SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from JANUARY 1, 2003 to JUNE 30, 2003
Commission File Number 0-22710
INTERPHARM HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3673965
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(State or other jurisdiction of (IRS. Employer
corporation or organization) Identification Number)
69 MALL DRIVE, COMMACK, NEW YORK 11725
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
Securities registered pursuant to
Section 12(b) of the Act: Common Stock $.01 par value
Securities registered pursuant to Section
12(g) of the Act: Series A Preferred Stock $.10
par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES X NO
---- ----
i
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES X NO
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES NO X
---- ----
On September 12, 2003, the aggregate market value of the voting common
equity of Interpharm Holdings, Inc., held by non-affiliates of the Registrant
was $69,680,001 based on the closing price of $7.10 for such common stock on
said date as reported by the American Stock Exchange. On such date, we had
17,393,886 shares of common stock outstanding.
ii
INTERPHARM HOLDINGS, INC.
Form 10-K
Six Months Ended June 30, 2003
TABLE OF CONTENTS
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PART I PAGE
Item 1. Business........................................................ 2
Item 2. Properties ..................................................... 13
Item 3. Legal Proceedings............................................... 13
Item 4. Submission of Matters to a Vote of
Security Holders................................................ 14
PART II
Item 5. Market for Common Stock
and Related Stockholder Matters............................... 15
Item 6. Selected Financial Data......................................... 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 24
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk............................................. 38
Item 8. Financial Statements and Supplementary Data..................... 38
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures......................................... 39
ITEM 9A. CONTROLS AND PROCEDURES........................................ 39
PART III
Item 10. Directors and Executive Officers
of the Registrant............................................. 40
Item 11. Executive Compensation........................................ 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters........................................... 48
Item 13. Certain Relationships and Related
Transactions.................................................. 51
Item 14. Principal Accounting Fees and Services......................... 52
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K....................................... 52
Signatures.............................................................. 54
Financial Statements ................................................... F-1
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange Commission.
The words "believe, expect, anticipate, intend and plan" and similar
expressions identify forward-looking statements. These statements are subject to
risks and uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date the statement was made.
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PART I
ITEM 1. BUSINESS
GENERAL
Interpharm Holdings, Inc., (the "Company" or "Interpharm") (formerly ATEC
Group, Inc.), through its operating wholly-owned subsidiary, Interpharm, Inc.,
("Interpharm, Inc." and collectively with Interpharm, "we" or "us") is engaged
in the business of developing, manufacturing and marketing generic prescription
strength and over-the-counter pharmaceutical products. On May 30, 2003,
Interpharm, Inc. was acquired by ATEC Group, Inc. ("ATEC") which then changed
its name to Interpharm Holdings, Inc. In that transaction, ATEC acquired all of
the issued and outstanding shares of Interpharm, Inc. in exchange for both ATEC
common and preferred stock. Concurrently with the acquisition of Interpharm,
Inc., ATEC sold its then existing computer/systems integration business to
certain members of ATEC management who simultaneously resigned from ATEC. These
transactions were approved by our shareholders on May 29, 2003 and are fully
described in ATEC's definitive proxy statement, filed with the Securities and
Exchange Commission on May 2, 2003.
Interpharm, Inc. was incorporated under the laws of New York in 1984. We
currently manufacture and market nineteen generic drug products in solid dosage
form. We hold Abbreviated New Drug Applications ("ANDA") for ten of these
products. The remaining products are manufactured under an over-the-counter
monogram or are drugs which do not otherwise require ANDA's. In addition, in the
quarter ending September 30, 2003 we began manufacturing five dosage strengths
of two distinct products for URL/Mutual pursuant to a Manufacturing and Supply
Agreement dated January 24, 2002. For a further description of our contract with
URL/Mutual, see "Recent Business Developments". All of the products that we
manufacture are solid oral dosage form, consisting of tablets, caplets and
capsules.
Approximately 65% of our sales are made under our own label. The remaining
35% are manufactured and delivered to our wholesalers and distributors which
sell our products under their own labels. We distribute our products as follows:
- to our distributors who sell to retail chain stores;
- directly to retail chains;
- to the resellers who repackage our products and sell them to retail
chains; and
- to the U.S. Department of Veterans Affairs through a government
appointed prime vendor.
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During the six-month period ending June 30, 2003, two of our customers
collectively accounted for approximately 50% of our total sales. For the same
period in 2002, two of our customers accounted for approximately 61% of our
total sales. For the twelve-month period ended December 31, 2002, two of our
customers collectively accounted for approximately 53% of our total sales. For
the twelve-month period ending December 31, 2001, three customers accounted for
approximately 19%, 20% and 22%, respectively, of our total sales. Except as
described below, we do not have contracts with any of these customers. During
the period July 1, 2001 to June 30, 2002, we had a contract with the Department
of Veterans Affairs for the supply of Ibuprofen through a prime vendor, which
accounted for 22% of our total sales.
On December 5, 2002, our bid was accepted by the Department of Veterans
Affairs to supply Ibuprofen tablets for the period January 2, 2003 through
January 1, 2004. The bid covers sales to a number of government entities
including: all Department of Veterans Affairs facilities, all Indian Health
Service facilities, Department of Health and Human Service Supply Center at
Perry Point and all Option 2 State Veterans Homes.
This bid provides for four one-year renewals at the option of the
Department of Veterans Affairs. The Department of Veterans Affairs estimated the
annual revenue to be generated by the bid to be $5,054,879.
The loss of any of our largest customers could have a material adverse
effect on our business. As is the case with our largest customers, most of our
other sales are not made pursuant to contracts, but pursuant to individual
purchase orders. Therefore, although we have very strong relationships with our
customers, most of whom have requested us to provide larger quantities of our
products than we have historically sold to them, there is nothing requiring many
of them to continue to purchase our products and there can be no guarantee that
they will continue to do so.
INDUSTRY
THE GENERIC DRUG MARKET AND NECESSARY APPROVALS
Pharmaceutical products in the United States are generally marketed as
either "brand-name" or "generic" drugs. Brand-name products are drugs generally
sold by the holder of the drug's patent or through an exclusive marketing
arrangement. A company that receives approval for a new drug application ("NDA")
from the U.S. Food and Drug Administration ("FDA"), usually the patent holder,
has the exclusive right to produce and sell the drug for about 20 years from the
date of filing of the patent application. This market exclusivity generally
provides brand-name products the opportunity to build up physician and customer
loyalties.
Once a patent on a drug expires, a manufacturer can obtain FDA approval to
market a "generic" version. A generic drug is therefore usually marketed after
the patent on a brand drug expires and is comparable to a brand-name drug. In
fact, the FDA requires that generic drugs have the same quality, strength,
purity, identity and efficacy as brand-name drugs. While comparable to
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brand-name drugs, generic drugs are usually far less costly than brand-name
drugs, resulting in substantial savings to consumers, healthcare providers and
hospitals. These cost savings have resulted in sustained growth of the generic
pharmaceutical industry in the United States. According to a Congressional
Budget Office study, "How Increased Competition from Generic Drugs has Affected
Prices and Returns in the Pharmaceutical Industry," (available at
HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0) in 1984, 19% of
prescription drugs sold in the United States were generic. According to a
Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to
Patent Expiration," (available at
HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF) that figure reached more
than 47%.
Much of the growth of the generic pharmaceutical industry has been
attributed to The Drug Price Competition and Patent Term Restoration Act of 1984
(the "Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Now, there is an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that the generic product is
bioequivalent to the brand-name product through the filing of an abbreviated new
drug application ("ANDA"). The ANDA may rely on information from the brand-name
drug's application with the FDA.
On June 12, 2003, the FDA announced new regulations and procedures to
improve implementation of the Waxman-Hatch Act. The new regulations and
procedures are aimed at reducing the time it takes to bring generic drugs to the
market and expanding educational programs to assist health care practitioners
and consumers to get accurate information about the availability of generic
drugs. The FDA has estimated that the new regulations and procedures will reduce
the typical time for generic drug approvals by three months or more over the
next three to five years and will save consumers approximately $35 billion over
10 years.
BUSINESS STRATEGY
PRODUCT DEVELOPMENT
During the six-month period ended June 30, 2003, and the years ended
December 31, 2002, 2001 and 2000, the majority of our revenues were derived from
sales of Ibuprofen tablets in both prescription strength and over-the-counter
strength. We believe that our growth in recent years has been due primarily to
our ability to create competitive advantages in our existing product line
through efficient manufacturing processes, cost competitiveness, and the ability
to create loyalty among our customers.
Over the next few years, patent protections on a large number of brand-name
drugs are expected to expire. We believe that these patent expirations will
provide opportunities for the manufacturers of generic drugs. In order to take
advantage of these upcoming opportunities, we intend to expand our product line
and allocate additional resources to new product development activities on
brand-name products that will become available to generic markets.
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FDA approval is required before any generic drug can be marketed through an
ANDA. While the FDA has significantly streamlined the process of obtaining ANDA
approval for generic drugs, it is difficult to predict how long the process will
take for any specific drug. Therefore, there is always the risk that the
introduction of new products can be delayed.
The ANDA process requires that a company's manufacturing procedures and
operations conform to FDA requirements and guidelines, generally referred to as
current Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in such
areas as production and quality control to ensure full technical compliance. The
evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to comply with regulatory
requirements.
The ANDA process also requires bioequivalency studies to show that the
generic drug is bioequivalent to the approved drug. Bioequivalence compares the
bioavailability of one drug product with that of another formulation containing
the same active ingredient. When established, bioequivalency confirms that the
rate of absorption and levels of concentration in the bloodstream of a
formulation of the approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
Supplemental ANDAs are required for approval of various types of changes to
an approved application, and these supplements may be under review for six
months or more. In addition, certain types of changes may only be approved once
new bioequivalency studies are conducted or other requirements are satisfied.
In December 2001, we received ANDA approval from the FDA to produce
prescription strength Naproxen. In addition, we have five new drugs that are
under development. There can be no assurances, however, that the FDA will
ultimately approve the drugs that are under development.
Even if an ANDA is approved, brand-name companies can impose substantial
barriers to market entry which may include: filing new patents on drugs whose
original patent protection is about to expire, developing patented
controlled-release products or other product improvements, developing and
marketing, as over-the-counter products, brand-name products that will soon face
generic competition, and commencement of marketing initiatives, regulatory
activities and litigation. While none of these actions have been taken against
us to date, there can be no assurance that they will not be taken in the future.
