SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
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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 $.01 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 [ ]
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 [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
On December 31, 2003, the aggregate market value of the voting common equity of
Interpharm Holdings, Inc., held by non-affiliates of the Registrant was
$50,567,655, based on the closing price of $4.69 for such common stock on said
date as reported by the American Stock Exchange
YES [ ] NO [X]
On September 22, 2004, the aggregate market value of the voting common
equity of Interpharm Holdings, Inc., held by non-affiliates of the Registrant
was $37,211,755 based on the closing price of $3.45 for such common stock on
said date as reported by the American Stock Exchange. On such date, we had
24,967,166 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III (Items 10, 11, 12, and 14) is
incorporated by reference to the Registrant's definitive proxy statement (the
"2004 Proxy Statement") in connection with its 2004 annual meeting of
stockholders, which is to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934.
ii
INTERPHARM HOLDINGS, INC.
Form 10-K
Fiscal Year Ended June 30, 2004
Table of Contents
PART I ----------------- Page
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Item 1. Business......................................................... 2
Item 2. Properties.......................................................16
Item 3. Legal Proceedings................................................17
Item 4. Submission of Matters to a Vote of
Security Holders...............................................17
PART II
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Item 5. Market for Common Stock
and Related Stockholder Matters................................18
Item 6. Selected Financial Data..........................................22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................23
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk..............................................40
Item 8. Financial Statements and Supplementary Data......................40
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures..........................................40
Item 9A. Controls and Procedures..........................................41
PART III
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Item 10. Directors and Executive Officers
of the Registrant..............................................43
Item 11. Executive Compensation...........................................43
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters............................................43
Item 13. Certain Relationships and Related
Transactions...................................................43
Item 14. Principal Accounting Fees and Services...........................44
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................44
Signatures....................................................................47
Financial Statements.........................................................F-1
iii
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.
1
PART I
ITEM 1. BUSINESS
GENERAL
Interpharm Holdings, Inc. (formerly ATEC Group, Inc.), is a Delaware
holding company which, through its operating wholly-owned subsidiary,
Interpharm, Inc., (collectively, "we" or "us") is engaged in the business of
developing, manufacturing and marketing generic prescription strength and
over-the-counter pharmaceutical products in solid oral dosage form, consisting
of tablets, caplets and capsules. The U.S. Food and Drug Administration ("FDA")
has defined generic drugs as "identical, or bioequivalent to a brand-name drug
in dosage form, safety, strength, route of administration, quality, performance
characteristics and intended use." The FDA has also stated: "Although generic
drugs are chemically identical to their branded counterparts, they are typically
sold at substantial discounts from the branded price. According to the
Congressional Budget Office, generic drugs save consumers an estimated $8 to $10
billion a year at retail pharmacies."
Brand-name drugs are typically patented in order to protect the developing
company's investment in the drug and the lengthy approval process. Generic
drugs, on the other hand, may be manufactured and marketed only if relevant
patents on their brand-name equivalents (and any additional government-mandated
market exclusivity periods) have expired, been challenged and invalidated, or
otherwise validly circumvented. Generic drugs, however, need not go through the
same lengthy approval process as brand-name drugs involving testing and clinical
research - they need only go through an Abbreviated New Drug Application
("ANDA") to show that the generic version of the drug has the same ingredients,
strength, dosage, administration and batch requirements as the brand-name drug
as well as that it is bioequivalent and manufactured under the same standards as
the brand-name drug.
We currently manufacture and market various dosage strengths for 21
generic drug products. Fourteen of our products are produced pursuant to ANDAs.
The remaining products are manufactured under an over-the-counter monogram or
are drugs which do not otherwise require ANDAs. In addition, we manufacture
eight dosage strengths of three distinct products for United Research
Laboratories, Inc. and Mutual Pharmaceutical Company, Inc. ("URL/Mutual"), which
holds the applicable ANDAs, pursuant to a Manufacturing and Supply Agreement,
dated January 24, 2002.
We market our products primarily to our distributors/wholesalers who sell
to retail stores; the U.S. Department of Veteran Affairs through a government
appointed prime vendor; and to resellers who repackage our products and sell
them directly to retail stores. Approximately 60% of our sales are made under
our own label. The rest of our sales are to wholesalers and distributors which
sell our products under their own labels.
During the fiscal year ended June 30, 2004, two of our customers
collectively accounted for approximately 55%, of our total sales. For the
six-month period ended June 30, 2003, two of our customers collectively
accounted for approximately 50% of our total sales. The loss of any of our
largest customers could have a material adverse effect on our business. Although
we have a contractual relationship with one of our two largest customers, most
of our sales are still not made pursuant to contracts, but rather through
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. We expect that as we
continue to grow, a larger percentage of our revenue will be to customers with
whom we will have contractual relationships.
2
BUSINESS AND CORPORATE HISTORY AND DEVELOPMENT
Interpharm, Inc. was incorporated under the laws of the State of New York
in 1984 and operated as a family owned private company until May 30, 2003. 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.
From the early 1990s until 2002, our sales were primarily composed of
Ibuprofen in various dosage strengths. While our revenues increased steadily
during that time, in 2002, we began an expansion plan in order to expand our
product line and increase production by investment in new equipment and
facilities. As a result of our expansion plans, we have invested in excess of
$3.0 million in new equipment since January 1, 2003 In addition, on June 29,
2004, we acquired a new facility in Brookhaven, New York for approximately $9.4
million. We paid approximately $2.0 million of the purchase price and closing
costs and financed the remaining $7.4 million with a mortgage loan.
Our net sales have grown from approximately $27.5 million for the twelve
months ended June 30, 2003 to approximately $41.1 million for the year ended
June 30, 2004. While overall net sales of Ibuprofen have increased by
approximately $300,000, Ibuprofen, as a percentage of net sales, decreased from
approximately 86% during the twelve months ended June 30, 2003, to approximately
60% during the twelve month period ended June 30, 2004.
We have adopted a Code of Ethics that applies to all of our directors,
officers, employees and representatives. This code is annexed to this Form 10-K
as Exhibit 99.3. Amendments to the code of ethics and any grant of a waiver from
a provision of the code requiring disclosure under applicable SEC rules will be
available on our website and future public filings. The charter of the
Nominating Committee of our Board of Directors is also annexed to this Form 10-K
as Exhibit 99.4. Any of these materials may also be requested in print by
writing to us, Attention: George Aronson, Chief Financial Officer, at 75 Adams
Avenue, Hauppauge, New York 11788.
3
INDUSTRY
THE GENERIC DRUG MARKET AND NECESSARY APPROVALS
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 ANDA. The ANDA
may rely on information from the brand-name drug's application with the FDA.
Branded Drugs: 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 FDA, usually the patent holder, has the exclusive
right to produce and sell the drug for about twenty 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.
Generic Drugs: 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 a generic drug to be identical or
bio-equivalent to a brand name drug in dose, form, safety, strength, route of
administration, quality, performance characteristic and intended use. Although
generic drugs are chemically identical to their branded counterparts, they are
typically sold at substantial discounts from the branded prices. According to
the Congressional Budget Office, generic drugs provide savings to the consumers
at an estimated amount of $8 billion to $10 billion a year at retail pharmacies,
not including the saving from the use of generic drugs in hospitals and other
health care facilities (see www.fda.gov/cder/ogd/). 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. -As of March, 2004,
more than 50% of all prescriptions are filled with generic drugs according to
the FDA (see "Update from the Office of Generic Drugs," March 2, 2004 available
at http://www.fda.gov/cder/ogd/2004-03-02_GPHA_Boca-gjb_files/frame.htm).
4
Over the past two years, the FDA has improved its procedures and received
more funding in order to expedite the processing of ANDAs and encourage the
growth of the generic drug market.
On December 8, 2003, the Medicare Prescription Drug, Modernization and
Improvement Act of 2003 (the "MMA") was enacted. The MMA seeks to bring generic
drugs to market sooner in an effort to save consumers up to $35 billion over 10
years. The MMA streamlines the generic drug approval process by limiting a
brand-name drug company to only one 30-month stay of a generic drug's entry into
the market for resolution of a patent challenge. The MMA also establishes a 180
day exclusivity period for a generic company that successfully challenges a
patent, provided that the generic drug at issue is marketed within the first 75
days of that period.
BUSINESS STRATEGY AND FISCAL YEAR ENDED JUNE 30, 2004 HIGHLIGHTS
We have experienced substantial growth over the past few years. 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)
successfully implement our research and development strategy with a view towards
expanding and diversifying our product line with a focus on higher margin
products, (iv) leverage our competitive strength in manufacturing to capture
market share on our new product lines, (v) increase production capacity in our
current plant, (vi) obtain FDA approval for our new facility in a timely manner,
(vii) utilize our manufacturing efficiencies to enter into additional
manufacturing and supply arrangements, (viii) enter into joint ventures and
strategic alliances with companies whose strengths compliment ours, and (ix)
create marketing and distribution channels for our existing and future products.
MANUFACTURING CAPACITY:
We currently conduct our manufacturing operations out of a leased facility
of approximately 100,000 square feet 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 are
currently taking steps to increase the size of this facility for products
requiring segregated rooms.
We believe that the most important component to our growth during the
fiscal year ended June 30, 2004 has been our commitment to capital investment to
increase production capacity. During the year ended June 30, 2004, we invested
approximately $2.4 million in new machinery and equipment, and infrastructure
improvements in our current plant. During the period from January 1, 2002
through June 30, 2003, we invested approximately $2.2 million in equipment and
improvements. Our commitment to increase capacity has allowed us to both
continue to meet increasing demand for our existing products such as Ibuprofen,
while, at the same time, allowing us to meet our requirements generated through
various strategic alliances.
5
We realize that in order to effectuate our plans to increase and diversify
our product line, we will need to continue to demonstrate our commitment to
increasing our production capacity. To that end, on June 29, 2004, we completed
the acquisition of a 92,000 square foot building with an additional 30,000
square feet of mezzanine space, located on over thirty-seven acres of land. The
acquisition cost for the building and land, which are located in Brookhaven, New
York, was approximately $9.4 million. Because the new facility is located in New
York's Brookhaven Empire Zone, we will be eligible for a number of economic
benefits, including, grants based on the number of employees hired, discounted
utility bills and real property and other tax reductions and credits.
In addition to using the new building as an additional manufacturing
facility, we intend to construct a new research and development laboratory and
move our corporate offices to the location. In order to be used for
manufacturing, the new facility will require site approval from the FDA. Pending
such approval, the facility can be used for warehousing and related activities,
thereby creating additional capacity in our current manufacturing plant. Once
FDA site approval is obtained, we will have two facilities with a combined size
of approximately 200,000 square feet. In addition, the thirty-seven acres of
land could, if needed, allow us to expand the new facility to over 500,000
square feet.
