<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 17, 1999
NUTRITION FOR LIFE INTERNATIONAL, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas
---------------------------------------------
(State or other jurisdiction of incorporation)
0-26362 76-0416176
------------------------ ------------------------------------
(Commission File Number) (IRS Employer Identification Number)
9101 Jameel, Suite 180, Houston, TX 77040
------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (713) 460-1976
--------------
_____________________________(Former address, if changed since last report)
<PAGE>
NUTRITION FOR LIFE INTERNATIONAL, INC.
INFORMATION TO BE INCLUDED IN THE REPORT
Introduction
- ------------
On December 2, 1999, Nutrition For Life International, Inc. (the "Company")
filed a Report on Form 8-K regarding the acquisitions by the Company on November
17, 1999 of Advanced Nutraceuticals, Inc. ("ANI") and Bactolac Pharmaceutical
Inc. ("BPI"). On December 15, 1999, the Company filed a Report on Form 8-K
reporting the acquisition on December 1, 1999 of Ash Corp. ("ASH") through a
merger with BPI.
The purpose of this Amendment is to provide the financial statements of the
businesses acquired and the pro forma financial information which were not
included in the initial filings.
ITEM 7. Financial Statements and Exhibits.
---------------------------------
(a) Financial Statements of Business Acquired.
Advanced Nutraceuticals, Inc.
Report of Grant Thornton LLP
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Ash Corp.
Report of Hein + Associates LLP
Balance Sheets
Statements of Operations
Statements of Stockholders' Deficit
Statements of Cash Flows
Notes to Financial Statements
Bactolac Pharmaceutical Inc.
Report of Grant Thornton LLP
Balance Sheets
Statements of Earnings
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
-2-
<PAGE>
(b) Pro forma Financial Information.
Attached is the following unaudited pro forma consolidated financial
statements which give effect to the acquisitions by the Company of 100% of the
outstanding common stock of ANI, BPI and ASH:
Unaudited pro forma combining balance sheet as of September 30, 1999.
Unaudited pro forma combining statements of operations for the year
ended September 30, 1999.
Explanatory Head Note
Notes to pro forma consolidated financial statements.
(c) Exhibits
23.1 Consent of Grant Thornton LLP
23.2 Consent of Hein + Associates LLP
23.3 Consent of Grant Thornton LLP
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION FOR LIFE INTERNATIONAL, INC.
Dated: January 28, 2000 By: /s/ David P. Bertrand
----------------------------
David P. Bertrand, President
-3-
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Advanced Nutraceuticals, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Advanced
Nutraceuticals, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the period from inception (September 9, 1997) through
December 31, 1997, and the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly,
in all material respects, the consolidated financial position of Advanced
Nutraceuticals, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
the period from inception (September 9, 1997) through December 31, 1997, and for
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Houston, Texas
November 10, 1999
F-1
<PAGE>
Advanced Nutraceuticals, Inc.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
------------- ------------- --------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 24,862 $ 156,480 $ 15,097
Prepaid expenses and other current assets 500 551 550
----------- ----------- -----------
Total current assets 25,362 157,031 15,647
PROPERTY AND EQUIPMENT, NET 2,292 2,530 2,530
DEFERRED OFFERING COSTS 1,847 - -
----------- ----------- -----------
$ 29,501 $ 159,561 $ 18,177
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Due to affiliates $ 25,000 $ 616 $ 616
Accounts payable 500 111,656 20,947
----------- ----------- -----------
Total current liabilities 25,500 112,272 21,563
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value, 5,000,000 shares
authorized, 0 issued and outstanding - - -
Common stock, $.001 par value, 30,000,000 shares
authorized, 1,800,000 issued and outstanding
at December 31, 1997 and 2,388,000 issued and
outstanding at December 31, 1998 and
September 30, 1999 1,800 2,388 2,388
Additional paid-in capital 2,998,200 3,944,718 3,944,718
Accumulated deficit (2,995,999) (3,899,817) (3,950,492)
----------- ----------- -----------
Total stockholders' equity (deficit) 4,001 47,289 (3,386)
----------- ----------- -----------
$ 29,501 $ 159,561 $ 18,177
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From inception Nine months
(September 9, 1997) Year ended
through ended September 30,
December 31, December 31, ---------------
1997 1998 1998 1999
------------------- ------------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C>
Compensation expense relating to issuance of
common stock to management and
consultants $ 2,985,000 $ - $ - $ -