RAW MATERIALS
The raw materials that we use in the manufacturing of our products consist
of pharmaceutical chemicals in various forms, which are available from various
sources. FDA approval is required in connection with the process of selecting
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active ingredient suppliers. The raw materials purchased from these suppliers
are available from a number of vendors. In selecting a vendor, we consider not
only their status as an FDA approved supplier, but consistency of their
products, timeliness of delivery and price.
MANUFACTURING FACILITIES
Currently, we have leased a 100,000 square foot manufacturing facility with
recently purchased and up to date equipment. Over the past five years, we have
upgraded our facilities, including building additional tablet compression and
packaging rooms, adding new air handling units and installing new manufacturing
and laboratory equipment. We intend to significantly increase our manufacturing,
packaging and laboratory capacity to develop new products and to meet the
increasing demand for our existing products.
RECENT BUSINESS DEVELOPMENTS
In January 2002, we entered into an agreement with United Research
Laboratories, Inc. and Mutual Pharmaceutical Company, Inc. ("URL/Mutual") to
manufacture, on a contract basis, four drugs in various dosage strengths.
The agreement is for a five-year term, which may be renewed for an
additional two years. The agreement also contains a non-compete provision
stating that we may not distribute any of the drugs covered by the agreement for
five years after its termination. We are currently in the process of obtaining
Site Transfer Approval ("STA") from the FDA for two drugs covered under the
agreement with URL/Mutual and have already received an STA for the other two.
Whereas an ANDA approves the formula for a given product produced at a
specified location, an STA granted by the FDA allows for the production of an
approved drug at a site other than the one approved in the ANDA. In order for
the FDA to approve an STA, the new production location must be shown to comply
with all of the terms and conditions set forth in the approved ANDA
In July 2003, we began manufacturing Atenolol Tablets for URL/Mutual. This
was the first of the four products that we are scheduled to manufacture for
URL/Mutual. Atenolol is a synthetic, beta-selective (cardioselective)
adrenoreceptor blocking agent and a generic version of the branded drug
Tenormin(R). Atenolol is indicated in the management of hypertension, for the
long-term management of patients with angina pectoris, and in the management of
patients with definite or suspected acute myocardial infarction to reduce
cardiovascular mortality.
In August 2003, we began manufacturing Allopurinol Tablets for URL/Mutual
in both 100mg and 300mg strengths. Allopurinol is a xanthine oxidase inhibitor
which is a generic version of the branded drug Zyloprim (R). Allopurinol is used
to lower blood uric acid levels. Uric acid is produced when the body breaks down
purines that are found in foods. Uric acid forms crystals in the tissues of the
body to cause the inflammation of gout. Elevated blood uric acid levels can also
cause kidney disease and stones. Allopurinol can be used to prevent uric acid
kidney stones and to prevent recurrent gouty arthritis attacks.
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Allopurinol also can be used to treat patients with multiple recurrent gout
attacks, erosive destructive gouty joint disease, hard lumps or uric acid
deposits in tissues (called tophi), gouty kidney disease, or uric acid stones.
It is also used to prevent elevation of blood uric acid in patients undergoing
chemotherapy for the treatment of certain cancers.
We believe that our continued growth is dependent upon our ability to (i)
continue increasing our market share in our existing product lines by utilizing
our manufacturing efficiency, cost competitiveness, and customer loyalty, (ii)
obtain FDA approval for the drugs currently under development, (iii) greatly
increase our product line, particularly with respect to "niche" products and
products with higher margins, (iv) leverage off of our competitive strengths to
capture market share on our new product lines, (v) utilize our manufacturing
efficiencies to enter into additional contract manufacturing arrangements and
(vi) enter into joint ventures and strategic alliances with companies whose
strengths compliment ours.
MARKETING STRATEGY
We market our products primarily through wholesalers, drug distributors,
other manufacturers and by our internal sales staff, as well as independent
sales representatives. Some of our wholesalers and distributors purchase
products that are warehoused for drug chains, independent pharmacies, state and
federal governmental agencies and managed healthcare organizations. Consistent
with industry practice, we have a returned goods policy. Pursuant to our policy,
any unopened item in its original packaging may be returned if accompanied by
(i) an authorization form obtained from Interpharm, and a "Returned Goods
Authorization Number" with a proof of purchase. Transportation charges for
returns are paid by the customer. If the foregoing procedures are followed, we
will return the customer's original purchase price or the current market price,
whichever is lower.
Pursuant to our return policy, we will not accept any of the following for
return: (i) short-dated products (14 months or less remaining on the expiration
date), (ii) expired products, products which have been opened, tampered with or
which have a broken seal, (iii) products which have stickers or other price
markings, (iv) products which have been damaged by improper handling, fire,
flood or other catastrophes, (v) products stored under conditions other than as
specified on the label, (vi) products returned by someone other than the direct
purchaser, or (vii) products without proof of purchase.
We have not experienced returns of material quantities of any of the
products we sell and therefore, do not believe that we are subject to material
risk of inventory buildup attributable to returns.
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PRODUCTS
INTERPHARM'S PRODUCT LINE
Below is a list of the drugs that we manufacture, including the drugs that
we are currently manufacturing pursuant to our agreement with URL/Mutual. The
names of all of the drugs under the caption "Brand-Name Drug" are registered
trademarks. The holders of the registered trademarks are non-affiliated
pharmaceutical manufacturers.
PRODUCT NAME BRAND-NAME DRUG
1. Acetaminophen 500 mg White Tablets Tylenol(R)
2. Acetaminophen 500 mg White Caplets Tylenol(R)
3. Acetaminophen 325 mg White Tablets Tylenol(R)
4. Allopurinol 100 mg White Tablets* Zyloprim(R)
5. Allopurinol 300 mg White Tablets* Zyloprim(R)
6. Atenolol 25 mg White Tablets* Tenormin(R)
7. Atenolol 50 mg White Tablets* Tenormin(R)
8. Atenolol 100 mg White Tablets* Tenormin(R)
9. Clorpheniramine Maleate 4mg Yellow Tablets Chlortrimetron(R)
10. Ibuprofen 200mg White Tablets Advil(R)
11. Ibuprofen 200mg Brown Tablets Advil(R)
12. Ibuprofen 200mg Orange Tablets Motrin(R)
13. Ibuprofen 200mg White Caplets Advil(R)
14. Ibuprofen 200mg Brown Caplets Advil(R)
15. Ibuprofen 200mg Orange Caplets Motrin(R)
16. Ibuprofen 400mg White Tablets Motrin(R)
17. Ibuprofen 600mg White Tablets Motrin(R)
18. Ibuprofen 800mg White Tablets Motrin(R)
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19. Isometheptene Mucate, Dichloralphenazone,
Acetaminophen, Red/Red Capsule, 65mg/100mg/325mg Midrane(R)
20. Naproxen 250mg White Tablets Naprosyn(R)
21. Naproxen 375mg White Tablets Naprosyn(R)
22. Naproxen 500mg White Tablets Naprosyn(R)
23. Pseudoephedrine HCl 60mg White Tablets Sudafed(R)
24. Pseudoephedrine HCl, Triprolidine HCl White
Tablets, 60mg/2.5mg Actifed(R)
* Manufactured, on a contract basis, for URL/Mutual, which holds the ANDA for
the product.
RESEARCH AND DEVELOPMENT
For the six-month period ended June 30, 2003, our expenditures on research
and development were approximately $185,600. In the fiscal years ended December
31, 2002 and 2001, our expenditures on research and development were
approximately $415,600 and $110,000, respectively. Our research and development
expenses in and prior to 2000 were negligible.
Currently, our research and development activities consist of (i)
identifying and conducting patent and market research on brand name drugs for
which patent protection has expired or will expire in the near future, (ii)
researching and developing new product formulations based upon such drugs, (iii)
obtaining approval from the FDA for such new product formulations, and (iv)
introducing technology to improve production efficiency and enhance product
quality.
The research and development of oral solid dosage products requires studies
and FDA review and approval which have historically taken approximately two to
three years. However, the length of time necessary to bring a product to market
can vary significantly and can depend on, among other things, availability of
funding, problems relating to formulation, safety or efficacy, patent issues
associated with the product or barriers to market entry from brand-name product
manufacturers.
We contract with outside laboratories to conduct biostudies, which, in the
case of oral solids, generally are required for FDA approval. Historically, the
vast majority of our research and development expenditures have been on
biostudies. While we believe that the companies contracted to perform the
biostudies are reliable, there can be no assurance that they will use the proper
due diligence or that their work will otherwise be accurate.
The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed and approved despite the amount spent on
research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
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COMPETITION
The generic pharmaceutical industry is intensely competitive. The primary
means of competition involve manufacturing capabilities and efficiencies,
innovation and development, timely FDA approval, product quality, marketing,
reputation, level of service, including the maintenance of sufficient inventory
levels to assure timely delivery of products, product appearance and price.
Often, price is the key factors in the generic pharmaceutical business.
Therefore, to compete effectively and remain profitable, a generic drug
manufacturer must manufacture its products in a cost effective manner. We
believe that we maintain adequate levels of inventories to meet customer demand
and have them readily available. In addition, the modernization of our facility,
hiring of experienced staff, and implementation of quality control programs have
improved our competitive position in recent years.
During the past several years the number of chain drug stores and
wholesaler customers have declined due to industry consolidation. In addition,
the remaining chain drug stores and wholesaler customers have instituted buying
programs that have caused them to buy more products from fewer suppliers. At the
same time, mail-order prescription services and managed care organizations have
grown in importance and they also limit the number of vendors. The reduction in
the number of our customers and limitation on the number of vendors by the
remaining customers has increased competition among generic drug marketers.
However, these pressures have not had a material adverse impact on our business
and we believe that we have good relationships with our key customers.
In addition to generic manufacturers, we have also experienced competition
from brand-name companies that have purchased generic companies or license their
products to generic companies prior to, or as relevant patents expire. No
further regulatory approvals are required for a brand-name manufacturer to sell
its pharmaceutical products directly or through a third party to the generic
market, nor do such manufacturers face any other significant barriers for entry
into such market.