Our ability to purchase our new facility and land, to renovate the new
building so as to meet our production requirements and FDA requirements, to
continue to increase our purchases of new machinery and equipment, and to
renovate our existing plant, have been assisted through a $21 million advised
line of credit obtained from HSBC Bank. Depending upon market conditions, we may
continue to rely on this advised credit line, or seek other means of financing
in the future.
STRATEGIC ALLIANCES:
URL/Mutual. In January 2002, we entered into an agreement with URL/Mutual
to manufacture 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. Since
we do not have ANDAs for any of these products, we produce them pursuant to
URL/Mutual's ANDAs, and were required to obtain Site Transfer Approvals ("STA")
from the FDA.
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.
6
In July 2003, we began manufacturing Atenolol Tablets for URL/Mutual. This
was the first of the four products that we were 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.
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.
The other two products to be manufactured under our agreement with
URL/Mutual are Prednisone and Amitriptyline. We began manufacturing Prednisone
for URL/Mutual in 2004. Total sales for this product during the fiscal year
ended June 30, 2004 were approximately $225,000. We anticipate that we will
begin manufacturing Amitriptyline during the second fiscal quarter of the fiscal
year ending June 30, 2005.
Watson Pharmaceuticals. On May 18, 2004, the FDA approved our ANDA for
Hydrocodone Bitartrate and Ibuprofen Tablets, 5 mg/200 mg. This product is a new
lower strength version of Hydrocodone Bitartrate and Ibuprofen Tablets, 7.5
mg/200 mg, which is the generic equivalent to the branded drug Vicoprofen(R). We
received a six-month exclusivity for marketing of this product from the FDA.
Since we are the first company to receive approval to manufacture and market
this product in this strength, we were provided the opportunity to market the
product as a branded generic drug.
We began marketing the product under the name Reprexain(R) in June 2004,
pursuant to a contract with Watson Pharmaceuticals, Inc. Pursuant to the terms
of the contract, we will manufacture and supply the product to Watson, who will
market, sell and distribute the product in the United States. We will receive
payment from Watson based on the amount of Reprexian ordered by it for sale as
well as a percentage of sales that Watson generates through its marketing
efforts.
Reprexain(R) is indicated for the short-term (generally less than 10 days)
management of acute pain. Reprexain(R) addresses a market opportunity by
combining 5 mg hydrocodone, the most commonly prescribed dose of hydrocodone in
a combination with 200 mg of ibuprofen, the leading prescribed non-steroidal
anti-inflammatory drug; a combination not available prior to introduction of the
product. Combining both central and peripheral analgesic action, Reprexain(R)
offers patients a balanced approach to the management of acute pain.
7
STRATEGIC AND PRODUCT DEVELOPMENT:
In furtherance or our expansion plans, during the fiscal year ended June
30, 2004, we began to focus on increasing our product pipeline with an emphasis
on higher margin products. Historically, the majority of our revenues were
derived from sales of Ibuprophen tablets in both prescription and
over-the-counter strengths. During our fiscal year ended June 30, 2004,
Ibuprophen accounted for approximately 60% of our total revenue. This is a
significant decrease from the same period ended 2003 when Ibuprophen accounted
for approximately 86% of our total revenue.
We believe that one source of higher margin products is a number of
successful brand-name products for which patent protection is due to expire over
the next several years. Other sources are successful generic products where we
can enter with a competitive advantage in manufacturing or sourcing of raw
materials.
We have expanded our pipeline of drugs under development since 2002 and
are formulating a plan to increase the pipeline. We currently have ten drugs
that are in various stages of development. In order to assist in strategic and
product development, we have added Cameron Reid to our Board of Directors. Mr.
Reid has over twenty-five years of experience in the pharmaceutical business,
most recently as the President of Dr. Reddy's Laboratories, Inc. Mr. Reid is
working with Bhupatlal Sutaria, our President, to formulate our plan to increase
our pipeline and strategically plan its marketing and sale. There can be no
assurances, however, that the FDA will ultimately approve the drugs that are
under development. During the fiscal year ended June 30, 2004, we spent
approximately $538,000 on research and development activities.
As we develop our product line, we (i) identify and conduct patent and
market research on brand name drugs for which patent protection has expired or
will expire in the near future, (ii) determine which products would supplement
our existing product line, and which products could potentially represent new
opportunities, (iii) research and develop new product formulations based upon
such drugs so as to ensure that FDA approval is received, and (iv) introduce
technology to improve production efficiency and enhance product quality.
GOVERNMENTAL REGULATION:
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. In fact, 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. Therefore, there is always the risk that
the introduction of new products can be delayed.
8
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.
We contract with outside laboratories to conduct biostudies. 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.
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.
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.
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,
particularly as we significantly expand our product development efforts.
9
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.
As a public company, we are subject to the Sarbanes-Oxley Act of 2002 (the
"SOX Act"). The SOX Act contains a variety of provisions affecting public
companies, including the relationship with its auditors, prohibiting loans to
executive officers and requiring an evaluation of its disclosure controls and
procedures and internal controls.
The federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement with the Federal Health Care Financing
Administration. Although not required under OBRA, we have also entered into
similar agreements with various states.
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.
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. In addition, we have also begun to market products
through strategic alliances with companies, such as Watson Pharmaceuticals,
Inc., whose marketing expertise exceeds our own. 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.
10
Pursuant to our return policy, we will not accept any of the following for
return, unless we have an agreement with a party which dictates otherwise: (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.
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
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. To date, we have experienced no
significant difficulty in obtaining raw materials and expect that raw materials
will generally continue to be available in the future. However, should we be
required to replace one or more of our suppliers, we may experience a delay of
six months or more in the manufacture and marketing of the drug involved while
the new supplier becomes qualified by the FDA and its manufacturing process is
found to meet FDA standards. Depending on the particular product, it may cause a
material adverse effect on our results of operations and financial condition. We
generally attempt, where economically and otherwise feasible, to minimize these
risks by having more than one approved supplier for the drugs that we
manufacture.
PRODUCTS
Below is a list of the drugs that we manufacture and sell, 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.
11
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. Acetaminophen & Diphenhydramine HCl Tylenol PM (R)
Caplets 500mg/25mg
5. Allopurinol 100 mg White Tablets* Zyloprim (R)
6. Allopurinol 300 mg White Tablets* Zyloprim (R)
7. Atenolol 25 mg White Tablets* Tenormin (R)
8. Atenolol 50 mg White Tablets* Tenormin (R)
9. Atenolol 100 mg White Tablets* Tenormin (R)
10. Clorpheniramine Maleate 4mg Yellow Tablets Chlortrimetron(R)
11. Hydrocodone Bitartrate & Ibuprofen Tablets Reprexain(R)**
5mg/200mg
12. Ibuprofen 200mg White Tablets Advil(R)
13. Ibuprofen 200mg Brown Tablets Advil(R)
14. Ibuprofen 200mg Orange Tablets Motrin(R)
15. Ibuprofen 200mg White Caplets Advil(R)
16. Ibuprofen 200mg Brown Caplets Advil(R)
17. Ibuprofen 200mg Orange Caplets Motrin(R)
18. Ibuprofen 400mg White Tablets Motrin(R)
19. Ibuprofen 600mg White Tablets Motrin(R)
20. Ibuprofen 800mg White Tablets Motrin(R)
21. Isometheptene Mucate, Dichloralphenazone,
Acetaminophen, Red/Red Capsule, 65mg/100mg/325mg Midrane(R)
12
22. Naproxen 250mg White Tablets Naprosyn(R)
23. Naproxen 375mg White Tablets Naprosyn(R)
24. Naproxen 500mg White Tablets Naprosyn(R)
25. Prednisone 5mg* Deltasone(R)
26. Prednisone 10mg* Deltasone(R)
27. Prednisone 20 mg* Deltasone(R)
28. Pseudoephedrine HCl 60mg White Tablets Sudafed(R)
29. Pseudoephedrine HCl, Triprolidine HCl White
Tablets, 60mg/2.5mg Actifed(R)
* Manufactured for URL/Mutual, which holds the ANDA for the product.
** Reprexian(R) is our brand-name drug which is marketed by Watson
Pharmaceuticals, Inc.
COMPETITION
The generic pharmaceutical industry is intensely competitive. Most of our
significant competitors have longer operating histories and greater financial,
research and development, marketing and other resources. Consequently, many of
our competitors may develop products and/or processes competitive with, or
superior to, ours.
The primary means of competition in the generic pharmaceutical industry
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
factor 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. Also, the modernization of our
facility, hiring of experienced staff, and implementation of quality control
programs have improved our competitive position in recent years. In addition,
once our new facility obtains FDA site approval, we believe that our competitive
position should be further improved.
13
During the past several years the number of chain drug stores and
wholesaler customers has 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.
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.
14
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.
GOVERNMENT CONTRACTS
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. This bid provides for four one-year renewals at the option of
the Department of Veterans Affairs. The Department of Veterans Affairs exercised
that option for the period January 2, 2004 through January 1, 2005. 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.
PATENTS AND TRADEMARKS
We do not own any Patents or Trademarks that are currently used in our
business. We have, however, entered into several agreements giving us the rights
to use the trademarks and tradenames of other parties for labeling and marketing
of certain drugs.
EMPLOYEES
As of June 30, 2004, we had 322 full time employees, of which 247 were
employed in manufacturing, 56 were employed in quality assurance and regulatory
affairs, 15 were employed in selling, general and administrative activities, and
4 were employed in research and development. We believe we have a strong
relationship with our employees. None of our employees are represented by a
union.
15
SEASONALITY
While we believe that our business is generally not seasonal, we typically
experience a decrease in orders in the fiscal quarter ending September 30 as
compared to other quarters. We believe that this decrease in orders is primarily
the result of decreased demand for certain over the counter cold remedies and
other products in the summer months and because many purchasing agents tend to
take vacations during this time and order more products prior to, or after the
quarter.
ITEM 2. PROPERTIES
DESCRIPTION OF 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 9,663,983 shares of our common stock,
456,562 shares of our Series A-1 Preferred Stock and 1,757,480 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. 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 May, 2005. The annual lease payments are approximately
$187,000. During the remaining eleven months of this lease, we have sublet
approximately18,500 square feet for $139,000.
On June 29, 2004, pursuant to a contract entered into on November 14,
2003, and through our wholly owned subsidiary, Interpharm Realty, LLC, we
purchased a 92,000 square foot facility on thirty seven acres of land, located
at 50 Horseblock Road in Brookhaven, New York. The purchase price for the
building and land was approximately $9.4 million. The new facility is located in
Suffolk County, New York's Brookhaven Empire Zone. We will construct an expanded
research and development laboratory at the new location which will also house
our executive offices.