Selling, general and administrative expenses 11,892 915,014 40,950 53,515
----------- --------- ---------- --------
Loss from operations (2,996,892) (915,014) (40,950) (53,515)
Other income (expense)
Interest 589 11,251 7,530 2,340
Other 304 (55) (55) 500
----------- --------- ---------- --------
893 11,196 7,475 2,840
----------- --------- ---------- --------
Loss before income taxes (2,995,999) (903,818) (33,475) (50,675)
Income tax (expense) benefit - - - -
----------- --------- ---------- --------
NET LOSS $(2,995,999) $(903,818) $ (33,475) $(50,675)
=========== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
December 31, 1997 and 1998
<TABLE>
<CAPTION>
Total
Additional stockholders'
Number of paid-in Accumulated equity
shares Amount capital deficit (deficit)
--------- ------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Issuance of management,
consultant and director
shares 1,800,000 $1,800 $2,998,200 $ - $ 3,000,000
Net loss - - - (2,995,999) (2,995,999)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1997 1,800,000 1,800 2,998,200 (2,995,999) 4,001
Issuance of stock 588,000 588 946,518 - 947,106
Net loss - - - (903,818) (903,818)
--------- ------ ---------- ----------- -----------
Balance at December 31,
1998 2,388,000 2,388 3,944,718 (3,899,817) 47,289
Net loss (unaudited) - - - (50,675) (50,675)
--------- ------ ---------- ----------- -----------
Balance at September 30,
1999 (unaudited) 2,388,000 $2,388 $3,944,718 $(3,950,492) $ (3,386)
========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
Advanced Nutraceuticals, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From inception
(September 9, 1997) Year Nine months ended
through ended September 30,
December 31, December 31, -----------------------------------
1997 1998 1998 1999
------------------------- ------------------ ----------------- ----------------
(Unaudited)
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net loss $(2,995,999) $(903,818) $ (33,475) $ (50,675)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities
Depreciation 208 1,667 417 -
Compensation expense related to
issuance of common stock to
management and consultants 2,985,000 - - -
Change in assets and liabilities
(Increase) decrease in prepaid
expenses and other current
assets (500) (51) (600) 1
(Increase) decrease in deferred
offering costs (1,847) 1,847 (607,362) -
Increase (decrease) in due to
affiliates 22,500 (24,384) (24,384) -
(Decrease) increase in
accounts payable 500 111,156 5,305 (90,709)
----------- --------- ---------- ----------------
Net cash provided (used) by
operating activities 9,862 (813,583) (660,099) (141,383)
Cash flows from investing activities
Acquisition of property and
equipment - (1,905) (1,905) -
Cash flows from financing activities
Issuance of stock 15,000 947,106 947,106 -
----------- --------- ---------- ----------------
Net increase (decrease) in cash and
cash equivalents 24,862 131,618 285,102 (141,383)
Cash and cash equivalents at
beginning of period - 24,862 24,862 156,480
----------- --------- ---------- ----------------
Cash and cash equivalents at end of
period $ 24,862 $ 156,480 $ 309,964 $ 15,097
=========== ========= ========== ================
Supplemental disclosure of noncash
investing activities:
Furniture and fixtures acquired
through donation from a related
party $ 2,292 $ - $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Description of Business
-----------------------
The consolidated financial statements included herein are of Advanced
Nutraceuticals, Inc. (ANI), a Delaware corporation, and of Naturally Direct,
Inc. (NDI), a Texas corporation and predecessor to ANI.
The consolidated financial statements include the accounts of the Company and
its wholly-owned, dormant subsidiaries. All significant intercompany accounts
have been eliminated in consolidation.
In September 1998, the incorporation of NDI was changed from Texas to Delaware
by the merger of NDI with and into ANI. At the time of the merger, each share
of NDI common stock outstanding was converted into one and two-tenths of ANI's
common stock. The effect of the merger on common stock has been retroactively
reflected in the accompanying financial statements. In addition to its
authorized common stock, ANI has authorized 5,000,000 shares of preferred stock
having a par value of $.001. References to the Company herein refer to ANI and
its predecessor, NDI.
The Company was incorporated on September 9, 1997 for the purpose of creating a
full service vertically integrated manufacturer and supplier of quality
nutritional supplements and botanical ingredients. The Company intended to
acquire four businesses, complete an initial public offering (IPO) of its
common stock and, subsequent to the offering, continue to acquire, through
merger or purchase, similar companies to expand its national operations.
During 1998, the Company filed a registration statement on Form S-1 for the
sale of 5,000,000 shares of its common stock, which was subsequently withdrawn.