As is the case with many generic pharmaceutical manufacturers, many of our
competitors have longer operating histories and greater financial resources than
us. Consequently, some of these competitors may have larger production
capabilities, may be able to develop products at a significantly faster pace at
a reduced cost, and may be able to devote far greater resources to marketing
their product lines.
Certain manufacturers of brand-name drugs and/or their affiliates have been
introducing generic pharmaceutical products equivalent to such brand-name drugs
at relatively low prices. Such pricing, with its attendant diminished profit
margins, could have the effect of inhibiting us and other manufacturers of
generic pharmaceutical products from developing and introducing generic
pharmaceutical products comparable to certain brand-name drugs. Also,
consolidation among wholesalers, distributors, and repackagers, and
technological advances in the industry and pricing pressures from large buying
groups, may create pricing pressure, which could reduce our profit margins on
our product lines.
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In addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products being
reintroduced into the market, has led to an increase in demands by customers for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on our earnings.
Brand-name companies also pursue other strategies to prevent or delay
generic competition. These strategies may include: seeking to establish
regulatory and legal obstacles that would make it more difficult to demonstrate
bioequivalence, initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand-name pharmaceuticals,
instituting legal action that automatically delays approval of generic products,
the approval of which requires certifications that the brand-name drug's patents
are invalid or unenforceable, or introducing "second generation" products prior
to the expiration of market exclusivity for the reference product, obtaining
extensions of market exclusivity by conducting trials of brand-name drugs,
persuading the FDA to withdraw the approval of brand-name drugs, for which the
patents are about to expire, thus allowing the brand-name company to obtain new
patented products serving as substitutes for the products withdrawn, or seeking
to obtain new patents on drugs for which patent protection is about to expire.
The ability of brand-name companies to successfully delay generic
competition in any of our targeted new product lines may adversely affect our
ability to enter into the desired product line or may impact our ability to
attain our desired market share for that product.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand-name companies are
utilizing this provision to extend periods of market exclusivity.
BACKLOG
We do not have a significant backlog, as we normally deliver products
purchased by our customers within a short time of the date of order.
GOVERNMENTAL REGULATION AND CONTRACTS
GOVERNMENT REGULATION
All pharmaceutical manufacturers are subject to extensive, complex and
evolving regulation by Federal, state and local governmental entities,
principally by the FDA, and, to a lesser extent, by the U.S. Drug Enforcement
Administration, Environmental Protection Agency and state governmental agencies.
The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act, the
Waxman-Hatch Act, the Generic Drug Enforcement Act and other Federal statutes
and regulations govern or influence the testing, manufacture, packaging, safety,
labeling, storage, record keeping, approval, advertising and promotion of our
products.
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Noncompliance with applicable requirements can result in judicially and/or
administratively imposed sanctions including the initiation of product seizures,
injunction actions, fines and criminal prosecutions. Administrative enforcement
measures can involve the recall of products, as well as the refusal of the
government to enter into supply contracts or to approve new drug applications.
The FDA also has the authority to withdraw approval of drugs in accordance with
regulatory due process procedures. Although, we have internal compliance
programs and standard operating procedures which have been reviewed by
independent consultants, and have had a favorable compliance history, if these
programs were not to meet regulatory agency standards in the future, or if our
compliance were deemed deficient in any significant way, it could have a
material adverse effect on our business and earnings.
The FDA inspects manufacturer's facilities to assure compliance with cGMP.
Manufacturers must follow cGMP regulations at all times during the manufacture
and processing of drugs. To comply with the standards set forth in these
regulations, we must continue to expend significant time, money and effort in
the areas of production, quality control and quality assurance.
In addition to the Federal government, individual states have laws
regulating the manufacture and distribution of pharmaceuticals, as well as
regulations pertaining to the substitution of generic drugs for brand-name
drugs. Our operations are subject to regulation, licensing requirements and
inspection by the states in which we are located or conduct business.
We must also comply with federal, state and local laws of general
applicability, such as laws regulating working conditions and equal opportunity
employment. Additionally, we are subject, as are all manufacturers, to various
federal, state and local environmental protection laws and regulations,
including those governing the discharge of materials into the environment.
Historically, the costs of complying with such environmental provisions have not
had a material adverse effect on our earnings, cash requirements or competitive
position, and we do not expect such costs to have any such material adverse
effect in the foreseeable future. However, if changes to such environmental
provisions are made that require significant changes in our operations or the
expenditure of significant funds, such changes could have a material adverse
effect on our earnings, cash requirements or competitive position.
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the pharmaceutical industry,
government agencies and others. Such studies, which increasingly employ
sophisticated methods and techniques, can call into question the utilization,
safety and efficacy of previously marketed products. There can be no assurances
that these studies will not, in the future, result in the discontinuance of
product marketing.
PATENTS AND TRADEMARKS
We do not have any Patents or Trademarks that are currently used in our
business. However, the U.S. Patent and Trademark Office awarded ATEC a patent,
which we hold, for an advanced PC motherboard and chassis design. The patent
addresses an Inverted Socket Process Architecture and design that place the
processor, system memory and cache sockets on the undercarriage of the
motherboard.
12
EMPLOYEES
As of June 30, 2003, we had 214 full time employees, of whom 20 were
employed in selling, general and administrative activities, 32 were employed in
quality assurance and regulatory roles and 162 were employed in manufacturing.
We believe we have a strong relationship with our employees. None of our
employees are represented by a union.
ITEM 2. PROPERTIES
DESCRIPTION OF PROPERTY
We do not own any real property. We lease an entire building in Hauppauge,
New York, pursuant to a non-cancellable lease expiring in October, 2019, which
houses our manufacturing, warehousing and some of our executive offices. The
leased building is approximately 100,000 square feet and is located in an
industrial/office park. The current annual lease payments to the landlord,
Sutaria Family Realty, LLC, are $480,000. Sutaria Family Realty, LLC is owned by
Mona Rametra, Perry Sutaria and Raj Sutaria, who collectively own 4,613,384
shares of our common stock, 456,562 shares of our Series A-1 Preferred Stock and
1,537,795 shares of our Series K Preferred Stock and are the children of Dr.
Maganlal K. Sutaria, the Chairman of our Board of Directors and our Chief
Executive Officer, and the niece and nephews of Bhupatlal K. Sutaria, our
President and a member of our Board of Directors. Mona Rametra is also the wife
of our General Counsel and Secretary, Munish K. Rametra. In addition, Raj
Sutaria is an officer of Interpharm, Inc. Upon a change in ownership of the
Company, and every three years thereafter, the annual base rent will be adjusted
to fair market value, as determined by an independent appraisal. There are no
tenants in the building other than us.
We also lease approximately 23,175 square feet of office space at 69 Mall
Drive in Commack, New York for some our executive offices. The lease for this
office space expires in 2005. The annual lease payments are approximately
$187,000 and we have sublet 18,500 square feet for $164,000 per year.
ITEM 3. LEGAL PROCEEDINGS
On or about January 31, 2002, Teresa Casey and Jerry Casey, as plaintiffs,
commenced a lawsuit against Interpharm, Inc., as defendant in Superior Court,
State of Washington, County of Pierce. On September 26, 2003, the Court
dismissed the lawsuit without prejudice. While the dismissal terminated the
civil action, plaintiffs may institute a new action. The basis for the dismissal
was that plaintiffs' counsel had resigned from his representation and plaintiffs
failed to get new counsel by a court-imposed deadline. Also on September 25,
2003, the plaintiffs voluntarily moved to dismiss their case Pro Se (without
counsel).
13
Plaintiffs had alleged that Teresa Casey suffered a hemorrhagic stroke and
aneurysm caused by ingesting guaifenesin/phenylpropanolamine ("PPA") for relief
of bronchitis symptoms. Plaintiffs also had alleged that (i) Teresa Casey
suffered severe injuries, including, but not limited to, invasive surgery,
physical and cognitive impairment, emotional distress and other economic and
non-economic damages and (ii) Interpharm, Inc. was the alleged designer,
constructor, manufacturer, producer, marketer, seller and distributor of the PPA
Teresa Casey ingested. Plaintiffs causes of action were for product liability,
tort liability, negligence, breach of implied and express warranties and
violation of the Washington Consumer Protection Act.
Should plaintiff re-commence the action, we believe that we have
meritorious defenses and will vigorously defend the action.
On or about August 13, 2002, Interpharm, Inc., as plaintiff, commenced a
lawsuit against General Star Indemnity Company, G.P. Insurance Agency, Inc. and
Mortsan General Agency, Inc., as defendants in the Supreme Court of the State of
New York, County of Suffolk. The lawsuit arose from General Star's refusal to
cover or defend Interpharm, Inc. under an insurance policy with respect to the
Casey action discussed in the preceding paragraphs. The insurance policy is
alleged to have been obtained for Interpharm, Inc. by G.P. Insurance Agency,
Inc. and Mortsan General Agency, Inc.
On September 26, 2003, the court rendered a decision on the parties'
motions for summary judgment (i) granting dismissal of all claims against
General Star Indemnity Company; (ii) granting dismissal of Interpharm, Inc.'s
statutory claims against G.P. Insurance Agency, Inc. and Mortsan General Agency,
Inc.; and (iii) allowing Interpharm, Inc. to continue its negligence claims
against G.P. Insurance Agency, Inc. and Mortsan General Agency, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 29, 2003 we held our annual meeting of stockholders for the
following purposes:
(i) To approve the acquisition of all of the outstanding stock of
Interpharm, Inc;
(ii) To approve an amendment to our Certificate of Incorporation to change
the name of the Company from ATEC Group, Inc. to Interpharm Holdings, Inc.;
14
(iii) To approve the sale of the assets of ATEC's computer and systems
integration businesses to, and assumption of substantially all of the
liabilities of those businesses to Baar Group, Inc.;
(iv) To elect Maganlal K. Sutaria, Bhupatlal Sutaria, Surinder Rametra,
Praveen Bhutani, David Reback and Stewart Benjamin as members of our Board of
Directors;
(v) To ratify and approve Weinick Sanders Leventhal & Co., LLP as our
independent public accountants to audit our financial statements for the year
ending June 30, 2003; and
(vi) To approve adjournment of the meeting in the event a quorum was not
present.