16
ITEM 3. LEGAL PROCEEDINGS
Because Interpharm, Inc. utilizes certain controlled substances, it is
subject to routine inspection by the U.S. Drug Enforcement Agency. In June,
2004, Interpharm, Inc. received a notice from the United States Attorney's
Office for the Eastern District of New York relating to a routine inspection
conducted in November, 2003. The notice references certain alleged record
keeping violations. As of the date of this report, no complaint has been filed
by the United States Attorney's Office, and Interpharm, Inc. is in the process
of setting up a meeting with the United States Attorney's Office to resolve the
matter. The Company is unable to predict the outcome of this claim and,
accordingly, no adjustments have been made in the consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our securityholders during the
fiscal quarter ended June 30, 2004.
17
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,
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."
HIGH LOW
---- ---
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
Quarter ended 6/30............................. 2.93 0.62
Quarter ended 9/30............................. 8.90 3.30
Quarter ended 12/31............................ 5.47 4.00
2004
Quarter ended 3/31............................. 5.87 4.30
Quarter ended 6/30............................. 4.80 2.45
As of September 21, 2004, there were approximately 8,856 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.
18
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).
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, 2004. 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 1,436,370 $ 2.30 -0-
2000 Flexible Stock Plan(1) 9,023,630 $ 1.51 2,208,563
=========== ========= ============
Total 10,460,000 $ 1.62 2,208,563
=========== ========= ============
================================================================================
(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.
19
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal quarter ended June 30, 2004, we have made the following
sales of restricted securities:
On June 18, 2004, we sold 10,000 shares of our common stock to David Reback
pursuant to the exercise of a stock option. 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 (the "Certificates").
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.
- Amount Authorized. 3 million shares.
- Amount Outstanding. 1,757,480
- Conversion. The Series K Stock began converting into shares of our
Common Stock on June 4, 2004. On that date, 292,913 shares of Series K Stock
converted into 6,274,775 shares of Common Stock. Assuming that the accelerated
vesting provisions of the Series K Stock Certificate described below will not
apply, the Series K shares will automatically convert into a like amount on
each June 4, 2005 through 2010, for an aggregate of an additional 37,648,650
shares of common stock.
20
Under the terms of the accelerated vesting provisions of the Series K
Stock Certificate, and a separate agreement with the Series K holders in which
they agreed to forego certain rights they possess pursuant to the terms of the
Series K Stock Certificate, in the event that (i) (a) any person or group other
than the holders of the Series K acquires 50% or more of Interpharm's common
stock or (b) if following a tender offer or proxy contest, the persons who were
previously Interpharm's directors do not constitute a majority of the Board of
Directors, and (ii) the Series K holders own less than 51% of Interpharm's
Common Stock, additional shares of Series K may convert at the request of the
Series K holders such that they own, in the aggregate, at least 51% of
Interpharm's Common Stock.
While the holders of the Series K have demand registration rights with
respect to the Common Stock to be issued upon conversion of the Series K, they
have not exercised that right as of the date of this Report. Therefore, all
common stock issued pursuant to the June 4, 2004 conversion is restricted.
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. 4,855,309
- 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.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary financial data for the year ended
June 30, 2004, the six-months ended June 30, 2003 and June 30, 2002 and the four
previous years ended December 31, 2002. The summary financial data set forth
below with respect to our statements of operations for the years ended December
31, 2000 and 1999 and the balance sheet data as at December 31, 2000 and 1999
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 ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
YEAR ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
JUNE 30, 2004 JUNE 30, 2003 2002(1) 2002 2001 2000 1999(1)
------------- ------------- ------------ ------------ ------------ ----------- -----------
Net Sales $41,099,728 $14,953,438 $11,743,440 $24,312,245 $18,435,446 $11,391,326 $ 9,946,348
Net income 3,122,821 723,645 610,802 1,050,419 514,565 337,764 34,407
Income per
common share:
Basic 0.16 0.08 0.07 0.13 0.06 0.04 0.01
Diluted 0.04 0.02 0.02 0.03 0.01 0.01 0.00
Balance Sheet Data
Total Assets 35,167,945 20,338,795 10,904,362 11,198,347 9,645,807 7,390,015 6,341,472
Long-term
obligations 7,075,801 267,056 3,460,959 3,335,754 3,591,480 3,289,118 3,474,682
Cash dividend per
common share 0 0 0 0 0 0 0
(1) Unaudited.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Interpharm Holdings, Inc. ("Interpharm," "we," or "us"), through its
wholly-owned subsidiary, Interpharm, Inc., is engaged in the business of
developing, manufacturing and marketing generic over-the-counter and
prescription strength pharmaceutical products. We make sales both under our own
label and to wholesalers and distributors which sell our products under their
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, rebates and chargebacks.
Our operating results for the fiscal year ended June 30, 2004 reflect our
continuing expansion plan, including continuing investments in increasing our
production capacity and our pursuit of strategic alliances. Presented below are
some of our financial highlights for the year ended June 30, 2004 and the
unaudited twelve-months ended June 30, 2003.
Twelve Months
Fiscal Year Ended Ended
June 30, 2004 June 30, 2003
(Audited) (Unaudited)
-------------------------------------
Revenue Increased 49% $41,099,728 $27,522,243
Gross Profit Increased 95% $9,794,835 $5,021,829
Operating Income Increased 152% $5,060,375 $2,011,597
Net Income Increased 168% $3,122,821 $1,163,262
We believe that a key component of our growth has been, and, will continue
to be, our commitment to capital investment to increase production capacity.
During the past year, we invested approximately $2.4 million in new machinery,
equipment and leasehold improvements.
Further, on June 29, 2004, we closed on the purchase of a 92,000 square
foot facility in Brookhaven, New York. Once FDA approval is obtained, this
facility will double our current available space of approximately 100,000 square
feet and provide us with sufficient additional acreage for potential further
expansion of our production facilities in the future. Until we obtain FDA
approval for manufacturing at the Brookhaven facility, we may use the new
facility for warehousing and other activities, which would enable us to free up
space for additional manufacturing in our current plant.
23
On May 18, 2004, the FDA approved our ANDA for Hydrocodone Bitartrate and
Ibuprofen Tablets, 5 mg/200 mg. This product is a new lower strength version of
Hydrocodone Bitartrate and Ibuprofen Tablets, 7.5 mg/200 mg, which is the
generic equivalent to the branded drug Vicoprofen(R). We received a six-month
exclusivity period for marketing of this product from the FDA. Since we are the
first company to receive approval to manufacture and market this product in this
strength, we were provided the opportunity to market the product as a branded
generic drug.
We began marketing the product under the name Reprexain(R) in June 2004,
pursuant to a contract with Watson Pharmaceuticals, Inc. Pursuant to the terms
of the contract, we will manufacture and supply the product to Watson, which
will market, sell and distribute the product in the United States. We will
receive payment from Watson based on the amount of Reprexian ordered by it for
sale as well as a percentage of sales that Watson generates through its
marketing efforts.
In furtherance of our expansion plans, during the fiscal year ended June
30, 2004, we began to focus on increasing our product pipeline with an emphasis
on higher margin products. Historically, the majority of our revenues were
derived from sales of Ibuprofen tablets in both prescription and
over-the-counter strengths. During our fiscal year ended June 30, 2004,
Ibuprofen accounted for approximately 60% of our total revenue. This is a
significant decrease from the same period ended 2003 when Ibuprofen accounted
for approximately 86% of our total revenue.
As we continue to implement our expansion plan, we are focusing our
efforts 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) successfully implement our research and development strategy
with a view towards expanding and diversifying immensely increasingly our
product line with a focus on higher margin products to a more diversified
portfolio of products resulting in higher margins, (iv) leverage off of our
competitive strengths in manufacturing to capture market share on our new
product lines, (v) increase production capacity in our current plant, (vi)
obtain FDA approval for our new facility in a timely manner, (vii) utilize our
manufacturing efficiencies to enter into additional manufacturing and supply
arrangements, (viii) enter into joint ventures and strategic alliances with
companies whose strengths compliment ours, and (ix) create marketing and
distribution channels for our existing and future products.
24
FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO TWELVE-MONTHS ENDED JUNE 30, 2003
(All financial information for the twelve months ended June 30, 2003 is
Unaudited)
FOR THE TWELVE FOR THE TWELVE
MONTHS ENDED MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
AUDITED UNAUDITED
-------------- --------------
SALES, Net $ 41,099,728 $ 27,522,243
COST OF SALES 31,304,893 22,500,414
GROSS PROFIT 9,794,835 5,021,829
-------------- --------------
Gross profit percentage 23.83% 18.25%
-------------- --------------
OPERATING EXPENSES
Selling, general and administrative expenses 4,124,261 2,485,863
Related party rent expense 72,000 72,000
Research and development 538,199 452,369
-------------- --------------
TOTAL OPERATING EXPENSES 4,734,460 3,010,232
-------------- --------------
OPERATING INCOME 5,060,374 2,011,597
-------------- --------------
OTHER INCOME (EXPENSES)
Related party interest expense -- (163,187)
Interest expense (21,368) (112,860)
Interest and other income 69,451 8,229
-------------- --------------
TOTAL OTHER INCOME (EXPENSE) 48,084 (267,818)
-------------- --------------
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE 5,108,457 1,743,779
1,985,638 580,517
-------------- --------------
NET INCOME $ 3,122,820 $ 1,163,262
============== ==============
Net Sales and Gross Profit
Net sales for the fiscal year ended June 30, 2004 were $41.1 million
compared to $27.5 million for the twelve-months ended June 30, 2003, an increase
of 49.3% or $13.6 million. Our increase in sales was attributable to increased
sales of Allopurinol, Atenolol and Naproxen which totaled approximately$13.8
million compared to approximately $1.8 million for the twelve-months ended June
30, 2003.
We launched production of Naproxen in December 2001 and have experienced
an increase in sales primarily as the result of customer awareness of our entry
into this market and their willingness to increase orders. We did not sell
Allopurinol during the twelve-months ended June 30, 2003.
25
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 fiscal year ended June 30, 2004 increased
approximately $4.8 million, or 95%, to $9.8 million, compared to $5.0 million
for the twelve-months ended June 30, 2003.
In addition, our gross profit percentage increased 5.6 percentage points
from 18.3% for the twelve-months ended June 30, 2003 to 23.8% for the fiscal
year ended June 30, 2004. Our increased margins are primarily the result of the
diversification of our product line to higher margin drugs as well as increased
manufacturing efficiency.
During the fiscal year ended June 30, 2004, two customers accounted for
approximately 29% and 26% of total sales, respectively.
Cost of Sales
Cost of sales increased $8.8 million to $31.3 million for the fiscal year
ended June 30, 2004, or 39.1% from $22.5 million for the twelve-months ended
June 30, 2003, primarily due to increased production and sales. Significant
factors contributing to the increase are: (i) approximately $4.6 million, or
51.7% is attributable to the cost of raw materials, increased quantities of
which were necessary due to increased production. Raw material prices were
relatively constant during the period; (ii) approximately $2.0 million, or
23.0%, was for increased labor costs, including payroll taxes and benefits, and
(iii) approximately $750,000 or 8.5% 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 our new product lines, as well as increased
production of Ibuprofen.