The Company incurred $845,965 in IPO costs which were expensed in 1998. The
Company has not conducted any operations, and all activities to date have
related to the contemplated offering and mergers. Substantially all
expenditures to date have been funded by the proceeds received in connection
with a private placement during 1998 (see Note B).
2. Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.
F-6
<PAGE>
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
3. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash deposits. The Company maintains
cash balances at financial institutions which may at times be in excess of
federally insured levels. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risks on
cash maintained in bank deposit accounts.
4. Property and Equipment
----------------------
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets on a
straight-line basis. The useful lives of property and equipment for purposes
of computing depreciation is three years. Property and equipment at December
31, 1998 and 1997, with a cost and accumulated depreciation of $4,405 and
$1,875 and $2,500 and $208, respectively, consists of furniture and fixtures
and a computer system.
Expenditures for major additions or improvements which extend the useful lives
of assets are capitalized. Minor replacements, maintenance and repairs which
do not improve or extend the life of such assets are charged to operations as
incurred.
5. Commitments
-----------
The Company is currently utilizing office space under a month-to-month lease
agreement which requires monthly rentals of $575.
6. Deferred Offering Costs
-----------------------
The costs related to filing a registration statement on Form S-1 for the sale
of common stock were capitalized when incurred at December 31, 1997; the Form
S-1 was subsequently withdrawn and deferred offering costs were expensed
during 1998.
7. Income Taxes
------------
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences are expected to reverse. Deferred tax expense (benefit) is the
result of changes in deferred tax assets and liabilities.
The Company has incurred losses from operations since its inception and,
accordingly, no deferred tax asset has been realized. All carryforwards are
subject to review and possible adjustment by the Internal Revenue Service.
Additionally, Section 382 of the Internal Revenue Code limits the amounts of
net operating loss carryforwards usable by a corporation following a more than
50 percentage point change in ownership of the corporation during a three year
period. It is possible that subsequent transactions involving the Company's
capital stock could result in such a limitation. As of September 30, 1999,
management does not believe that a 50 percentage point change in ownership has
occurred during a three year period.
F-7
<PAGE>
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
8. Financial Instruments
---------------------
The Company's financial instruments consist of cash and cash equivalents and
accounts payable. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
9. Use of Estimates
----------------
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
10. New Accounting Pronouncements
-----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The
Company is required to adopt SFAS 133 in the year ended December 31, 2000.
SFAS 133 established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. To date, the Company has not entered into any derivative financial
instruments or hedging activities.
11. Unaudited Interim Information
-----------------------------
The financial information for the nine months ended September 30, 1999 and 1998
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim period are not necessarily indicative of the results
of operations for the full year.
F-8
<PAGE>
Advanced Nutraceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE B - STOCKHOLDERS' EQUITY
In December 1997, the Company issued a total of 1,800,000 shares of common
stock to management and directors of and consultants to the Company at a price
of $.01 per share. As a result of these transactions, the Company recorded a
nonrecurring, noncash compensation charge of $2,985,000 representing the
difference between the amount paid for the shares and an estimated fair market
value of the shares on the date of sale.
During 1998, the Company issued under a subscription agreement in a private
placement a total of 588,000 shares of common stock to investors at a price of
$1.67 per share. As a result, the Company recorded additional paid-in capital
of $946,518, net of offering costs of $34,854, representing the difference
between the amount paid for the shares and the par value of the shares on the
date of sale.
NOTE C - EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS (UNAUDITED)
On November 17, 1999, the Company merged into a wholly-owned subsidiary of
Nutrition For Life International, Inc., a Houston-based publicly-held company.
F-9
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Ash Corp.
Gulfport, Mississippi
We have audited the accompanying balance sheets of Ash Corp. as of December 31,
1998 and 1997, and the related statements of operations, stockholders' deficit
and cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ash Corp. as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
HEIN + ASSOCIATES LLP
Houston, Texas
July 16, 1999
F-10
<PAGE>
ASH CORP.