The votes cast for each of the foregoing matters was as follows:
PROPOSAL FOR AGAINST ABSTAIN/WITHHELD
1 4,805,061 86,803 8,858
2 4,808,407 83,457 8,858
3 4,805,587 84,956 10,179
4
S. Rametra 4,804,171 -- 96,551
S. Benjamin 4,805,721 -- 95,001
D. Reback 4,808,682 -- 92,040
P. Bhutani 4,805,231 -- 95,491
Dr. Sutaria 4,804,171 -- 96,551
B. Sutaria 4,805,231 -- 95,491
5 7,788,126 74,757 9,476
6 7,774,717 80,400 17,233
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the American Stock Exchange under
the symbol "IPA." The following table sets forth the high and low sale prices
for our common stock for the periods indicated as reported by the American Stock
Exchange. Such prices reflect inter-dealer prices, without retail mark-up,
15
markdown or commissions and may not necessarily represent actual transactions.
It should be noted that prior to May 30, 2003, the Company was in the
computer/systems integration business. On May 30, 2003, that business was sold
and Interpharm, Inc. was acquired. Accordingly, historical stock prices prior to
May 30, 2003 are not representative of our current business. On June 2, 2003,
our stock symbol changed from "TEC" to "IPA."
COMMON STOCK
HIGH LOW
2001
Quarter ended 3/31.................................. $1.12 $ 0.37
Quarter ended 6/30.................................. $0.81 $ 0.38
Quarter ended 9/30.................................. $0.84 $ 0.37
Quarter ended 12/31................................. 0.84 0.43
2002
Quarter ended 3/31................................. 0.79 0.43
Quarter ended 6/30................................. 0.50 0.40
Quarter ended 9/30................................. 0.44 0.26
Quarter ended 12/31................................ 0.85 0.26
2003
Quarter ended 3/31................................. 0.72 0.54
May 30, 2003....................................... 1.03 0.85
Quarter ended 6/30................................. 2.93 0.62
As of September 12, 2003, there were approximately 2,600 holders of our
common stock, 17 holders of record of Series A preferred shares, 294 holders of
record of Series C preferred shares, 4 holders of record of Series K Preferred
Stock and 3 holders of record of Series A-1 Preferred Stock.
We do not currently pay dividends on our common stock. It is our current
intention not to declare or pay dividends on our common stock, but to retain
earnings for the operation and expansion of our business.
The holders of our Series A and Series A-1 preferred shares are entitled to
certain dividend payments upon declaration by the Board of Directors. The Series
A preferred shares are entitled to a cumulative dividend of 10% of par value
($0.10 per share), when and as declared by our Board of Directors. The Series B
preferred shares are entitled to a non-cumulative dividend of $1.00 per share.
The Series A-1 preferred shares are entitled to a cumulative annual dividend of
$0.0341 per share when and as declared by our Board of Directors (See "Series K
and Series A-1 Preferred Stock" below).
16
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our equity
compensation plans as of June 30, 2003. The table includes the following plans:
1997 Stock Option Plan and 2000 Flexible Stock Plan.
Number of Number of securities
Securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding Outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a))
=================================================== ======================= ================= ============================
Equity compensation plans approved by security
holders:
1997 Stock Option Plan 2,236,533 $ 3.78 -0-
2000 Flexible Stock Plan(1) 10,309,158 $ 0.556 1,883,682
=========== ========= ============
Total 12,545,691 $ 1.17 1,883,682
=========== ========= ============
====================================================================================================================================
(1) Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 20 million shares.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three fiscal years, we have made the following sales of
restricted securities.
On May 30, 2003, we exchanged a total 6,151,178 shares of our common stock
and 2,050,393 shares of our Series K Preferred Stock for all of the outstanding
common stock of Interpharm, Inc. The common stock and Series K preferred stock
were issued to Mona Rametra, Raj Sutaria, Perry Sutaria and Ravi Sutaria without
registration in reliance upon Section 4(2) of the Securities Act because each
was an accredited investor.
On May 29, 2003, we agreed to the issuance of 4,855,389 shares of our
Series A-1 Preferred Stock to a grantor annuity trust and annuity set up by Dr.
Maganlal K. Sutaria, our Chief Executive Officer, in exchange for the
cancellation of $3 million of loans from the trust and annuity to Interpharm,
Inc. and to Mona Rametra, in exchange for cancellation of a $311,375 loan to
Interpharm, Inc. The offer and issuance was accomplished in reliance upon
Section 4(2) of the Securities Act.
17
On May 28, 2003, we issued 10,200 shares of our common stock to an
employee, Kenneth Bohacs, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On May 28, 2003, we issued 500,000 shares of our common stock to an
employee, Rajnish Rametra, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On March 31, 2003, we issued 7,500 shares of our common stock to an
employee, Kenneth Bohacs, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On March 28, 2003, we issued 357,142 shares of our common stock to our then
Chairman, Surinder Rametra, upon exercise of an option for the purchase of our
common stock. The shares were issued in reliance upon Section 4(2) of the
Securities Act.
On July 22, 2002, we made the following issuances of common stock pursuant
to consulting agreements: 300,000 shares to Balwinder Singh Baltha, 20,000
shares to Deepak Kumar, 20,000 shares to Jaspal Chhachhi, 100,000 shares to Drew
Alexander Associates, 60,000 shares to Nuripinder Kaur Bathla, 200,000 shares to
Parmjit Singh, 30,000 shares to Tejinder Kaur Sodhi, 150,000 shares to
Intellicorp, Inc. and 100,000 shares to Alan Prefer (90,000 of which were
subsequently canceled). The shares were issued in reliance upon Section 4(2) of
the Securities Act.
SERIES K AND A-1 PREFERRED STOCK
The following is a summary of the designations, preferences and rights of
our Series K and Series A-1 preferred stocks, which is qualified in its
entirety, by the certificate of designations, preferences and rights for the
Series K and A-1 preferred stocks.
SERIES K
- Title. $.01 par value per share Series K Convertible Preferred Stock.
- Voting. The Series K Stock is entitled to one vote per share, voting
together as a class with the holders of our Common Stock.
- Liquidation Preference. None.
- Dividend Rights. Same as Common Stock.
- Redemption Provisions. None.
18
- Amount Authorized. 3 million shares.
- Amount Outstanding. 2,050,393
- Conversion. The Series K Stock will be convertible into shares of our
Common Stock, no sooner than May 30, 2004, upon the happening of any of the
following events (the "Triggering Events"): the Company is (i) deemed by AMEX to
be in compliance with applicable listing standards; (ii) deemed by another
exchange to be in compliance with its applicable listing standards in the event
our securities are listed on such exchange; or (iii) we are no longer listed on
AMEX, the Nasdaq National Market or SmallCap Market, or the New York Stock
Exchange.
Upon the occurrence of any of the above Triggering Events, the shares of
Series K Stock will become convertible into shares of common stock. The
aggregate number of shares of common stock to be issued upon the full conversion
of all of the Series K Stock is equal to:
4 times (COP - P - T) - T
where:
COP means the company outstanding common stock (as defined below).
P means the number of all shares of common stock issued by the Company
pursuant to any agreements or obligations which arose after May 30, 2003,
up to and including the dated a Triggering Event occurs (the "Trigger
Date").
T means the number of shares of common stock issued to the former Interpharm,
Inc. shareholders pursuant to the November 25, 2002 Capital Stock Exchange
Agreement - 6,151,178.
The "Company Outstanding Common Stock" shall mean the sum of (a) the number of
shares of common stock issued and outstanding on the Trigger Date and (b) the
number of shares of common stock that are issuable upon the conversion of all
issued and outstanding shares of Series A, Series B, Series C and Series J
preferred stock of the Company, such number to be calculated as if all of the
issued and outstanding shares of Series A, Series B, Series C and Series J that
are issued and outstanding on the Trigger Date had been converted on the day
immediately preceding the Trigger Date.
Beginning on the Trigger Date and on each anniversary date thereof,
one-seventh of the total number of shares of Series K Stock will automatically
convert into common stock until all of the Series K Stock has been converted.
The Series K preferred stock certificate of designations, preferences and rights
further provides that if, at any time after the Trigger Date, the holders of the
Series K Stock own less than 51% of our outstanding common stock, then the
holders may convert such number of Series K Stock as will be necessary such that
the holder will own 51% of the outstanding common stock. The holders of the
Series K stock have agreed with the Company to waive this accelerated vesting
provision of the Series K stock unless and until such time as (a) any person, or
any two or more persons acting as a group, and all affiliates of such person or
persons, shall, acquire and own, beneficially, 50% or more of our outstanding
common stock , or (b) if following (i) a tender or exchange offer for voting
securities of the Company, or (ii) a proxy contest for the election of
Directors, the persons who were Directors of the Company immediately before the
initiation of such event cease to constitute a majority of our Board of
Directors upon the completion of such tender or exchange offer or proxy contest
or within one year after such completion.
19
SERIES A-1
- Title. $.01 par value per share Series A-1 Convertible Cumulative
Preferred Stock.
- Voting. No voting rights.
- Liquidation Preference. $0.682 per share.
- Dividend Rights. $0.0341 per share, per year, when and as declared by our
Board of Directors.
- Redemption Provisions. None.
- Amount Authorized. 5 million shares.
- Amount Issued. 4,855,389
- Conversion. Converts on a 1:1 basis into common stock upon:
i. the Company reaching $150 million in revenues;
ii. a merger, consolidation, sale of assets or similar transaction; or
iii. a "Change in Control" which occurs if (a) any person, or any two or
more persons acting as a group, and all affiliates of such person or persons,
shall, acquire and own, beneficially, 50% or more of the common stock
outstanding, or (b) if following (i) a tender or exchange offer for voting
securities of the Company, or (ii) a proxy contest for the election of directors
of the Company, the persons who were directors of the Company immediately before
the initiation of such event cease to constitute a majority of the Board of
Directors of the Company upon the completion of such tender or exchange offer or
proxy contest or within one year after such completion.
20
ANALYSIS OF EQUITY CAPITAL
The following is an analysis of the number of shares of common stock
outstanding as of September 24, 2003, on a fully diluted basis, including shares
potentially issuable upon exercise or conversion of outstanding options and
preferred stock. The descriptions of our preferred stock contained below are
qualified, in their entirety, by their respective Certificates of Designation,
Preferences and Rights.