Research and Development
Research and development expenses for the fiscal year ended June 30, 2004
were approximately $538,000 compared to approximately $452,000 for the
twelve-months ended June 30, 2003, an increase of approximately $86,000.
Research and development expenses were primarily for materials, wages 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.
Selling, General and Administrative
Selling, general and administrative expenses were $4.1 million, in the
fiscal year ended June 30, 2004, or 10.0% of net sales, compared to $2.5
million, or 9.0% of net sales, for the twelve-months ended June 30, 2003.
Selling, general and administrative expenses for the fiscal year ended
June 30, 2004 were primarily made up of salaries, including payroll taxes and
benefits ($1,461,000), selling commissions ($577,000), freight expenses
($419,000), legal, accounting and other professional services ($587,000),
insurance expense ($170,000) and utilities ($108,000). Salaries, including
payroll taxes and benefits increased $863,000, or 144.1% from the twelve-months
ended June 30, 2003 due to increases in staff to accommodate increased
production. Selling commissions, utilities, insurance and freight similarly
increased by 226.3%, 61.2%, 48.7% and 28.7% respectively, from the fiscal year
ended June 30, 2003 due to increased production and sales.
26
Operating Income
Operating income for the fiscal year ended June 30, 2004 increased
approximately $3.1 million, or 151.6%, to approximately $5.1 million from
approximately $2.0 million in the twelve-months ended June 30, 2003. The
increase in operating income is primarily the result of our increasing net sales
$13.6 million, diversification of our product line to higher margin drugs and
increased manufacturing efficiencies.
Income Taxes
Our provision for income taxes for the year ended June 30, 2004 increased
approximately $1,405,000 to $1,986,000 when compared to $581,000 for the
twelve-months ended June 30, 2003. This is primarily due to the 193.0% increase
in income before income taxes of $3,365,000 when comparing $5,109,000 to
$1,744,000 for the years ended June 30, 2004 and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We currently finance our operations and capital expenditures through cash
flows from operations, bank loans, lines of credit, cash acquired in our reverse
merger in May, 2003 and cash received from the exercises of stock options. Net
income for the fiscal year ended June 30, 2004 was $3.1 million, an increase of
$2.0 million from $1.1 million for the twelve-months ended June 30, 2003. Net
cash provided by operating activities for the fiscal year ended June 30, 2004
was $1.9 million, as compared to $1.2 million for the same period last year. Net
cash from operating activities during this period increased $2.0 million as a
result of realizing $2.0 million in cash savings from the tax benefits
associated wih the exercise of stock options, as well as depreciation and
amortization expenses of $886,000. Net cash was substantially offet by increases
in accounts receivable ($2.0 million) and inventories ($947,000). The increase
in inventories occurred gradually throughout the fiscal year in order to
accommodate increasing demand for our products. Net cash was also offset by a
decrease of $784,000 in accounts payable, accrued expenses and other
liabilities. Other items affecting our net cash provided from operating
activities aggregated $370,000.
During the fiscal year ended June 30, 2004, we were able to pay down bank
loans aggregating $462,000 and bank lines of credit by $1.64 million, in total
approximately $2.1 million. As discussed in Note 8, during the fiscal year ended
June 30, 2004, we recently obtained a $21,000,000 credit facility consisting of:
o A $7,400,000 mortgage loan which is to be repaid with 119 monthly
installments, based upon an amortization schedule of twenty years, and a
balloon payment due in ten years for the balance.
27
o Two advised credit lines aggregating $6,600,000 primarily to acquire new
equipment and for renovations of the Company's new Brookhaven, NY plant.
The balance of the funds accessed through these credit lines will convert
to fully amortizing five year term loans.
o A $2 million advised non-revolving secured facility for equipment
purchases. Each advance cannot exceed 90% of the invoice amount of the new
equipment and is convertible into separate notes that fully amortize over
60 months.
o A $5,000,000 advised line of credit primarily for working capital and
general corporate purposes.
This new credit facility is collateralized by substantially all of our
assets. At our option, interest will generally be calculated at (i) LIBOR plus
1.5% for 3 to 36 months periods, or (ii) at the Bank's then fixed prime rate. In
addition, we will be required to comply with certain financial covenants. The
Bank will review the new credit facility annually; the next review is scheduled
to occur no later than November 30, 2004. The credit lines are terminable by the
Bank at any time as to undrawn amounts.
Net cash used in investing activities was $2.9 million for the fiscal year
ended June 30, 2004, which is as a result of increases in fixed assets of $2.4
million and the downpayment for a new facility of $2.0 million in Brookhaven,
New York, offset by the collection of $1.5 million of notes receivable from our
reverse merger with Atec Group, Inc., and the sale of property and equipment of
$19,000. Net cash provided by financing activities was $1.5 million for the
fiscal year ended June 30, 2004, which resulted from the receipt of $3.5 million
from option exercises and $64,000 of additional cash received after the reverse
merger transaction, less repayment of various bank lines and notes of
approximately $2.1 million. Subsequent to June 30, 2004, the Company paid down
the complete balance owing on the general lines of credit of $424,847.
As a result of our cash flows from operations and financing activities
during the fiscal year ended June 30, 2004, working capital increased $6.2
million to $11.7 million from $5.5 million at June 30, 2003.
We believe our advised bank lines of credit, increased working capital,
funds generated from operations and cash provided by option exercises will allow
us to continue our expansion plans and will be sufficient to continue meet our
operating requirements. We may nevertheless, choose to raise additional funds or
seek other financing arrangements to facilitate more rapid expansion and
additional research and development activities. There can be no assurance,
however, that such additional funds will be available, or, if available, on
commercially acceptable terms.
At June 30, 2004, we had approximately $12.2 million in Federal net
operating loss carryforwards ("NOLs") available to reduce future taxable income.
These NOLs could result in savings of approximately $4.5 million in future
income tax payments (although there will be no corresponding benefit on income
tax expenses).
28
Accounts Receivable
Our accounts receivable at June 30, 2004 was $6.8 million as compared to
$4.9 million at June 30, 2003. This increase is primarily attributable to the
increase in sales for the fiscal year ended June 30, 2004. The average number of
days outstanding of our accounts receivable for the fiscal year ended June 30,
2004 was 51. 6 days and for the twelve-months ended June 30, 2003 was 60.5 days.
Inventory
At June 30, 2004, our inventory was $5.5 million as compared to $4.6
million at June 30, 2003. We believe the increase in inventory is necessary in
order to maintain our growth and overall customer demands. Our turnover of
inventory was 6.19 turns at June 30, 2004 and 6.23 at June 30, 2003.
Accounts Payable
Accounts payable, accrued expenses and other liabilities, in the
aggregate, decreased approximately $769,000. We believed it was important to
improve our relationships with key vendors. As such, during the fiscal year
ended June 30, 2004, we reduced our overall accounts payable when compared to
June 30, 2003.
Cash and Cash Equivalents
During the year ended June 30, 2004, cash and cash equivalents increased
$548,000 from $2,336,000 at June 30, 2003 to $2,885,000 at June 30, 2004,
primarily among other factor the result of: (i) collection of $1,524,000 of
notes receivable associated with the reverse merger and (ii) through the
collection of approximately $3,520,000 from the exercise of stock options. These
inflows were offset by: (i) net cash used in operating activities of $1,947,000,
consisting of net income of $3,123,000, offset by net funds used in operating
activities of $1,176,000; (ii) the cash used for the acquisition of our new
facility as well as new packaging equipment and other fixed assets aggregating
$4,424,000; and (iii) repayment of various bank lines of credit and bank notes
payable totaling approximately $2,102,000.
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.
29
OUR OBLIGATIONS
As of June 30, 2004, 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
---------------------------------------------------------------------------------------------------------------
Lines of credit(1) $ 424,847 $ 424,847 $ -- $ -- $ --
Bank notes payable(1) $ 7,400,000 $ 339,197 $ 740,000 $ 740,000 $ 5,580,803
Operating leases $ 7,500,839 $ 620,839 $ 960,000 $ 960,000 $ 4,960,000
------------ ------------- ------------ ------------- -------------
Total cash obligations $ 15,325,686 $ 1,384,883 $ 1,700,000 $ 1,700,000 $ 10,540,803
============ ============= ============ ============= =============
(1) See "Bank Loans and Lines of Credit," below.
The following are financial covenants related to the lines of credit and bank
loans:
o Minimum debt service ratio of at least 1.25 : 1.0, on a semi-annual
basis;
o Maximum debt to net worth ratio of not more than 1.2 : 1.0, on an
annual basis;
o Current Ratio not less than 1.5 : 1.0
All Ratios shall be tested quarterly, and Debt Service Coverage Ratio and
Interest Coverage Ratio shall be on a rolling four-quarter basis.
We are in compliance with all of the above covenants.
Bank Loans and Lines of Credit
Our advised credit lines and loans are fully described in Note 8 of the
accompanying financial statements.
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. 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.
30
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 May 2005. The annual lease payments are approximately
$187,000 and we have sublet 18,500 square feet for $164,000 per year. During the
remaining eleven months of this lease, we have sublet approximately18,500 square
feet for $139,000.
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 27.3% or $3.2 million to $14.9 million from $11.7
million.
o Gross profit increased 27.0% or $580,000 to $2.7 million from $2.1
million.
o Operating income increased 15.6% or $168,000 to $1.2 million from $1.0
million.
o Net income increased 18.5% or $113,000 to $724,000 from $611,000.
Net Sales and Gross Profit
Net sales for the six-month period ended June 30, 2003 were $15.0 million
compared to $11.7 million for the six-month period ended June 30, 2002, an
increase of 27.3% or $3.2 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 $2.7 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 $2.6 million to $12.2 million for the six-month
period ended June 30, 2003, or 27.4% from $9.6 million for the six-month period
ended June 30, 2002, primarily due to increased production and sales.
Approximately $1.9 million, or 72.2% 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 14.7%, was for increased labor costs, including
payroll taxes and benefits. Approximately $242,000 or 9.2% is attributable to
increased costs of packaging, lab and factory supplies.
31
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 $186,000 or 1% of net sales, compared to $149,000, or 1% of net sales
for the same period in 2002, an increase of $37,000. 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.
Selling, General and Administrative
Selling, general and administrative expenses were $1.3 million, in the
six-month period ended June 30, 2003, or 8.5% of net sales, compared to
$900,000, or 7.6% 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 ($320,000), selling commissions ($91,000), freight expenses
($197,000), legal, accounting and other professional services ($252,000),
insurance expense ($71,000), bad debts ($40,000), and utilities ($40,000).
Salaries increased $40,000, or 14.3% 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 $204,000, or 429.7% 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
$168,000 to $1.2 million as compared to $1.1 million, or 15.6% as compared to
the same period ended June 30, 2002. The six-month period ended June 30, 2003
included an increase of approximately $204,000 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.
