dividend rate of $1
each and are senior to all but the rights of the A stockholders. The C and
J shares have no dividend rights, except as may be authorized at the sole
discretion of the Company's Board of Directors. The K shares are entitled
to receive dividends to the same extent and in the same amounts as the
common stock. The A-1 shares have a cumulative annual dividend of $.0341
per share when and as disclosed by the Board of Directors.
Each of the A, B, C and K shares has the right to one vote on all matters
in which stockholders are entitled to vote. The holders of Series A-1 and J
shares shall not be entitled to any voting rights. Each of the A, B, C and
A-1 shares carry dissolution rights upon liquidation amounting to $100,
$10, $5 and $.682 per share, respectively. The A shares grant the Company
the right to redeem such shares at a price of $100 per share. The A, B and
C shares may be converted into shares of common stock at an exchange rate
of five, five and fifty shares, respectively, for each share of common
stock or approximately 7,438 shares. The conversion rights of the J, K and
A-1 shares are described below.
The J shares had a mandatory conversion provision, if any time on or after
the applicable issuance date, the closing price of the common stock of the
Company for three consecutive trading days is equal to or greater than five
dollars. In the first quarter of fiscal 2004, the mandatory conversion
price was attained and all of the outstanding J shares converted into
105,000 shares of common stock.
F-24
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - EQUITY SECURITIES, continued
PREFERRED STOCKS, continued
The K shares are convertible into shares of common stock, no sooner than
May 30, 2004, upon the happening of any of the following events (the
"Triggering Events"): (i) the Company is deemed by AMEX to be in compliance
with applicable listing standards; (ii) deemed by another exchange to be in
compliance with its applicable listing standards in the event the Company's
securities are listed on such exchange; or (iii) the Company is no longer
listed on AMEX, the Nasdaq National Market or SmallCap Market, or the New
York Stock Exchange. Upon the occurrence of any of the above Triggering
Events, the K shares become convertible into an aggregate total number of
shares of common stock in accordance with a defined formula, which assumes
the conversion of the A, B, C and J shares into common stock. The net
effect of the conversion feature, which has been deemed to be a contingent
event, together with the shares of common stock issued in the reverse
merger, would be to issue to Interpharm, Inc. stockholders, common stock
totaling approximately 80% of the total number of shares of common stock
and voting convertible preferred stock, outstanding as of the date of the
Triggering Event, after giving effect to the conversion, less shares of
common stock which may be issued between the date of the closing of the
reverse merger and the date of the Triggering Event arising out of
obligations which arose after the date of closing.
On May 30, 2003 the Company authorized the satisfaction of the loan due to
the Company's Chief Executive Officer and one of its stockholders (Note 9),
by issuing 4,855,389 A-1 shares. The A-1 shares convert on a 1:1 basis into
Company common stock subject to the definitive terms in the list of
designations upon (i) the Company reaching $150 million in sales or (ii) a
merger, consolidation, sale of assets or similar transaction.
STOCK OPTIONS
On May 30, 2003, Interpharm, Inc., as a part of the ATEC reverse merger
transaction, assumed options to acquire ATEC's common stock which were
granted previously by ATEC pursuant to two Stock Option Plans. The two
option plans are the 1997 Stock Option Plan ("1997 Plan") and the 2000
Flexible Stock Option Plan ("2000 Plan"). Both plans provide for the
issuance of qualified and non-qualified options as those terms are defined
by the Internal Revenue Code.
The 1997 Plan provides for the issuance of 6,000,000 shares of common
stock. All options issued, pursuant to the 1997 Plan, can not have a term
greater than ten years. Options granted under this plan vest over periods
established in option agreements. As of June 30, 2003, 2,236,533 options
are outstanding under this plan. No additional shares can be granted under
this plan.
F-25
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - EQUITY SECURITIES, continued
STOCK OPTIONS, continued
The 2000 Plan provides the issuance of 10,000,000 shares of common stock
plus an annual increase, effective on the first day of each calendar year,
equal to 10% of the number of outstanding shares of common stock as of the
first day of such calendar year, but in no event, more than 20,000,000
shares in the aggregate. All options issued, pursuant to the 2000 Plan, can
not have a term greater than ten years. Options granted under the 2000 Plan
vest over periods established in option agreements. As of June 30, 2003,
the Company provides for the issuance of 12,192,840 shares of common stock
pursuant to the 2000 Plan. As of that date, 10,309,158 options had been
issued.