As of September 24, 2003, we had 17,393,886 shares of common stock and
10,334,578 options to purchase our common stock outstanding. Of these options,
5,259,578 were issued prior to the acquisition of Interpharm, Inc. on May 30,
2003. Of the 5,259,578 options, 1,259,578 are currently exercisable and
4,000,000 are not exercisable prior to the Trigger Date of the Series K
Preferred Stock.
We also have five series of preferred stock outstanding. Our Series A, B
and C preferred stock, which were issued prior to May 30, 2003, are convertible
into 7,438 shares of common stock.
On May 30, 2003, we issued 5,075,000 options, of which 25,000 will vest on
December 31, 2003, and 25,000 will vest on December 31, 2004. The remaining
5,025,000 options are subject to vesting schedules that are dependant on certain
circumstances that are, as yet, undeterminable. However, the following is a
table setting forth the earliest dates on which such options can be exercised,
absent a change in control.
January 1, 2005 1,272,500
May 30, 2005 15,000
December 31, 2005 1,207,500
December 31, 2006 1,207,500
December 31, 2007 1,207,500
December 31, 2010 15,000
December 31, 2011 100,000
On May 30, 2003, we also issued 4,855,389 shares of Series A-1 Cumulative
Convertible Preferred Stock in exchange for the retirement of approximately
$3.31 million in related party debt. Each share of the Series A-1 stock is
convertible into one share of common stock only if: (i) our total revenue for
any four consecutive three month periods equals or exceeds $150 million, (ii) we
or Interpharm, Inc. merge with or into another company or sell substantially all
of our or Interpharm Inc.'s assets, or (iii) there is a change in control.
On May 30, 2003, we also issued 2,050,393 shares of our Series K Preferred
Stock. The timing and amount of shares of common stock that the Series K
Preferred Stock can be converted into is dependant on certain factors discussed
in this Form 10-K under the heading "Series K and A-1 Preferred Stock." The
Series K Preferred Stock is to vest ratably over a seven-year period beginning
on a date no sooner than May 30, 2004, and only after certain triggering events
have occurred. The Series K Preferred Stock also provides that at any time the
holders of the Series K Preferred Stock do not own 51% of our outstanding shares
of common stock, the vesting provisions would accelerate. In August 2003, we
21
entered into an agreement with the holders of the Series K Preferred Stock
whereby they have agreed to waive their rights to accelerate vesting unless and
until such time as (a) any person, or any two or more persons acting as a group,
and all affiliates of such person or persons, shall, acquire and own,
beneficially, 50% or more of our common stock, or (b) if following (i) a tender
or exchange offer for our voting securities, or (ii) a proxy contest for the
election of directors, the persons who were directors of the Company immediately
before the initiation of such event cease to constitute a majority of our Board
of Directors upon the completion of such tender or exchange offer or proxy
contest or within one year after such completion. If any of these events occur,
and the accelerated vesting provision set forth in the Certificate of
Designations, Preferences, and Rights of the Series K Preferred Stock have been
met, then the Series K Preferred Stock shall vest as set forth in the
Certificate of Designations, Preferences, and Rights.
The Series K and Series A-1 Preferred Stock are held by a total of seven
holders, each of whom is an affiliate of the Company. Assuming that all
currently vested options that are eligible to be exercised are exercised prior
to the triggering date of the Series K stock, we will ultimately issue
43,887,718 shares to the holders of the Series K stock.
Based on the foregoing, the following table illustrates the maximum number
of shares that will be issued by us based on our current capital structure for
the periods presented assuming (i) all options are exercised as soon as they are
eligible to be exercised; (ii) the Series A, B, and C Preferred Stock are
converted prior to May 30, 2003; (iii) the trigger date of the Series K stock
will be May 30, 2004; (iv) we achieve the $150,000,000 revenue trigger for the
Series A-1 stock during the year 2009; (v) there is no change in control of the
Company and (vi) there is no stock split, recapitalization or restructuring of
the Company.
Maximum Number of
DATE Shares to be Issued
- ---- -------------------
Common Stock
Outstanding at
September 24, 2003 17,393,886
September 24, 2003 - 1,292,016
May 30, 2004
May 30, 2004 6,269,674
December 31, 2004 25,000
January 1, 2005 -
December 31, 2005 10,764,674
January 1, 2006 -
December 31, 2006 9,477,174
January 1, 2007 -
December 31, 2007 7,477,174
May 30, 2008 6,269,674
May 30, 2009 11,125,063
January 1, 2010 -
December 31, 2010 6,284,674
December 31, 2011 100,000
Maximum total outstanding
shares at December 31, 2011 76,479,009
22
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary financial data for the six-month
period ended June 30, 2003 and the four previous fiscal years ended December 31,
2002. The summary financial data set forth below with respect to our statements
of operations for the fiscal years ended December 31, 1999 and 1998 and the
balance sheet data as at December 31, 1999 and 1998 was derived from our
consolidated financial statements which are not included in this report. The
following summary financial data should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report.
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
JUNE 30, 2003 JUNE 30, 2002(1) 2002 2001 2000 1999 (1) 1998 (1)
-------------- -------------- ------------ -------------- -------------- --------------- -------------
Net Sales $14,953,438 $11,743,440 $24,312,245 $18,435,446 $11,391,326 $ 9,946,348 $ 8,663,881
Net income $ 723,645 $ 610,802 $ 1,050,419 $ 514,565 $ 337,764 $ 34,407 $ 60,269
Income per
common share:
Basic $ 0.08 $ 0.07 $ 0.13 $ 0.06 $ 0.04 $ 0.01 $ 0.01
Diluted $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ 0.00 $ 0.00
Balance Sheet Data
Total Assets $20,338,795 $10,904,361 $11,198,347 $ 9,645,807 $ 7,390,015 $ 6,341,472 $ 5,867,048
Long-term
obligations $ 267,056 $ 3,400,959 $ 3,335,754 $ 3,591,480 $ 3,289,118 $ 3,474,682 $ 3,467,251
Cash dividend per
common share 0 0 0 0 0 0 0
(1) Unaudited.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
Interpharm, Inc. is engaged in the business of developing, manufacturing
and marketing generic over-the-counter and prescription strength pharmaceutical
products. Approximately 65% of our sales are made under our own label. The
remaining 35% are to wholesalers and distributors which sell our products under
their own labels.
We market our products primarily to wholesalers, drug distributors,
repackagers, and other manufacturers through our internal sales staff as well as
independent sales representatives. Some of our wholesalers and distributors
purchase products that are warehoused for drug chains, independent pharmacies,
state and federal governmental agencies and managed healthcare organizations.
Sales are recognized when the product is shipped and appropriate provisions are
made for returns. Consistent with industry practice, we have a returned goods
policy which is described in "Business," above.
During the six-month period ended June 30, 2003 and the 12-month periods
ended December 31, 2002 and 2001, we did not experience returns of material
quantities of any of the products we sell. Therefore, we do not believe that we
are subject to a material risk attributable to returns.
We have been faced with increased demand for our existing products from our
existing customers. These customers have expressed satisfaction with the quality
of our products, our prices, and our reliability. Accordingly, we have developed
and implemented a plan to upgrade our production capacity and are exploring
adding an additional production facility. During the 12-month period ended
December 21, 2002, we spent approximately $1,200,000 on production equipment and
leased an additional 38,000 square feet of space in the building we currently
occupy. During the six-month period ended June 30, 2003, we spent $1,031,403 on
production equipment.
Although our growth in the recent past has been attributable primarily to
increased orders from our existing customers, we are also actively seeking to
create strategic alliances with companies whose strengths would compliment ours.
To that end, we have, in July and August 2003, launched two of four products
that we are manufacturing for URL/Mutual, on a contract basis. We believe that
our future growth is dependent upon other mutually beneficial arrangements with
companies such as URL/Mutual, as well as obtaining new clients and aggressively
increasing our product line.
24
RESULTS OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002
(All June 30, 2002 financial information is unaudited)
Financial Highlights
o Net sales increased 27.33% or $3.21 million to $14.95 million from $11.74
million.
o Gross profit increased 27.02% or $0.58 million to $2.74 million from $2.16
million.
o Operating income increased 15.59% or $167,600 to $1.24 million from $1.07
million.
o Net income increased 18.47% or $112,843 to $723,645 from $610,802.
NET SALES AND GROSS PROFIT
Net sales for the six month period ended June 30, 2003 were $14.95 million
compared to $11.74 million for the six-month period ended June 30, 2002, an
increase of 27.33% or $3.21 million. The increase in sales is primarily
attributable to increased orders from our existing customers resulting from our
increased production capacity. We launched production of Naproxen in December
2001. We have experienced an increase in our sales of Naproxen which is
primarily the result of customer awareness of our entry into this market and
their willingness to increase orders for Naproxen as they do for Ibuprofen. The
increase in net sales was not attributable to any change in prices which, for
our entire product line, remained stable. Gross profit for the six months ended
June 30, 2003 was $2.74 million.
During the six months ended June 30, 2003, two customers accounted for
approximately 50% of total sales.
COST OF SALES
Cost of sales increased $2.63 million to $12.21 million for the six-month
period ended June 30, 2003, or 27.41% from $9.59 million for the six-month
period ended June 30, 2002, primarily due to increased production and sales.
Approximately $1.90 million, or 72.23% of this increase is attributable to the
cost of raw materials, increased quantities of which were necessary due to
increased production. Raw material prices were constant during the period.
Approximately $386,000, or 14.69%, was for increased labor costs, including
payroll taxes and benefits. Approximately $242,000, or 9.19% is attributable to
increased costs of packaging, lab and factory supplies.
We continued to increase our production capabilities to satisfy increasing
demand from existing customers. The increase in production is attributable to
our continued efforts to grow Naproxen, as well as increased production of
Ibuprofen.
RESEARCH AND DEVELOPMENT
Research and development expenses for the six-month period ended June 30,
2003 were $185,601, or 1% of net sales, compared to $148,850, or 1% of net sales
for the same period in 2002, an increase of $36,751. Research and development
expenses were used primarily for materials and biostudies for new drugs
currently in development. We believe that research and development expenses will
represent a substantially larger percentage of our net sales in the future as we
seek to expand our product line.