32
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations were $200,000 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 Group,
Inc.'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 12 months.
Net cash used in investing activities for the six-month period ended June
30, 2003 was approximately $1.0 million related to the purchase of production
equipment.
During the six-month period ended June 30, 2003, we generated
approximately $3.1 million including approximately $2.1 million (net of $190,000
of costs) from the reverse merger with ATEC and $1.1 million 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 $1.5 million from the purchaser of
Atec Group, Inc.'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 $3.3
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 $7.7 million in Federal net
operating loss carryforwards ("NOLs") available to reduce future taxable income.
These NOLs could result in savings of up to $3.0 million in future income tax
payments (although there will be no effect on income tax expenses).
33
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 $9.0 million which could result in cash savings of up
to $3.0 million.
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 outstanding of 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 sufficient to meet current
demand.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increased
approximately $1.2 million and amounts due on our working capital credit line
increased $1.1 million 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 $2.3 million as compared
to $106,000 at December 31, 2002, an increase of $2.2 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 approximately $1.0 million. Offsetting these events were equipment
purchases of $1,031,000 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.
34
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 $3.0 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.
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 $0.9 million to $4.4 million from $3.5
million.
o Operating income increased 80% or $0.8 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 $900,000 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.
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.
35
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.
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 $0.2 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.
36
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.
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.
37
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 ongoing 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.
Revenue from the sale of Interpharm products are recognized upon shipment
of the product. Upon a review of specific accounts and historical experience we
record, when necessary, a provision for allowances, chargebacks, returns and
other sales credits based. These provisions have been recorded as a reduction of
sales in the consolidated statements of income.
We purchase raw materials from two suppliers, which are manufactured into
finished goods and sold back to such suppliers as well as to other customers. We
can, and do, purchase raw materials from other suppliers. We also (i) have the
general inventory risk of loss associated with the raw materials purchased; (ii)
negotiate the selling price for the finished product; (iii) significantly change
the raw material into a finished product based upon our specifications, and (iv)
have the option to obtain the raw materials from alternate sources. 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 $74,166
at June 30, 2004 and $47,776 at June 30, 2003.
38
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.
Income Taxes
We account 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. Our net deferred tax
asset at June 30, 2004 was $4,182,000 and $2,561,400 at June 30, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, and revised in December 2003, the Financial Accounting
Standards Board issued Interpretation No. 46R ("FIN 46"), "Consolidation of
Variable Interest Entities." Prior to the issuance of this interpretation, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
requires a variable interest entity, as defined, to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns. For these purposes, variable interests held by related parties
should be combined with the reporting entity. FIN 46 is effective for our
Company. The adoption of FIN 46 had no impact on our financial position, results
of operation or cash flows.
39
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
Our principal financial instrument currently is a $22.0 million credit
facility. At June 30, 2004, $7.4 million mortgage note payable and borrowings of
$425,000 under the line of credit was outstanding. The $425,000 borrowings were
repaid subsequent to June 30, 2004. Any obligations created under this credit
facility incur interest calculated at our option at (i) LIBOR plus 1.5% for
periods ranging in length from 3 to 36 months, or (ii) at the Bank's then fixed
prime rate. As of June 30, 2004, the interest rates on the borrowings and
mortgage note payable were 4.5% and 2.86%, respectively. We are required to
comply with certain financial covenants. The Bank will review the new credit
facility annually; the next review is scheduled to occur no later than November
30, 2004. The credit lines are terminable by the Bank at any time as to undrawn
amounts.
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.
Due to the nature of our borrowings as described above and our relatively
small amount of short-term investments, we have concluded that there is no
material risk exposure which could occur as a result of possible changes in
market interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the notes thereto,
together with the report from our independent registered public accounting firm
are presented beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the previous two fiscal years, and the subsequent interim period,
our 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. by Atec Group, 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 Group, Inc.'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.
40
WSLCO's report on Atec Group, Inc.'s financial statements for the previous
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, there were no disagreements with our accountants on any matter of
accounting principles or practices, financial statement disclosure, auditing
scope, or procedure, which disagreements, if not resolved to the satisfaction of
our accountants, 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 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, 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, 2004, 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.
41
On September 20, 2004, our independent registered accounting firm Marcum &
Kliegman, LLP ("MK"), informed us and our Audit Committee of the Board of
Directors that in connection with their review of our financial results for the
fiscal year ended June 30, 2004, MK had discovered a condition which they
deemed to be a material weakness in our internal controls (as defined by
standards established by the Public Company Accounting Oversight Board). MK
noted the lack of adequate internal control / review procedures required to
properly and timely record customer chargebacks. Management has informed MK and
the Audit Committee that it is modifying its internal control / review
procedures in such a manner that it believes will prevent reoccurrences of this
deficiency. The impact of the above condition was isolated to the fiscal quarter
ended June 30, 2004, and did not affect the results of any prior periods.
ITEM 9B OTHER INFORMATION
None
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the section entitled "Directors and Executive Officers of the Registrant " of
the 2004 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the section entitled "Executive Compensation " of the 2004 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters " of the 2004 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
43
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated herein by reference
to the section entitled "Principal Accounting Fees and Services" of the 2004
Proxy Statement.
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 herein:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2004 and June 30, 2003
Consolidated Statements of Income for the year ended June 30, 2004, for the
six-months ended June 30, 2003 and 2002 and for the years ended December 31,
2002 and 2001
Consolidated Statement of Stockholders' Equity for the year ended June 30, 2004,
for the six-months ended June 30, 2003 and 2002 and for the years ended December
31, 2002 and 2001
Consolidated Statements of Comprehensive Income for the year ended June 30,
2004, for the six-months ended June 30, 2003 and 2002 and for the years ended
December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the year ended June 30, 2004, for the
six-months ended June 30, 2003 and 2002 and for the years ended December 31,
2002 and 2001
(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.
44
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K in the quarter ended June 30,
2004:
REPORT DATE ITEM REPORTED
----------- -------------
June 30, 2004 The June 29, 2004 closing of the acquisition of a 92,000
square foot facility on thirty seven acres of land,
located in Brookhaven, New York.
June 11, 2004 The conversion of a portion of our Series K convertible
preferred stock.
May 17, 2004 Announcing our financial results for the three and
nine-months ended March 31, 2004.
April 21, 2004 Announcing the resignation of Bhupatlal K. Sutaria and
Praveen Bhutani as directors and the appointment as
Directors of Dr. Mark Goodman and James Charles.
(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)
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
(3);
10.3 Form of Employment Agreements for Interpharm Holdings, Inc.
employees (3);
45
10.4 December 5, 2002 Department of Veterans Affairs acceptance of
Interpharm, Inc.'s bid to supply Ibuprofen Tablets (3);
10.5 Contract of Sale for Land and Building at 50 Horseblock Road,
Yaphank, N.Y.
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 George Aronson 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 (3);
99.2 Form of Non-Qualified Stock Option Agreement (3);
99.3 Interpharm Holdings, Inc. Code of Ethics;
99.4 Interpharm Holdings, Inc. Nominating Committee Charter.
Footnotes:
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 Current Report on Form 8-K filed on November 26, 2002 and
incorporated herein by reference;
3. Annexed to our Transition Report on Form 10-K filed on September 29, 2003
and incorporated herein by reference.
46
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 28, 2004
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/ George Aronson September 28, 2004
---------------------------------------------------
George Aronson, Chief Financial Executive Officer
/s/ Bhupatlal K. Sutaria September 28, 2004
---------------------------------------------------
Bhupatlal K. Sutaria, President and Treasurer
/s/ Surinder Rametra September 28, 2004
---------------------------------------------------
Surinder Rametra, Director of Corporate Development
and Director
/s/ Dr. Mark Goodman September 28, 2004
---------------------------------------------------
Dr. Mark Goodman, Director
/s/ Stewart Benjamin September 28, 2004
---------------------------------------------------
Stewart Benjamin, Director
/s/ David Reback September 28, 2004
---------------------------------------------------
David Reback, Director
/s/ James Charles September 28, 2004
---------------------------------------------------
James Charles, Diretor
/s/ Cameron Reid September 28, 2004
---------------------------------------------------
Cameron Reid, Director
47
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended June 30, 2004, for the Six Months Ended June 30, 2003 and
2002 (Unaudited) and for the Years Ended December 31, 2002, and 2001
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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-10
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
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, 2004 and 2003,
and the related consolidated statements of income, stockholders' equity,
comprehensive income and cash flows for the year ended June 30, 2004, the six
month period ended June 30, 2003 and for the years ended December 31, 2002 and
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Interpharm Holdings, Inc. and Subsidiaries at June 30, 2004 and 2003, and the
consolidated results of its operations and its cash flows for the year ended
June 30, 2004, the six month period ended June 30, 2003 and the years ended
December 31, 2002 and 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Marcum & Kliegman LLP
Woodbury, New York
September 15, 2004
F-1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
June 30,
---------------------------
2004 2003
---------------------------
CURRENT ASSETS
Cash and cash equivalents $ 2,884,639 $ 2,336,203
Marketable securities, at fair market value 36,791 48,462
Accounts receivable, net 6,849,778 4,930,109
Notes receivable, current -- 1,000,000
Inventories, net 5,530,161 4,583,205
Prepaid expenses and other current assets 453,157 224,149
Deferred tax assets 1,280,000 23,500
----------- -----------
Total Current Assets 17,034,526 13,145,628
Land, building and equipment, net 15,007,132 4,085,302
Notes receivable, long-term -- 524,092
Deferred tax assets 2,902,000 2,537,900
Deposits 224,287 45,873
----------- -----------
TOTAL ASSETS $35,167,945 $20,338,795
=========== ===========
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,
----------------------------
2004 2003
----------------------------