The following table summarizes the options assumed by Interpharm, Inc. in
the ATEC reverse merger and activity for the period May 30, 2003 to June
30, 2003. There were no options issued by Interpharm, Inc. prior to the
reverse merger.
Weighted
Average Exercise
2003 Price
----------------------------
Options assumed from ATEC in reverse merger
transaction - May 30, 2003 7,495,691 $1.51
Granted 5,075,000 $ .68
Exercised (25,000) $1.25
----------
Outstanding at June 30, 2003 12,545,691 $1.17
==========
Exercisable at June 30, 2003 3,470,691 $1.17
=========
The following table summarizes information concerning outstanding and
exercisable stock options as of June 30, 2003:
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices June 30, 2003 Life Price June 30, 2003 Price
--------------- --------------- -------------- ------------ ---------------- --------
$ .40 - $.68 10,224,158 8.97 $ .60 2,341,158 $ .49
$ .75 - $2.00 808,500 6.06 $1.83 658,500 $1.80
$2.125 - $6.80 1,513,033 5.00 $4.69 471,033 $3.64
----------- ---------
12,545,691 3,470,691
========== =========
F-26
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - EQUITY SECURITIES, continued
STOCK OPTIONS, continued
In the first quarter of fiscal 2004, 2,187,863 options were exercised
generating cash proceeds to the Company of approximately $2,700,000, and
resulting in tax deductions allowed for employee stock options
approximating $9,000,000.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
On June 1, 2003 the Company entered into employment agreements with 6
executive officers and 7 employees. Each of the agreements is substantially
identical and provides for the following significant terms:
- employment terms through December 31, 2007, termination with or without
cause, and upon termination, the employee is entitled to receive only any
accrued salary and vacation pay,
- confidentiality and non-competition clauses which remain effective
following termination of employment,
-annual salary ranging from $80,000 through $150,000 ($770,000 in total)
for the 6 executive officers and salary ranging from $55,000 through
$95,000 ($477,000 in total) for the 7 employees, with increases and bonus
payments at the sole discretion of the Board of Directors. The agreements
also provide the executive officers and three employees with an automobile
allowance. These officers and employees also received an aggregate of
4,995,000 stock options (Note 12).
OPERATING LEASES
The Company's corporate headquarters is located in Commack, New York, where
the Company leases 23,175 square feet of space for executive offices from
an unrelated party. The lease expires in June 2005. Rent expense under this
operating lease was $15,557 for the one-month period ended June 30, 2003.
In addition, the Company is subletting approximately 20,400 square feet to
three unrelated parties. Rental income of $13,676 was recognized under
these agreements for the one-month period ended June 30, 2003. Minimum
future annual lease commitments under this lease, net of the rental income
are as follows:
For the Year
Ending June 30, Rent Sublease Net
----------------- ---------------- ------------ ---------------
2004 $186,678 $116,286 $ 70,392
2005 171,122 109,691 61,431
-------- -------- ---------
Total $357,800 $225,977 $ 131,823
======== ======== =========
F-27
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES, continued
LEGAL PROCEEDINGS
On or about January 31, 2002, Teresa Casey and Jerry Casey, as plaintiffs,
commenced a lawsuit against Interpharm, Inc., as defendant. Plaintiffs
allege that Teresa Casey was injured as a result of ingesting
guaifenesin/phenylpropanolamine of which the Company was the designer,
constructor, manufacturer, producer, marketer, seller and distributor.
Plaintiffs have alleged nine causes of action of product liability, tort
liability, negligence, breach of implied and express warranties and
violation of the Washington Consumer Protection Act. Plaintiffs seek
unspecified damages, attorney's fees, prejudgment interest, punitive
damages and such other relief as the court deems just.
Subsequently, on September 26, 2003 the Court dismissed the Plaintiffs'
claim in the above action without prejudice. The basis for the dismissal
was that the Plaintiffs' counsel had resigned from his representation and
plaintiffs failed to get new counsel by a court-imposed deadline. The
Plaintiff is not prevented from instituting a new action at a future date,
which would be subject to all defenses, including a defense that the future
action is barred by the statute of limitations.