25
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $1.27 million, in the
six-month period ended June 30, 2003, or 8.52% of net sales, compared to $0.90
million, or 7.63% of net sales, for the same period in 2002.
Selling, general and administrative expenses for the six-month period ended
June 30, 2003 were primarily made up of salaries, including payroll taxes and
benefits ($319,621), selling commissions ($90,606), freight expenses ($197,239),
legal, accounting and other professional services ($251,567), insurance expense
($71,403), bad debts ($40,200), and utilities ($39,724). Salaries increased
$40,110, or 14.35% from the six month period ended June 30, 2002 due to
increases in staff to accommodate increased production. Legal, accounting and
other professional services increased $204,072, or 429.67% from the six month
period ended June 30, 2002. This increase is attributable to costs associated
with the acquisition of Interpharm, Inc. by ATEC and the increased legal and
accounting expenses resulting from being a public company. No sales were made to
any customer whose balance was written off during the six month period ended
June 30, 2003
OPERATING INCOME
Operating income for the six-month period ended June 30, 2003 increased
$167,600 to $1.24 million as compared to $1.07 million, or 15.59% as compared to
the same period ended June 30, 2002. The six-month period ended June 30, 2003
included an increase of approximately $204,072 of legal, professional and
accounting costs, as compared to the same period in 2002. These increased
expenses are the result of the acquisition of Interpharm, Inc., by ATEC which
was consummated on May 30, 2003, and the legal and accounting fees associated
with being a public company. For the six-month period ended June 30, 2002, there
were no such fees.
INCOME TAXES
The effective tax rate for the six-month period ended June 30, 2003 was 35%
compared to 34% for 2002. Our deferred tax asset was primarily attributable to
New York State investment tax and employment incentive tax credits. The tax
credits utilized are limited to the state taxes computed on the minimum taxable
income base. These tax credits also expire in 15 years if not utilized. We
estimated a reserve for the deferred tax asset based upon prior years' actual
credits utilized and projected credits to be utilized on future taxable income.
The valuation allowance reserve has decreased due to our increased taxable
income which has utilized more credits and our estimate of future growth which
has reduced the estimated credits that will not be utilized.
26
LIQUIDITY AND CAPITAL RESOURCES
Since Interpharm, Inc.'s inception, it has financed its operations and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit, and loans from its stockholders. For the past
several years prior to its acquisition by ATEC, cash provided from Interpharm,
Inc.'s operations has been the primary source of funds to operate its business.
Cash flows from operations were $200,432 during the six-month period ended June
30, 2003. As a result of Interpharm, Inc.'s cash flows from operations during
the six-month period ended June 30, 2003 and the sale of ATEC's computer
operations on May 30, 2003, working capital increased $2.9 million to $5.2
million from $2.3 million at December 31, 2002. We believe that Interpharm,
Inc.'s working capital and cash provided by operating activities are sufficient
to meet its operating needs for the next twelve months.
Net cash used in investing activities for the six-month period ended June
30, 2003 was approximately $1.031 million related to the purchase of production
equipment.
During the six-month period ended June 30, 2003, we generated approximately
$3,061,000 including approximately $2,068,000 (net of $190,000 of costs) from
the reverse merger with ATEC and $1,100,000 of proceeds from our bank credit
line. The exercise of 2,187,863 options from July 1, 2003 to September 12, 2003
resulted in cash proceeds to us of $2.7 million. These options were outstanding
prior to the closing of the transaction with ATEC. In addition, promissory notes
in the amount of $1,524,092 from the purchaser of ATEC's computer business were
collected subsequent to June 30, 2003.
In August 2003, we increased our credit lines from $3.5 million (at
December 31, 2002) to $7 million. In addition, we retired approximately $3.31
million in related party loans to Interpharm in exchange for our Series A-1
Preferred Stock. We believe that our increased liquidity will afford us the
opportunity to increase our Research and Development expenditures on a more
aggressive pace than in previous years.
At June 30, 2003, we have approximately $7,680,000 in Federal net operating
loss carryforwards ("NOLs") available to reduce future taxable income. These
NOLs could result in savings of up to $3,000,000 in future income tax payments
(although there will be no effect on income tax expenses).
In addition, the exercise of 2,251,382 employee stock options and warrants
from July 1, 2003 to September 24, 2003 resulted in additional future tax
deductions approximating $9,000,000, which could result in cash savings of up to
$3,000,000.
Accounts Receivable
Our accounts receivable at June 30, 2003 was $4.9 million as compared to
$4.2 million at December 31, 2002. This increase is primarily attributable to
the increase in sales for the six-month period ended June 30, 2003. The average
number of days oustanding for our accounts receivable for the six-month period
ended June 30, 2003 consistently ranged from 54 to 59 days.
Inventory
In late 2000 and early 2001, Interpharm, Inc. commenced a program to
increase inventory production levels to meet demand created by increasing sales.
At June 30, 2003, our inventory increased to $4.6 million from $3.4 million at
December 31, 2002 which is a level we believe to be sufficent to meet current
demand.
27
Accounts Payable
The accounts payable, accrued expenses and other liabilities increased
approximately $1,156,000, and amounts due on our working capital credit line
increased $1,100,000 from December 31, 2002. This increase is primarily
attributable to increased inventory production to meet demand.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2003 were $2.34 million as compared
to $105,789 at December 31, 2002, an increase of $2.23 million. This increase is
primarily attributable to the proceeds from the sale of ATEC computer
operations, Interpharm, Inc.'s cash flow from operating activities and net bank
borrowings of $993,875. Offsetting these events were equipment purchases of
$1,031,403 during the six month period ending June 30, 2003.
We believe that one of the most important factors in our ability to
continue to grow our business will be our ability to launch new products. To
that end, we plan to devote substantially greater resources to our research and
development efforts than we have in previous years. In addition, we plan to
continue to devote substantial resources to increasing our production capacity
through the purchase of new equipment and otherwise improving our production
facility. While we anticipate that our cash flow and current credit arrangements
will be sufficient for at least the next 12 to 18 months, we may choose to raise
additional funds or seek other financing arrangements to facilitate more rapid
expansion, to develop new products at a faster pace, or to acquire or invest in
complimentary businesses, technologies, services or products.
From time to time in the past, Interpharm, Inc.'s shareholders, directors,
and officers had made loans to it for working capital. As of December 31, 2002,
each of theses loans was paid by Interpharm, Inc. with the exception of a loan
with a $3 million principal balance from Dr. Maganlal K. Sutaria to Interpharm,
Inc. and a $311,375 loan from a shareholder. Both loans were converted into
Series A-1 preferred stock on May 30, 2003.
28
OUR OBLIGATIONS
As of June 30, 2003, our obligations and the periods in which they are
scheduled to become due are set forth in the following table:
DUE IN
LESS DUE DUE DUE
THAN 1 IN 1-3 IN 4-5 AFTER 5
OBLIGATION TOTAL YEAR YEARS YEARS YEARS
- --------------------------- --------------- ------------------ ---------------- -------------- ---------------
Line of credit (1) $ 2,064,793 $ 2,064,793 $ -- $ -- $ --
Bank notes payable (1) 461,762 224,241 237,521 -- --
Operating leases (2) 8,282,908 627,636 1,735,272 960,000 4,960,000
----------- ----------- ----------- ----------- -----------
Total cash
obligations $10,809,823 $ 2,917,030 $ 1,972,793 $ 960,000 $ 4,960,000
=========== =========== =========== =========== ===========
(1) See "Bank Loans and Lines of Credit," below.
29
- Minimum debt service ratio of at least 1.2 : 1, on an annual basis;
- Maximum debt to net worth ratio of not more than 1.0 : 1, on an annual
basis;
- Maintain a tangible net worth of at least $4,000,000 as of June 30, 2003
with an increase of tangible net worth of not less than $50,000 for each
fiscal year end, thereafter.
- Interpharm is also required to provide financial statements and other
financial information on a regular basis.
As of June 30, 2003 and December 31, 2002 and 2001, we were in compliance with
all of the above covenants.
BANK LOANS AND LINES OF CREDIT
We have the following loans and credit lines outstanding as of June 30,
2003, each of which is guaranteed by Raj Sutaria, Mona Rametra, Perry Sutaria,
and Bhupatlal Sutaria:
1. HSBC Advised Secured Line of Credit Facility totaling $2.38 million. The
interest rate on this credit line is, at the Company's option, equal to either
(i) LIBOR plus 2.25%, or (ii) HSBC's prime rate plus (4.25% at June 30, 2003).
The line of credit is due on demand. The facility is reviewed by the bank at
least annually and automatically expires unless extended in writing. The line of
credit is scheduled to be reviewed by November 30, 2003.
2. HSBC Non-Revolving Secured Facility for Equipment Purchases for
$483,542. This facility was revised on August 6, 2003 to provide for a $2
million line of credit. Each advance under the Equipment Purchase Line cannot
exceed 90% of the invoice amount of the new equipment. Each advance is converted
into a separate note that is fully amortizing in up to 60 equal monthly
installments of principal and interest. Interest on the notes payable is, at the
Company's option, (i) a fixed rate equal to HSBC's cost of funds plus 2.25%,
(ii) LIBOR plus 2.25% or (iii) HSBC's prime rate. At June 30, 2003, there were
four separate notes outstanding with current aggregate monthly installments
totaling $24,597. During the first quarter of fiscal 2004, all of the notes
payable were paid in full.
In April, 2003, Sutaria Family Realty, LLC refinanced its mortgage on our
leased building at 75 Adams Avenue in Happauge. In connection with the
refinancing, a guarantee of the mortgage, previously given by Interpharm, Inc.,
was eliminated. However, the owners of Sutaria Family Realty, LLC continue to
guarantee our loans and lines of credit.
LEASES
We lease an entire building in Hauppauge, New York, pursuant to a
non-cancellable lease expiring in October, 2019, which houses our manufacturing,
warehousing and some executive offices. The leased building is approximately
100,000 square feet and is located in an industrial/office park. The current
annual lease payments to the landlord, Sutaria Family Realty, LLC, are $480,000.
Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj
Sutaria.
30
Upon a change in ownership of the Company, and every three years thereafter, the
annual base rent will be adjusted to fair market value, as determined by an
independent appraisal. There are no tenants in the building other than us.