CURRENT LIABILITIES
Current maturities of bank debt $ 764,014 $ 2,289,034
Accounts payable, accrued expenses and other liabilities 4,545,345 5,314,341
------------ ------------
Total Current Liabilities 5,309,359 7,603,375
------------ ------------
OTHER LIABILITIES
Bank debt, less current maturities 7,060,833 237,521
Other liabilities 14,968 29,535
------------ ------------
Total Other Liabilities 7,075,801 267,056
------------ ------------
TOTAL LIABILITIES 12,385,160 7,870,431
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued and outstanding -
6,902,963 and 7,300,876, respectively; aggregate
liquidation preference of $5,494,080 348,042 352,021
Common stock, $.01 par value,70,000,000 shares authorized;
shares issued - 25,591,311 and 15,671,649 respectively 255,913 156,717
Additional paid-in capital 19,184,291 12,076,237
Accumulated other comprehensive (loss) income (92) 11,579
Retained earnings 3,792,499 669,678
Treasury stock at cost, 624,145 shares (797,868) (797,868)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,782,785 12,468,364
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,167,945 $ 20,338,795
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Year Ended Six Months Ended June 30, Year Ended December 31,
June 30, -------------------------------------------------------------
2004 2003 2002 2002 2001
------------------------------------------------------------------------------
(Unaudited)
SALES, Net $41,099,728 $14,953,438 $11,743,440 $24,312,245 $18,435,446
COST OF SALES (including related party
rent expense of $408,000 for the year
ended June 30, 2004, $204,000 for the
six months ended June 30, 2003 and
2002 and $408,000 and $399,500 for
the years ended December 31, 2002
and 2001, respectively) 31,304,893 12,214,822 9,587,344 19,872,936 14,939,725
------------ ------------ ------------ ------------ -----------
GROSS PROFIT 9,794,835 2,738,616 2,156,096 4,439,309 3,495,721
------------ ------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and
administrative expenses 4,124,261 1,274,445 896,276 2,107,694 1,966,098
Loss on disposal of equipment -- -- -- -- 313,166
Related party rent expense 72,000 36,000 36,000 72,000 70,500
Research and development 538,199 185,601 148,850 415,618 110,000
------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 4,734,460 1,496,046 1,081,126 2,595,312 2,459,764
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 5,060,375 1,242,570 1,074,970 1,843,997 1,035,957
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Related party interest expense -- (69,125) (94,063) (188,125) (188,126)
Interest expense (21,367) (63,299) (52,542) (102,103) (119,434)
Interest and other income 69,451 8,166 -- 63 452
------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSES) 48,084 (124,258) (146,605) (290,165) (307,108)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 5,108,459 1,118,312 928,365 1,553,832 728,849
PROVISION FOR INCOME TAXES 1,985,638 394,667 317,563 503,413 214,284
------------ ------------ ------------ ------------ ------------
NET INCOME $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419 $ 514,565
============ ============ ============ ============ ============
EARNINGS PER SHARE
Basic earnings per share $ 0.16 $ 0.08 $ 0.07 $ 0.13 $ 0.06
============ ============ ============ ============ ============
Diluted earnings per share $ 0.04 $ 0.02 $ 0.02 $ 0.03 $ 0.01
============ ============ ============ ============ ============
Basic weighted average shares outstanding 17,594,979 7,721,524 6,151,178 6,151,178 6,151,178
============ ============ ============ ============ ============
Diluted weighted average shares and
equivalent shares outstanding 68,637,185 41,664,357 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
--------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
--------------------------------------------------------------------------
BALANCE - January 1, 2001 2,050,393 $ 20,504 6,151,178 $ 61,512 $ 2,287,984
Unrealized gain on marketable securities, net -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2001 2,050,393 20,504 6,151,178 61,512 2,287,984
Unrealized loss on marketable securities, net -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2002 2,050,393 20,504 6,151,178 61,512 2,287,984
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 -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - June 30, 2003 7,300,876 352,021 15,671,649 156,717 12,076,237
Shares issued for options and warrants exercised -- -- 3,535,887 35,358 3,484,784
Tax benefit in connection
with exercise of stock options -- -- -- -- 3,679,100
Adjustments related to reverse merger -- -- 4,000 40 3,989
Conversion of Series J preferred stock (105,000) (1,050) 105,000 1,050 --
Conversion of Series K preferred stock (292,913) (2,929) 6,274,775 62,748 (59,819)
Unrealized loss on marketable securities, net -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - June 30, 2004 6,902,963 $ 348,042 25,591,311 $ 255,913 $ 19,184,291
============ ============ ============ ============ ============
Accumulated
Other Retained Total
Comprehensive Earnings/ Treasury Stock Stockholders'
Income (Loss) (Deficit) Shares Amount Equity
---------------------------------------------------------------------------
BALANCE - January 1, 2001 $ (14,529) $ (1,618,951) -- $ -- $ 736,520
Unrealized gain on marketable securities, net 16,972 -- -- -- 16,972
Net income -- 514,565 -- -- 514,565
------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2001 2,443 (1,104,386) -- -- 1,268,057
Unrealized loss on marketable securities, net (3,334) -- -- -- (3,334)
Net income -- 1,050,419 -- -- 1,050,419
------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2002 (891) (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 -- -- -- 12,470
Net income -- 723,645 -- -- 723,645
------------ ------------ ------------ ------------ ------------
BALANCE - June 30, 2003 11,579 669,678 624,145 (797,868) 12,468,364
Shares issued for options and warrants exercised -- -- -- -- 3,520,142
Tax benefit in connection
with exercise of stock options -- -- -- -- 3,679,100
Adjustments related to reverse merger -- -- -- -- 4,029
Conversion of Series J preferred stock -- -- -- -- --
Conversion of Series K preferred stock -- -- -- -- --
Unrealized loss on marketable securities, net (11,671) -- -- -- (11,671)
Net income -- 3,122,821 -- -- 3,122,821
------------ ------------ ------------ ------------ ------------
BALANCE - June 30, 2004 $ (92) $ 3,792,499 624,145 $ (797,868) $ 22,782,785
============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
Year Ended Six Months Ended June 30, Year Ended December 31,
June 30, -------------------------------------------------------
2004 2003 2002 2002 2001
----------------------------------------------------------------------
(Unaudited)
NET INCOME $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419 $ 514,565
OTHER COMPREHENSIVE INCOME
Unrealized (loss) gain
on marketable securities, net (11,671) 12,470 (3,677) (3,334) 16,972
----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME $ 3,111,150 $ 736,115 $ 607,125 $ 1,047,085 $ 531,537
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Year Ended Six Months Ended June 30, Year Ended December 31,
June 30, --------------------------------------------------------
2004 2003 2002 2002 2001
-----------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419 $ 514,565
----------- ----------- ----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 886,141 317,034 221,253 494,986 378,208
Deferred tax expense (benefit) 1,998,500 116,100 58,000 79,500 (32,000)
Accrued interest on related party loans -- 6,625 94,063 188,125 188,126
Provision for doubtful accounts 40,000 40,200 -- 47,165 261,641
(Gain) loss on disposal of equipment (2,554) -- -- -- 313,166
Changes in operating assets and liabilities:
Accounts receivable (1,959,669) (812,167) (417,855) (308,583) (2,465,379)
Inventories (946,956) (1,194,106) (471,685) (1,219,985) 439,690
Prepaid expenses and other current assets (229,008) (152,671) (42,306) 76,195 (13,305)
Deposits (178,414) -- -- -- --
Accounts payable, accrued expenses
and other liabilities (783,563) 1,155,772 679,806 1,339,713 1,321,631
----------- ----------- ----------- ----------- -----------
TOTAL ADJUSTMENTS (1,175,523) (523,213) 121,276 697,116 391,778
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,947,298 200,432 732,078 1,747,535 906,343
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities -- -- (19,011) (19,011) --
Proceeds from notes receivable 1,524,092 -- -- -- --
Proceeds from sale of equipment 19,000 -- -- -- --
Purchases of land, building and equipment (4,424,417) (1,031,403) (730,859) (1,184,210) (964,259)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $(2,881,325) $(1,031,403) $ (749,870) $(1,203,221) $ (964,259)
----------- ----------- ----------- ----------- -----------
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
--------------------------------------------------------------------------------
Year Ended Six Months Ended June 30, Year Ended December 31,
June 30, --------------------------------------------------------
2004 2003 2002 2002 2001
----------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment of) proceeds from bank debt $(2,101,708) $ 962,625 $ (98,454) $ (214,662) $ 428,998
Due to related parties -- -- (24,000) (807,721) (214,500)
Cash received in
reverse merger transaction 64,029 2,067,510 -- -- --
Proceeds from options
and warrants exercised 3,520,142 31,250 -- -- --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 1,482,463 3,061,385 (122,454) (1,022,383) 214,498
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND
CASH EQUIVALENTS 548,436 2,230,414 (140,246) (478,069) 156,582
CASH AND CASH
EQUIVALENTS - Beginning 2,336,203 105,789 583,858 583,858 427,276
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS - Ending $ 2,884,639 $ 2,336,203 $ 443,612 $ 105,789 $ 583,858
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 21,367 $ 125,799 $ 52,542 $ 412,230 $ 332,135
Income Taxes $ 110,013 $ 348,302 $ 227,728 $ 405,047 $ 184,905
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
--------------------------------------------------------------------------------
Year Ended Six Months Ended June 30, Year Ended December 31,
June 30, ----------------------------------------------------
2004 2003 2002 2002 2001
-------------------------------------------------------------------
(Unaudited)
Non-cash investing
and financing activities:
Mortgage loan utilized to acquire
new facility (Note 6) $ 7,400,000 $ -- $ -- $ -- $ --
=========== =========== ========== =========== ==========
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
in 2003 $ 64,029 $ 2,067,510 $ -- $ -- $ --
Equipment -- 11,965 -- -- --
Notes receivable -- 1,524,092 -- -- --
Deposits -- 34,494 -- -- --
Deferred tax assets (60,000) 2,610,000 -- -- --
Accounts payable -- (144,044) -- -- --
Other liabilities -- (29,535) -- -- --
----------- ----------- ---------- ----------- ----------
Net assets obtained in reverse
merger transaction $ 4,029 $ 6,074,482 $ -- $ -- $ --
=========== =========== ========== =========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
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 ("Series K"), 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 Series K 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.
Since this transaction is in substance, a recapitalization of Interpharm,
Inc. and not a business combination, the reverse merger with ATEC has been
recorded based on the fair value of ATEC's net tangible assets, which
consist primarily of cash, equipment, notes receivable, deposits and a
deferred tax asset with an aggregate value of $6,078,511 (net of
transaction costs of $190,051). Accordingly, 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-10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Change of Fiscal Year
The Company has changed its fiscal year end from December 31 to June 30. A
Transition Report on Form 10-K was filed for the six month transition
period 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 two suppliers, which are
manufactured into finished goods and sold back to such suppliers 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, these suppliers 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 suppliers. For the year ended June 30, 2004, the six month
periods ended June 30, 2003 and 2002 and for the years ended December 31,
2002 and 2001, the Company purchased raw materials from the two suppliers
totaling approximately $12,367,000, $3,573,000, $3,693,000, $6,805,000 and
$2,189,000, respectively and sold finished goods to such suppliers
totaling approximately $22,625,000, $5,795,000, $5,290,000, $10,745,000
and $3,601,000, respectively.
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. In
accordance with EITF Issue No. 03-6, "Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per Share," the
Company uses the two-class method to calculate the effect of the
participating Series K on the calculation of basic EPS and the
if-converted method is used to calculate the effect of the participating
Series K on diluted EPS. The adoption of EITF Issue No. 03-6 did not
require any changes to the Company's calculation of EPS.
F-11
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.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects management's best estimate of
probable losses inherent in the account receivable balance. Management
determines the allowance based on known troubled accounts, historical
experience and other currently available evidence.
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.
Land, Building and Equipment
Land, building and equipment is stated at cost. Maintenance and repairs
are charged to expense as incurred, costs of major additions and
betterments are capitalized. When 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.