On or about August 13, 2002, Interpharm, Inc., as plaintiff, commenced a
lawsuit against General Star Indemnity Company, G.P. Insurance Agency, Inc.
and Mortsan General Agency, Inc., as defendants. The lawsuit arose from
General Star's refusal to cover or defend the Company under an insurance
policy with respect to the Casey action above. The Company sought a
declaratory judgment that General Star is obligated to cover and defend the
action and seeks damages, costs and attorney's fees for fraud
misrepresentation and other claims.
Subsequently, on September 26, 2003, the Court rendered a decision for
summary judgment (i) granting dismissal of all claims against General Star
Indemnity Company; (ii) granting dismissal of Interpharm, Inc.'s statutory
claims against G.P. Insurance Agency, Inc. and Mortsan General Agency,
Inc.; and (iii) allowing Interpharm, Inc. to continue its negligence claims
against G.P. Insurance Agency, Inc. and Mortsan General Agency, Inc.
It is reasonably possible that the Company may incur a liability as a
result of the resolution of these related matters due to the fact that the
Plaintiff is not prevented from instituting a new action at a future date.
Given the current resolution of these matters, the Company did not make
adjustments to the consolidated financial statements for any amounts that
could be due from the Company on a future date.
NOTE 14 - ECONOMIC DEPENDENCY
MAJOR CUSTOMERS
The Company had the following customer concentrations for the six month
period ended June 30, 2003 and June 2002 and for each of the three years
ended December 31, 2002, 2001 and 2000:
F-28
NOTE 14 - ECONOMIC DEPENDENCY, continued
Sales - Percent of Revenue
Six Months Ended
June 30, Year Ended December 31,
2003 2002 2002 2001 2000
-------------- ------- ------ ------ ------- ------
Customer A ** -- -- -- 19% *
Customer B 37% 45% 44% 20% --
Customer C 13% 16% 9% 22% 35%
Customer D * * * * 11%
Accounts Receivable
June 30, December 31,
2003 2002 2002 2001
-------------- ----------- ----------- ------------ ------------
Customer A ** $ -- $ 47,599 $ -- $ 771,363
Customer C 2,202,354 3,246,392 2,691,230 2,114,747
Customer B 736,022 152,812 179,415 562,722
Customer D 229,288 117,679 227,456 176,548
* Sales to customers were less than 10%
** This customer was the minority owner of Interpharm, Inc.'s subsidiary
prior to the transfer of interest on June 6, 2003.
MAJOR SUPPLIERS
The Company purchased materials from two suppliers totaling approximately
60%, 72%, 68% and 65% of the Company's total purchases, during the six
month period ended June 30, 2003, 2002 and for the years ended December 31,
2002 and 2001, respectively and three suppliers totaling approximately 68%
of the Company's total purchases during the year ended December 31, 2000.
At June 30, 2003, December 31, 2002 and December 31, 2001 amounts due to
these suppliers included in accounts payable, were approximately
$2,737,000, $2,323,000 and $1,895,000, respectively.
F-29
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial information consists of the following:
Sept. 30, 2002 Dec. 31, 2002 March 31, 2003 June 30, 2003
-------------- --------------- --------------- ---------------
Sales, net $5,932,585 $6,636,220 $7,191,002 $7,762,436
Gross profit 1,074,386 1,208,827 1,366,290 1,372,326
Net income 191,693 247,924 480,575 243,070
Basic EPS $.02 $.04 $.08 $.02
==== ==== ==== ====
Diluted EPS $.01 $.01 $.01 $ --
==== ==== ==== ====
Sept. 30, 2001 Dec. 31, 2001 March 31, 2002 June 30, 2002
-------------- --------------- --------------- -------------
Sales, net $5,171,609 $5,314,883 $5,888,788 $5,854,652
Gross profit 1,055,118 771,323 1,124,675 1,031,421
Net income 163,505 147,244 371,489 239,313
Basic EPS $.02 $.02 $.06 $.04
==== ==== ==== ====
Diluted EPS $ -- $ -- $.01 $.01
===== ===== ==== ====
The unaudited interim financial information reflects all adjustments, which
in the opinion of management, are necessary to a fair statement of the
results of the interim periods presented. All adjustments are of normal
recurring nature.
F-30
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