We also lease approximately 23,175 square feet of office space at 69 Mall
Drive in Commack, New York for some of our executive offices. The lease for this
office space expires in 2005. The annual lease payments are approximately
$187,000 and we have sublet 18,500 square feet for $164,000 per year.
FISCAL YEAR ENDED DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001
Financial Highlights
o Net sales increased 32% or $5.9 million to $24.3 million from $18.4
million.
o Gross profit increased 27% or $.9 million to $4.4 million from $3.5
million.
o Operating income increased 80% or $.8 million to $1.8 million from $1.0
million.
o Net income increased 104% or $535,854 to $1,050,419 from $514,565.
NET SALES AND GROSS PROFIT
Net sales for the fiscal year ended December 31, 2002 were $24.3 million
compared to $18.4 million for the fiscal year ended December 31, 2001, an
increase of $5.9 million. Of this 32% increase in net sales approximately $5.1
million is attributable to increased orders from existing customers spread
evenly across Interpharm, Inc.'s product lines and resulting from Interpharm,
Inc.'s increased production capacity and $800,000 is attributable to the
introduction of Naproxen to Interpharm, Inc.'s product line. The increase in net
sales was not attributable to any change in prices which, for all products in
Interpharm, Inc.'s product line, remained stable from the fiscal year ended
December 31, 2001 to the year ended December 31, 2002. Gross profit for the year
ended December 31, 2002 was $4.4 million, an increase of 22% or .9 million from
the $3.5 million for the prior year.
During the year ended December 31, 2002, two Interpharm, Inc. customers
accounted for approximately 48% of Interpharm, Inc.'s total sales.
COST OF SALES
Cost of sales increased to $19.9 million in the fiscal year ended December
31, 2002, or 34% from $14.9 million in the prior year due to increased
production. Approximately $3.7 million, or 73% of this increase is primarily raw
material purchases and approximately $1.0 million, or 12%, was for increased
labor costs. Raw material prices were constant during the period.
31
Interpharm, Inc. increased its production to satisfy existing demand from
existing customers which have additional purchasing capacity. The increase in
production is attributable to the introduction of Naproxen as well as increased
production of Ibuprofen and Iso Cap, the production of which increased 25% and
30% respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses for the fiscal year ended December 31,
2002 were $415,618, or 2% of net sales, compared to $110,000, or 1% of net sales
in 2001, an increase of $305,618. Research and development expenses were used
primarily for materials and biostudies for new drugs currently in development.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $2.1 million, in the year
ended December 31, 2002, or 9% of net sales, compared to $2.0 million, or 11% of
net sales, for 2001.
Selling, general and administrative expenses for the fiscal year ended
December 31, 2002 were primarily made up of salaries ($492,000), selling
commissions ($164,000) freight expenses ($370,000), legal, accounting and other
professional services ($328,000), repairs and maintenance costs ($74,000) and
insurance expense ($23,000). Salaries increased $37,000 due to increases in
staff to accommodate increased production. In addition, bad debt expense
decreased by $214,000 due to the write-off of one customer balance in the
preceding year and write-offs occurring during the year ended December 31, 2002
were $47,000. No sales were made to the customer whose balance was written off
in the fiscal year ended December 31, 2002.
INCOME TAXES
The effective tax rate for the fiscal year ended December 31, 2002 was 32%
compared to 29% for 2001. The increase in the effective tax rate for 2002 was
primarily due to a decrease in the net deferred tax asset valuation allowance in
the 2001 fiscal period. The deferred tax asset was primarily attributable to New
York State investment tax and employment incentive tax credits. The tax credits
utilized are limited to the state taxes computed on the minimum taxable income
base. These tax credits also expire in 15 years if not utilized. Management has
estimated a reserve for the deferred tax asset based upon prior years' actual
credits utilized and projected credits to be utilized on future taxable income.
The valuation allowance reserve has decreased due to Interpharm, Inc.'s
increased taxable income which has utilized more credits and management's
estimate of future growth which has reduced the estimated credits that will not
be utilized.
32
Liquidity and Capital Resources - December 31, 2002
Cash flows from operations were $1,747,585 during the fiscal year ended
December 31, 2002, $906,343 during year ended December 31, 2001 and $353,293
during 2000. As a result of Interpharm, Inc.'s cash flows from operations during
fiscal 2002, working capital increased $.2 million to $2.3 million from $2.1
million in 2001.
Net cash used in investing activities for the fiscal year ended December
31, 2002, 2001 and 2000 were $1,203,221, $964,259 and $175,583, respectively.
These were all for the purchase of production equipment except for $19,011 in
2002 for the purchase of marketable securities. In the year ended 2002,
Interpharm, Inc. used $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. In the year ended 2001, Interpharm, Inc. removed
$313,166 of net equipment from service.
Accounts Receivable
The accounts receivable increase from December 31, 2001 to December 31,
2002 is primarily attributable to the increase in sales throughout 2002. This
increase resulted in an increased accounts receivable balance at December 31,
2002.
The accounts receivable days outstanding for the periods December 31, 2001
through December 31, 2002 consistently ranged from 54-59 days.
Inventory
During the later part of 2000 and early 2001 Interpharm, Inc. commenced a
program to increase inventory production levels to meet the demand for
increasing sales. Due to the increase in sales at the end of 2001 Interpharm,
Inc.'s inventory had decreased. During 2002 Interpharm, Inc. had increased
production capacity to produce more inventory to meet future demand resulting in
a more optimal level of inventory at December 31, 2002.
The inventory turnover for the periods ended December 31, 2001 through
December 31, 2002 has consistently improved with a decrease in number days sales
in inventory from 58 days to 50 days.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increase from
December 31, 2001 to December 31, 2002 is primarily attributable to increased
inventory production to meet future sales demands.
Cash and Cash Equivalents
The decrease in cash and cash equivalents from December 31, 2001 to
December 31, 2002 of $478,069 is primarily attributable to $1,184,210 in
equipment purchases and $1,044,176 to repay bank notes of $236,455 and loans to
related parties of $807,721. These amounts were partially offset by $1,747,535
in net cash provided by operating activities.
33
From time to time in the past, Interpharm, Inc.'s shareholders, directors
and officers had made loans to it for working capital. As of December 31, 2002,
each of these loans was paid by Interpharm, Inc. with the exception of a loan
with a balance of $304,750 from Mona Sutaria and a loan with a $3 million
principal balance from Dr. Maganlal K. Sutaria to Interpharm, Inc. The
$3,000,000 loan reflected in Interpharm, Inc.'s December 31, 2002 financial
statements has a maturity date of January 1, 2012. Repayment of this loan was
subordinated to Interpharm, Inc.'s bank debt.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
Financial Highlights
o Net sales increased 62% or $7 million to $18.4 million from $11.4
million
o Gross profit increased 58% or $1.3 million to $3.5 million from $2.2
million
o Operating income increased 20% or $172,679 to $1,035,957 from $863,278
o Net earnings increased 52% or $176,801 to $514,565 from $337,764
NET SALES AND GROSS PROFIT
Net sales for 2001 were $18.4 million compared to $11.4 million for fiscal
2000, an increase of $7 million or 62%. In 2001, Interpharm, Inc. increased its
production capacity to satisfy demand from existing customers with the capacity
to make additional purchases. Once Interpharm, Inc.'s production capacity was
increased, it received a corresponding increase in orders from these customers.
Gross profit for 2001 was $3.5 million, or 19% of net sales, compared to
$2.2 million, or 19% of net sales, for fiscal 2000. This increase of $1.3
million, or 58%, was also attributable to increased production of Interpharm,
Inc.'s generic products.
The increase in net sales was not attributable to any change in prices
which, for all products in Interpharm, Inc.'s product line, remained stable
between 2000 and 2001.
COST OF SALES
Cost of sales increased from $9.2 million in 2000 to $14.9 million in 2001,
an increase of $5.7 million or 62% due to increased production. $2.6 million, or
46%, of this increase was attributable to raw material purchases, $1.9 million,
or 33%, was attributable to manufacturing overhead, $.2 million, or 4%, was
attributable to increases in the purchase of packing supplies and $.1 million,
or 2%, was attributable to increased labor costs. Raw material prices were
constant during the period.
34
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 2001 were $110,000, or 1% of
net sales, compared to $0, in fiscal 2000. This increase was largely
attributable to the new drugs currently in development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2.0 million, or 11% of
net sales, for fiscal 2001, compared to $1.3 million, or 11% of net revenues,
for fiscal 2000. For fiscal 2001, selling general and administrative expenses
were primarily made up of salaries ($456,000), freight expenses ($248,000),
commissions ($166,000), legal, accounting and other professional services
($199,000), repairs and maintenance expenses ($89,000) and, a bad debt of
$297,000 for one customer, the other 50% owner of Interpharm, Inc.'s Saturn
subsidiary. The bad debt and an increase in salaries of $218,000 relating to the
hiring of additional personnel in order to increase production comprised most of
the increase in selling, general and administrative expenses from 2000 to 2001.
INCOME TAXES
The effective tax rate for fiscal 2001 was 29% compared to 39% for fiscal
2000. The decrease in the effective tax rate was due to the decrease in the tax
effect of permanent differences, primarily due to the minority owner's share of
the loss of Interpharm, Inc.'s subsidiary during 2000. At December 31, 2001,
Interpharm, Inc. has net deferred tax assets of $298,000 primarily related to
New York State investment tax credits of approximately $268,500 and cumulative
losses in excess of its subsidiary basis. The net deferred tax asset has been
reduced by a valuation allowance of $151,000 because Interpharm, Inc. may not be
able to utilize all of these deferred tax assets prior to their expiration.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that Interpharm
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, Interpharm evaluates
judgments and estimates made, including those related to revenue recognition,
inventories, income taxes and contingencies including litigation. Interpharm
bases its judgments and estimates on historical experience and on various other
factors that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing its
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
35
REVENUE RECOGNITION
Revenues from the sale of Interpharm products are recognized upon shipment
of the product. Revenues are recorded net of provisions for rebates,
charge-backs, discounts and returns, which are established at the time of sale.
Estimates for rebates, charge-backs, and discounts are calculated based on
actual experience and also cover chargebacks on sales to intermediary wholesale
prime vendors for the supply of Ibuprofen to the Department of Veterans Affairs.