F-12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
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. Significant estimates include
deferred tax asset valuations and inventory overhead costing estimates.
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 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 year ended June 30, 2004, the six
months ended June 30, 2003 and 2002 and for the years ended December 31,
2002 and 2001, shipping and handling costs approximated $419,000,
$198,000, $181,000, $370,000 and $248,000, respectively.
F-13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
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, 2004, the Company has cash investments
totaling approximately $4,192,000 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.
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, 2004, the Company had two stock-based employee plans. As
permitted under Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation - Transition 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:
F-14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
Year Ended Six Months Year Ended
June 30, Ended June 30, December 31,
2004 2003 2002 2001
---------------------------------------------------
Net income as Reported $ 3,122,821 $ 723,645 $ 1,050,419 $ 514,565
Less: Stock-based employee
compensation expense
determined under fair value-
based method for all awards,
net of income tax 803,544 60,000 -- --
----------- --------- ----------- -----------
Pro forma $ 2,319,277 $ 663,645 $ 1,050,419 $ 514,565
=========== ========= =========== ===========
Basic net income per share
As reported $ .16 $ .08 $ .13 $ .06
=========== ========= =========== ===========
Pro forma $ .11 $ .07 $ .13 $ .06
=========== ========= =========== ===========
Diluted net income per share
As reported $ .04 $ .02 $ .03 $ .01
=========== ========= =========== ===========
Pro forma $ .03 $ .02 $ .03 $ .01
=========== ========= =========== ===========
The fair values of Company common stock options granted to employees were
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility ranging from
126% to 135%, (2) risk-free interest rates ranging from 4.25% to 4.50% and
(3) expected average lives of 10 years.
New Accounting Pronouncement
In January 2003, and revised in December 2003, the Financial Accounting
Standards Board issued Interpretation No. 46R ("FIN 46"), "Consolidation
of Variable Interest Entities." Prior to the issuance of this
interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined,
to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. For these
purposes, variable interests held by related parties should be combined
with the reporting entity. FIN 46 is effective for the Company. The
adoption of FIN 46 had no impact on the Company's financial position,
results of operation or cash flows.
F-15
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,
--------------------
2004 2003
--------------------
Cost $ 36,883 $ 36,883
Unrealized (loss) gain (92) 11,579
-------- --------
Fair market value $ 36,791 $ 48,462
======== ========
NOTE 3 - Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of
$74,166 and $47,776 at June 30, 2004 and 2003, respectively. The changes
in the allowance for doubtful accounts are summarized as follows:
Six Months
Year Ended Ended Year Ended
June 30, June 30, December 31,
------------------------------------------------
2004 2003 2002 2001
------------------------------------------------
Beginning balance $ 47,776 $ 47,776 $ 47,776 $ 26,950
Provision for doubtful accounts 40,000 40,200 47,165 261,641
Charge-offs (13,610) (40,200) (47,165) (240,815)
--------- --------- --------- ---------
Ending balance $ 74,166 $ 47,776 $ 47,776 $ 47,776
========= ========= ========= =========
NOTE 4 - Inventories
Inventories consist of the following:
June 30,
-----------------------
2004 2003
-----------------------
Finished goods $ 534,175 $ 347,189
Work in process 2,710,270 2,227,139
Raw materials 1,932,971 1,733,109
Packaging materials 352,745 275,768
---------- ----------
Total $5,530,161 $4,583,205
========== ==========
F-16
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
Two notes receivable acquired as part of the reverse merger (Note 1) with
an aggregate amount of $1,524,092 were repaid in full during the three
months ended September 30, 2003.
NOTE 6 - Land, Building and Equipment
Land, building and equipment consists of the following:
June 30, Estimated
--------------------------- Useful
2004 2003 Lives
-------------------------------------------
Land $ 4,924,000 $ --
Building 4,475,482 -- 20 Years
Machinery and equipment 5,457,395 3,454,147 5-7 Years
Furniture and fixtures 319,762 107,565 5 Years
Leasehold improvements 2,623,203 2,095,845 5-15 Years
Construction in progress (a) -- 346,648
----------- -----------
17,799,842 6,004,205
Less: accumulated
depreciation and amortization 2,792,710 1,918,903
----------- -----------
Land, Building & Equipment, net $15,007,132 $ 4,085,302
=========== ===========
(a) Construction in progress represents costs of constructing a
manufacturing equipment line in the Company's current facility. The
equipment was placed in service in fiscal 2004.
On June 29, 2004, the Company completed a transaction in which it acquired
a second facility located in Brookhaven, New York. The 92,000 square foot
facility, situated on 37 acres, was purchased for $9,399,482 which
included closing costs of $149,482. $4,924,000 has been allocated to land
with the balance, $4,475,482, attributable to the building. The Company
secured a $7,400,000 mortgage loan for part of the purchase price.
Depreciation and amortization expense for the year ended June 30, 2004,
the six month period ended June 30, 2003 and for the years ended December
31, 2002 and 2001 was $886,141, $317,034, $494,986 and $378,208,
respectively.
F-17
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,
-----------------------
2004 2003
-----------------------
Trade accounts payable $3,455,444 $4,927,448
Accrued expenses and other current liabilities 1,089,901 386,893
---------- ----------
Total $4,545,345 $5,314,341
========== ==========
NOTE 8 - Bank Debt
The Company had a credit facility agreement with a Bank, which consisted
of an advised secured line of credit totaling $5,000,000 and a $2,000,000
non-revolving secured facility for equipment purchases. Borrowings under
this credit facility were collateralized by substantially all assets of
the Company and personally guaranteed by four of the Company's
stockholders. In addition, the Company was required to comply with certain
financial covenants. As of June 30, 2004, the Company had outstanding
borrowings of $424,847 under the line of credit. Subsequent to June 30,
2004, the Company paid down this entire balance.
On March 29, 2004, the Company obtained a $21 million credit facility from
the same Bank. The new credit facility consists of (i) a $7.4 million
mortgage loan for the purchase of the Company's second manufacturing plant
in Brookhaven, NY (Note 6); (ii) $8.6 million of credit lines primarily to
acquire new equipment and for renovations, and (iii) a $5 million general
line of credit. This credit facility replaces the $7 million credit
facility discussed above. Details of the new facility are as follows:
o The $7,400,000 mortgage loan is to be repaid with 119 monthly
principal installments of $30,833 commencing on August 1, 2004 with
the balance due June 1, 2014.
o Two advised secured credit lines aggregating $6,600,000 primarily
for acquisitions of equipment and for renovations of the Company's
new Brookhaven, NY plant. The balance of the funds accessed through
these credit lines will convert to fully amortizing five year term
loans.
o A $2,000,000 advised non-revolving secured facility for equipment
purchases (the "Term Loan Line"). Each advance cannot exceed 90% of
the invoice amount of the new equipment and is convertible into
separate notes that fully amortize over 60 months.
o The $5,000,000 advised secured line of credit is primarily for
working capital and general corporate purposes.
F-18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Bank Debt, continued
This new credit facility is collateralized by substantially all assets of
the Company and no longer requires personal guarantees of four of the
Company's stockholders. At the option of the Company, interest will
generally be calculated at (i) LIBOR plus 1.5% for 3 to 36 month periods,
or at (ii) the Bank's then fixed prime rate. As of June 30, 2004, the
interest rates on the working capital line and mortgage note payable were
4.5% and 2.86%, respectively. In addition, the Company is required to
comply with certain financial covenants. The Bank will review the new
credit facility annually; the next review is scheduled to occur no later
than November 30, 2004. The credit lines are terminable by the Bank at any
time as to undrawn amounts.
A summary of the outstanding balances is as follows:
June 30,
-----------------------
2004 2003
-----------------------
Working capital lines $ 424,847 $2,064,793
Mortgage note payable 7,400,000 --
Equipment notes payable -- 461,762
---------- ----------
Total Long-Term Debt 7,824,847 2,526,555
Less: current maturities 764,014 2,289,034
---------- ----------
Long-Term Debt, Less Current Maturities $7,060,833 $ 237,521
========== ==========
Scheduled annual maturities of the bank debt are as follows:
For the Year
Ending June 30, Amount
------------------------------------------
2005 $ 764,014
2006 370,000
2007 370,000
2008 370,000
2009 370,000
Thereafter 5,580,833
----------
Total $7,824,847
==========
F-19
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - 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 are as
follows:
For the Year
Ending June 30, Amount
---------------------------------------
2005 $ 480,000
2006 480,000
2007 480,000
2008 480,000
2009 480,000
Thereafter 4,960,000
----------
Total $7,360,000
==========
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 had
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.
F-20
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - Income Taxes
The income tax (benefit) expense is comprised of the following:
Year Ended
Year Ended Six Months December 31,
June 30, Ended June 30, -------------------------
2004 2003 2002 2001
-------------------------------------------------------
Current
Federal $ (30,967) $ 243,255 $ 404,663 $ 240,635
State 18,105 35,312 19,250 5,649
----------- ----------- ----------- -----------
Total Current (12,862) 278,567 423,913 246,284
----------- ----------- ----------- -----------
Deferred
Federal 1,785,200 119,500 67,100 4,000
State 213,300 (3,400) 12,400 (36,000)
----------- ----------- ----------- -----------
Total Deferred 1,998,500 116,100 79,500 (32,000)
----------- ----------- ----------- -----------
Provision for
Income Taxes $ 1,985,638 $ 394,667 $ 503,413 $ 214,284
=========== =========== =========== ===========
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 Year Ended
Year Ended Ended December 31,
June 30, June 30, ----------------
2004 2003 2002 2001
------------------------------------------
Statutory U.S. federal tax rate 34.0% 34.0% 34.0% 34.0%
State taxes 3.0 2.0 1.2 1.2
Permanent differences 0.2 (0.7) (0.9) (0.6)
Change in valuation allowance 0.7 (0.4) (1.5) (4.4)
Other 1.0 0.4 (0.4) (0.8)
---- ---- ---- ----
Effective income tax rate 38.9% 35.3% 32.4% 29.4%
==== ==== ==== ====
F-21
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - Income Taxes, continued
The components of deferred tax assets and liabilities consist of the
following:
June 30,
--------------------------
2004 2003
--------------------------
Deferred Tax Assets, Current Portion
Capitalized inventory $ 17,000 $ 7,000
Receivable allowance and reserves 27,000 16,500
Other 45,000 --
Net operating loss carryforwards 1,191,000 --
----------- -----------
Deferred Tax Assets, current $ 1,280,000 $ 23,500
=========== ===========
Deferred Tax Assets, Non-Current Portion
Investment tax credits $ 518,000 $ 302,000
Other -- 26,600
Net operating loss carryforwards 3,295,000 3,067,300
----------- -----------
3,813,000 3,395,900
Valuation allowance (620,000) (650,000)
----------- -----------
Deferred Tax Assets, Non-Current 3,193,000 2,745,900
----------- -----------
Deferred Tax Liabilities, Non-Current Portion
Depreciation and amortization (291,000) (208,000)
----------- -----------
Deferred Tax Assets, Non-Current, net 2,902,000 2,537,900
----------- -----------
Total Deferred Tax Assets, Net $ 4,182,000 $ 2,561,400
=========== ===========
As part of the reverse merger transaction (Note 1), approximately
$7,370,000 of ATEC's net operating loss carryforwards ("NOLs") are
available to the Company. During the year ended June 30, 2004, stock
options were exercised which generated approximately $9,900,000 of income
tax deductions, resulting in a tax benefit of $3,679,100 which was
credited to additional paid-in capital.
At June 30, 2004 the Company has remaining Federal NOLs of approximately
$12,170,000 and State NOLs of approximately $11,600,000 expiring through
2024. Pursuant to Section 382 of the Internal Revenue Code regarding
substantial changes in Company ownership, utilization of approximately
$11,640,000 of these NOLs is limited to approximately $2,690,000 per year,
plus any prior years' amount not utilized, if any. As of June 30, 2004,
the Company has determined that it is more likely than not, that the
Company will utilize all of the Federal NOLs in the future. The Company
reserved approximately 30% of the State NOLs which the Company does not
anticipate utilizing due to State limitations.
F-22
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - Income Taxes, continued
In addition, at June 30, 2004, the Company has approximately $518,000 of
New York State investment tax credit carryforwards, expiring in various
years through 2019. These carryforwards are available to reduce future New
York State income tax liabilities. However, the Company has reserved 100%
of the investment tax credit carryforward, which the Company does not
anticipate utilizing.
NOTE 11 - Earning Per Share
The calculations of basic and diluted EPS are as follows:
Six Months Ended Year Ended
Year Ended June 30, December 31,
June 30, -----------------------------------------------------
2004 2003 2002 2002 2001
-------------------------------------------------------------------
Numerator:
Net income $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419 $ 514,565
Less: Preferred stock dividend 165,569 13,150 -- -- --
Less: Net income attributable to
Series K preferred
stockholders 194,476 86,765 152,701 262,605 128,641
----------- ----------- ----------- ----------- -----------
Numerator for basic EPS 2,762,776 623,730 458,101 787,814 385,924
Effect of dilutive securities:
Net income attributable to
Series K preferred stockholders 194,476 86,765 152,701 262,605 128,641
----------- ----------- ----------- ----------- -----------
Numerator for diluted EPS $ 2,957,252 $ 710,495 $ 610,802 $ 1,050,419 $ 514,565
=========== =========== =========== =========== ===========
Denominator:
Denominator for basic EPS
Weighted average shares
outstanding 17,594,979 7,721,524 6,151,178 6,151,178 6,151,178
Effect of dilutive securities:
Convertible Series K
preferred stock 43,460,533 32,609,356 29,783,884 29,783,884 29,783,884
Convertible Series A, B, C and J
preferred stocks 11,454 19,879 -- -- --
Stock options 7,570,219 1,313,598 -- -- --
----------- ----------- ----------- ----------- -----------
Denominator for diluted EPS 68,637,185 41,664,357 35,935,062 35,935,062 35,935,062
=========== =========== =========== =========== ===========
Basic EPS $ .16 $ .08 $ .07 $ .13 $ .06
=========== =========== =========== =========== ===========
Diluted EPS $ .04 $ .02 $ .02 $ .03 $ .01
=========== =========== =========== =========== ===========
F-23
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Earning Per Share, continued
As of June 30, 2004, 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 24,967,166
Stock options outstanding (see Note 12) 10,460,000
Common stock issuable upon conversion of preferred stocks:
Series A 1,526
Series A-1 (maximum contingent conversion) (a) 4,855,389
Series B 292
Series C 5,620
Series K (b) 37,648,650
----------
Total (c) 77,938,643
==========
(a) 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.
(b) On June 4, 2004 one seventh of the 2,050,393 Series K shares, or
292,913 shares, converted into 6,274,775 of the Company's common
stock. On June 4, 2005 and on each anniversary date thereof, through
June 4, 2010, 292,913 Series K shares will automatically convert
into 6,274,775 shares of the Company's common stock (see Note 12).
(c) 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).
F-24
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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, 2004:
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 -- -- --
Series K Convertible 3,000,000 1,757,480 17,575 --
---------- ---------- ---------- ----------
Total preferred 8,496,937 6,902,963 $ 348,042 $5,494,080
========== ========== ========== ==========
* Classes of preferred stock assumed in the ATEC reverse merger.
At June 30, 2004, 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 declared 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
F-25
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - Equity Securities, continued
Preferred Stocks, continued
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. The J shares cannot be
re-issued.
On June 4, 2004, the Company was deemed by AMEX to be in compliance with
applicable listing standards, and as a result, a "Triggering Event"
occurred. Upon the occurrence of the Triggering Event, the holders of the
K shares, in accordance with a defined formula, which assumes among other
things, the conversion of the A, B, C and J shares into common stock,
converted one seventh or 292,913 of the K shares into 6,274,775 restricted
shares of the Company's common stock. The K shares automatically convert
into a like amount on each June 4, 2005 through 2010, for an aggregate of
an additional 37,648,650 shares of common stock. Upon a change in control,
as defined, the conversion of the K shares may accelerate. The holders of
the K shares have demand registration rights with respect to the common
stock to be issued upon conversion. The net effect of the conversion
feature, 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 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 loans due to
the Company's Chief Executive Officer and one of its stockholders, 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.
F-26
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - Equity Securities, continued
Stock Options, continued
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, 2004, 1,436,370 options
are outstanding under this plan. No additional shares can be granted under
this plan.
The 2000 Plan provides for 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, 2004, the 2000 Plan provides for the issuance of 13,932,721
shares of common stock. As of that date, 9,023,630 options are outstanding
under this plan.
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, 2004. There were no options issued by Interpharm, Inc. prior to the
reverse merger.
Number Weighted Average
of Options Exercise 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
Granted 1,415,000 $ 4.10
Exercised (3,477,441) $ 1.04
Forfeited (23,250) $ .94
-----------
Outstanding at June 30, 2004 10,460,000 $ 1.62
===========
F-27
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - Equity Securities, continued
Stock Options, continued
The following table summarizes information concerning outstanding and
exercisable stock options as of June 30, 2004:
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, 2004 Life Price June 30, 2004 Price
------------------------------------------------------------------------------------------------------------
$0.450 - $0.680 7,608,630 8.39 $0.63 2,555,391 $0.54
$1.625 - $3.970 1,416,370 3.38 $3.50 416,370 $2.38
$4.260 - $6.800 1,435,000 4.94 $5.00 1,020,000 $5.24
---------- ---------
10,460,000 3,991,761
========== =========
During the year ended June 30, 2004, 3,477,441 options and 58,446 warrants
were exercised generating cash proceeds to the Company of approximately
$3,520,000, and resulting in tax deductions approximating $9,900,000 (Note
10).
NOTE 13 - Commitments and Contingencies
Employment Agreements
On June 1, 2003 the Company entered into employment agreements with 6
executive officers and 7 employees. Additionally, in January, 2004, the
Company entered into an employment agreement with its Chief Financial
Officer. Each of the agreements is substantially identical and provides
for the following significant terms:
- employment terms extend through December 31, 2008, 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 ($910,000 in total)
for the 7 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
5,245,000 stock options.
F-28
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - Commitments and Contingencies, continued
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 May, 2005. Rent expense
under this operating lease was $186,684 for the year ended June 30, 2004
and $15,557 for the one-month period ended June 30, 2003. The Company is
subletting a portion of the facility to three unrelated parties. Rental
income of $167,719 and $13,676 was recognized under these agreements for
the year ended June 30, 2004 and the one-month period ended June 30, 2003.
Legal Proceedings
Because Interpharm, Inc. utilizes certain controlled substances, it is
subject to routine inspection by the U.S. Drug Enforcement Agency. On May
27, 2004, Interpharm, Inc. received a notice from the United States
Attorney's Office for the Eastern District of New York relating to a
routine inspection conducted in November, 2003. The notice references
certain alleged record keeping violations. As of the date of this report,
no complaint has been filed by the United States Attorney's Office, and
Interpharm, Inc. is in the process of setting up a meeting with the United
States Attorney's Office to resolve the matter. The Company is unable to
predict the outcome of this claim and, accordingly, no adjustments have
been made in the consolidated financial statements.
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management, it
is not anticipated that the settlement or resolution of any such matters
will have a material adverse impact on the Company's financial condition,
liquidity or results of operations.
NOTE 14 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the year end
ended June 30, 2004, the six month periods ended June 30, 2003 and 2002
and for each of the years ended December 31, 2002 and 2001:
Sales - Percent of Revenue
--------------------------
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
2004 2003 2002 2002 2001
---------------------------------------------------------------------------------------------------------
Customer A ** -- -- -- -- 19%
Customer B 29% 37% 45% 44% 20%
Customer C * 13% 16% * 22%
Customer D * * * * *
Customer E 26% * * * *
F-29
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - Economic Dependency, continued
Accounts Receivable
-------------------
June 30,
2004 2003
----------------------------------------------------------
Customer A ** $ -- $ --
Customer B 2,760,500 2,202,354
Customer C 172,851 736,022
Customer D 34,280 229,288
Customer E 849,055 461,721
* 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 three suppliers, during the year
ended June 30, 2004, totaling approximately 82%, and two suppliers
totaling approximately 60%, 72%, 68% and 65% of the Company's total
purchases, during the six month periods ended June 30, 2003 and 2002 and
for the years ended December 31, 2002 and 2001, respectively. At June 30,
2004 and 2003 amounts due to these suppliers included in accounts payable,
were approximately $2,590,000 and $2,737,000, respectively.
NOTE 15 - Quarterly Financial Data (Unaudited)
Summarized quarterly financial information consists of the following:
Sept. 30, 2003 Dec. 31, 2003 March 31, 2004 June 30, 2004
-----------------------------------------------------------------
Sales, net $ 6,875,348 $11,706,231 $11,307,974 $11,210,175
Gross profit 1,431,830 2,618,275 2,815,151 2,929,579
Net income 227,439 1,024,097 983,530 887,755
Basic EPS $ .01 $ .05 $ .05 $ .04
=========== =========== =========== ===========
Diluted EPS $ .00 $ .01 $ .01 $ .01
=========== =========== =========== ===========
-----------------------------------------------------------------
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 $ --
========== ========== ========== ==========
NOTE 15 - Quarterly Financial Data (Unaudited), continued
The unaudited interim financial information reflects all adjustments,
which in the opinion of management, are necessary to fairly present the
results of the interim periods presented. All adjustments are of a normal
recurring nature. The sum of the quarterly EPS amounts may not equal the
full year amounts due to rounding.
F-30