We purchase raw materials from a supplier, which is then used in the
manufacturing of completed goods and sold back to the supplier, by direct drop
shipment to the supplier's customers. The raw materials are also used in the
manufacturing of products for other customers. We also (i) have the general
inventory risk by taking title to all of the raw material purchased, (ii)
establish the selling price for the finished product and, (iii) significantly
change the raw materials into the finished product under our specifications and
formulas. These factors among others, qualify us as the principal under the
indicators set forth in EITF 99-19, Reporting Revenue Gross as a Principal vs.
Net as an Agent. If the terms and substance of the arrangement change, such that
we no longer qualify to report these transactions on a gross reporting basis,
our net income and cash flows would not be affected. However, our sales and cost
of sales would both be reduced by a similar amount.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record allowances for doubtful accounts based upon customer specific
analysis and assessment of past-due balances. Additional allowances for doubtful
accounts may be required if there is an increase in past-due balances or for
customer specific circumstances. The allowance for doubtful accounts was $47,776
at June 30, 2003 and December 31, 2002 and 2001.
INVENTORY
Our inventories are valued at the lower of cost or market, determined on a
first-in, first -out basis, and include the cost of raw materials and
manufacturing. We continually evaluate the carrying value of our inventories and
when factors such as expiration dates and spoilage indicate that impairment has
occurred, either a reserve is established against the inventories' carrying
value or the inventories are disposed of and completely written off in the
period incurred.
36
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for Interpharm in the December 31, 2002 financial statements. We do
not expect the adoption the initial recognition requirements to FIN 45 will have
a significant impact on our consolidated financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
37
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We are currently evaluating the
effect that the adoption of FIN 46 will have on our results of operations and
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective for the first interim period beginning
after June 15, 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability. We believe that we are
currently in substantial compliance with the requirements of SFAS No. 150.
ISSUE AND UNCERTAINTIES
RISK OF PRODUCT LIABILITY CLAIMS
The testing, manufacturing and marketing of pharmaceutical products subject
us to the risk of product liability claims. We believe that we maintain an
adequate amount of product liability insurance, but no assurance can be given
that such insurance will cover all existing and future claims or that we will be
able to maintain existing coverage or obtain additional coverage at reasonable
rates.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We do not use any derivative financial instruments to hedge our exposure to
adverse fluctuations in interest rates, fluctuations in commodity prices or
other market risks, nor do we invest in speculative financial instruments.
Borrowings under our lines of credit are indexed to the prime rate.
Due to the nature of our borrowings and short-term investments, we have
concluded that there is no material risk exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the previous two fiscal years, and the subsequent interim period,
Interpharm, Inc.'s accountant has not resigned, declined to stand for
re-election and was not dismissed. During the previous two fiscal years, and the
subsequent interim period, there were no material disagreements with
Interpharm, Inc.'s accountant with respect to any matter.
Following the acquisition of Interpharm, Inc., on June 9, 2003, we
dismissed Weinick Sanders Leventhal & Co., LLP ("WSLCO") as our independent
accountant. WSLCO had been previously engaged as the principal accountant to
audit ATEC's financial statements. The reason for the termination was the
acquisition of Interpharm, Inc., which is now our primary business unit and
which has been audited by the firm of Marcum & Kliegman LLP. We believe that it
is in our best interests to have Marcum & Kliegman LLP continue to work with us.
WSLCO's report on our financial statements for the past two years did not
contain an adverse opinion or a disclaimer of opinion, and was not qualified or
modified as to uncertainty, audit scope, or accounting principles.
The decision to change accountants was recommended by our Board of
Directors and approved by the Audit Committee of our Board of Directors.
During our two most recent fiscal years, and the subsequent interim
periods, prior to June 9, 2003, there were no disagreements with WSLCO on any
matter of accounting principles or practices, financial statement disclosure,
auditing scope, or procedure, which disagreements, if not resolved to the
satisfaction of WSLCO, would have caused it to make reference to the subject
matter of the disagreement in connection with its reports.
On June 11, 2003, we retained Marcum & Kliegman LLP as our new independent
accountant. Marcum & Kliegman LLP is located at 130 Crossways Park Drive,
Woodbury, New York 11797.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed,
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summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management to allow timely decisions regarding required disclosure. Management
necessarily applied its judgment in assessing the costs and benefits of such
controls and procedures, which, by their nature, can provide only reasonable
assurance regarding management's control objectives.
At the conclusion of the period ended June 30, 2003, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer, Chief Financial Officer and
General Counsel, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chairman and
Chief Executive Officer, Chief Financial Officer and General Counsel concluded
that our disclosure controls and procedures were effective in alerting them in a
timely manner to information relating to the Company required to be disclosed in
this report but adopted additional disclosure controls and procedures to improve
the quality and timeliness of disclosure during our transition from a private to
a public company.
CHANGES IN INTERNAL CONTROLS
At the conclusion of the period ended June 30, 2003, our Chairman and Chief
Executive Officer, Chief Financial Officer and General Counsel reviewed our
internal controls and procedures. Subsequent to the date of their evaluation as
described above, the following changes have been made: We have taken efforts to
implement additional segregation of duties within our accounting department we
are also investigating a more efficent and effective inventory costing system.
No significant deficiencies or material weaknesses have been identified.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
Directors and Officers
The following table sets forth the names and ages of all current Directors
and Officers and the position held by them:
Name Age Position
Dr.Maganlal K Sutaria 66 Chairman of the Board of
Directors
Chief Executive Officer and
Director
Bhupatlal K. Sutaria 57 President, Treasurer and
Director
James J. Charles 60 Chief Financial Officer
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Munish K. Rametra 33 General Counsel and Secretary
Surinder Rametra 63 Director of Corporate
Development and Director
Praveen Bhutani 55 Director
David C. Reback 60 Director
Stewart Benjamin 38 Director
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders or until their successors
have been elected and qualified.
DR. MAGANLAL K. SUTARIA. Dr. Sutaria is a Cardiovascular surgeon and has
served as the Chairman of Interpharm, Inc.'s Board of Directors since 1989. Dr.
Sutaria received his medical degree from the Medical College, Ahmedabad, Gujarat
University in 1961. Dr. Sutaria has served as an Assistant Professor of Surgery
at the State University of New York at Stony Brook. Dr. Sutaria has been a
Director since May 29, 2003 and is Chairman of our Board of Directors.
BHUPATLAL K. SUTARIA. Mr. Sutaria has served as the President of Interpharm
Inc. since 1990. Prior to joining Interpharm, Inc., Mr. Sutaria was an
entrepreneur involved in several businesses. Mr. Sutaria received a Bachelor's
degree in Chemistry from Saurashpra University in India in 1972 and a Masters of
Business Administration degree from the University of Palm Beach in 1974. Mr.
Sutaria is the brother of Dr. Maganlal K. Sutaria. Mr. Sutaria has been a
Director since May 29, 2003.
JAMES J. CHARLES. Mr. Charles was appointed Chief Financial Officer of ATEC
in January 1999. Prior to his appointment, Mr. Charles was a financial
consultant to several public companies for the period of 1994-1998. Mr. Charles
was also the Chief Financial Officer of a printing company from 1991-1994 and a
partner at Ernst & Young from 1966-1991.
MUNISH K. RAMETRA. Mr. Rametra was an associate for the law firm of
Sullivan and Cromwell from 1995 to 1999. From 1999 to 2003, Mr. Rametra acted as
a financial and legal consultant to several companies. He was appointed our
general counsel and Secretary on May 29, 2003. Mr. Rametra attended the Stern
School of Business at New York University and New York University School of Law.
SURINDER RAMETRA was appointed the Chief Executive Officer and Chairman of
the Board of Directors of ATEC. in June 1994. He resigned as Chief Executive
Officer in January 2002. Prior to June 1994 Mr. Rametra was president of one of
our subsidiaries. Mr. Rametra received a Bachelor's degree in Mechanical
Engineering from the Punjab Engineering College, India and a Master's degree in
Industrial Engineering from the Indian Institute of Technology in 1965 and 1969
respectively. In 1976, Mr. Rametra received a Masters of Business Administration
Degree in Finance from New York University.
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PRAVEEN BHUTANI has served as a Director since May 2001. Mr. Bhutani was
the founder of Ultra Spec Cables, Inc., a cable manufacturing company and The
Options Group, Inc., a placement company. He has served both companies as the
Chief Executive Officer since 1992. Prior to 1992 he held various executive
positions. Mr. Bhutani has Bachelor and Masters degrees in finance from the
Delhi College, Delhi, India.
DAVID C. REBACK has served as a Director since in November 1997. Since
1969, Mr. Reback has been a partner with Reback & Potash, LLP, a law firm
specializing in litigation, appellate matters and real estate. Mr. Reback
received a B.A. from Syracuse University, and in 1965 he received a Juris
Doctor's degree from Syracuse University College of Law.
STEWART BENJAMIN has served as a Director since May 2001. Mr. Benjamin is a
certified public accountant in the State of New York. From January 1996 to the
present, Mr. Benjamin has been self-employed as a sole practitioner under the
name of Stewart H. Benjamin, CPA, P.C. From 1985 through December 1995, Mr.
Benjamin was employed as a staff accountant in both private industry and local
public accounting firms. Mr. Benjamin received a Bachelor of Business
Administration degree from Pace University in 1985.
To our knowledge, except as set forth below, based solely on a review of
such materials as are required by the Securities and Exchange Commission, none
of our officers, directors or beneficial holders of more than ten percent of our
issued and outstanding shares of Common Stock has failed to timely file with the
Securities and Exchange Commission any form or report required to be so filed
pursuant to Section 16(a) of the Securities Exchange Act of 1934 during the
fiscal year ended June 30, 2003.
1. Ashok Rametra - Form 4 dated July 11, 2003
2. Praveen Bhutani - Form 4 dated July 11, 2003
3. Ashok Rametra - Form 4 dated August 21, 2003
ITEM 11. EXECUTIVE COMPENSATION
The Summary Compensation Table for the years ended June 30, 2003, 2002 and
2001 is provided herein. This table provides compensation information on behalf
of the Chief Executive Officer and other officers who earn in excess of
$100,000.
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