Balance Sheets
<TABLE>
<CAPTION>
September December 31,
30, -------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
(unaudited)
ASSETS
------
Current Assets:
Cash $ 151,038 $ - $ 135,448
Accounts receivable - trade 976,826 684,957 697,427
Stockholder receivable 170,098 35,887 -
Inventories, net 1,673,005 1,243,368 854,722
Prepaid expenses 15,814 18,918 8,910
---------------- ---------------- ----------------
Total current assets 2,986,781 1,983,130 1,696,507
Property And Equipment, net 2,130,453 2,260,547 2,181,187
Other Assets 7,813 8,346 9,056
---------------- ---------------- ----------------
Total assets $ 5,125,047 $ 4,252,023 $ 3,886,750
================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities:
Current portion of notes payable $ 2,200,017 $ 1,075,777 $ 2,396,650
Accounts payable, trade 2,602,435 2,253,097 2,017,171
Accrued expenses 1,047,293 483,775 173,683
---------------- ---------------- ----------------
Total current liabilities 5,849,745 3,812,649 4,587,504
Notes Payable, less current portion 1,385,796 2,919,906 1,566,220
Commitments And Contingencies (Notes 6, 9 and 11)
Stockholders' Deficit:
Common stock, $.001 par value, 30,000,000 shares authorized, 10,000 10,000 10,000
10,000,000 issued and outstanding
Accumulated deficit (2,120,494) (2,490,532) (2,276,974)
---------------- ---------------- ----------------
Total stockholders' deficit (2,110,494) (2,480,532) (2,266,974)
---------------- ---------------- ----------------
Total liabilities and stockholders' deficit $ 5,125,047 $ 4,252,023 $ 3,886,750
================ ================ ================
</TABLE>
See accompanying notes to these financial statements
F-11
<PAGE>
ASH CORP.
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended Years Ended December 31,
September 30,
------------------------------------- -------------------------------------
1999 1998 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(unaudited)
Revenue $9,213,285 $8,224,299 $10,533,761 $10,500,780
Cost Of Revenue 6,968,492 6,576,529 8,734,289 9,128,075
---------- ---------- ----------- -----------
Gross Profit 2,244,793 1,647,770 1,799,472 1,372,705
General and Administrative 1,583,979 1,292,654 1,713,855 1,986,277
---------- ---------- ----------- -----------
Operating Income (Loss) 660,814 355,116 85,617 (613,572)
Other Income (Expense):
Other income 7,874 39,710 11,601 10,996
Interest expense (298,650) (229,371) (310,776) (285,489)
---------- ---------- ----------- -----------
Total other income (expense) (290,776) (189,661) (299,175) (274,493)
---------- ---------- ----------- -----------
Net Income (Loss) $ 370,038 $ 165,455 $ (213,558) $ (888,065)
========== ========== =========== ===========
</TABLE>
See accompanying notes to these financial statements
F-12
<PAGE>
ASH CORP.
Statements of Stockholders' Deficit
Years Ended December 31, 1998 and 1997 and
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Common Stock Total
------------------------------------ Accumulated Stockholders'
Shares Amount Deficit Deficit
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balances, January 1, 1997 10,000,000 $10,000 $(1,388,909) $(1,378,909)
Net loss - - (888,065) (888,065)
---------- ------- ----------- -----------
Balances, December 31, 1997 10,000,000 10,000 (2,276,974) (2,266,974)
Net loss - - (213,558) (213,558)
---------- ------- ----------- -----------
Balances, December 31, 1998 10,000,000 10,000 (2,490,532) (2,480,532)
Net income (unaudited) - - 370,038 370,038
---------- ------- ----------- -----------
Balances, September 30, 1999 10,000,000 $10,000 $(2,120,494) $(2,110,494)
========== ======= =========== ===========
</TABLE>
See accompanying notes to these financial statements
F-13
<PAGE>
ASH CORP.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended Years Ended December 31,
September 30,
----------------------------------- -----------------------------------
1999 1998 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(unaudited)
Cash Flows from Operating Activities:
Net income (loss) $ 370,038 $ 165,455 $(213,558) $(888,065)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 215,155 206,472 276,821 251,140
Changes in:
Accounts receivable (291,869) (123,833) 12,470 (118,083)
Inventory (429,637) (767,141) (388,646) 713,345
Prepaid expenses 3,104 (75,087) (10,008) 16,949
Accounts payable 349,338 817,039 235,926 (314,749)
Accrued expenses 563,518 16,385 310,092 2,047
--------- --------- --------- ---------
Net cash provided by (used in) 779,647 239,290 223,097 (337,416)
operating activities
Cash Flows from Investing Activities:
Advances from (to) stockholder (134,211) (162,148) (35,887) 79,617
Additions of property and equipment (84,528) (45,441) (355,471) (53,369)
--------- --------- --------- ---------
Net cash provided by (used in) (218,739) (207,589) (391,358) 26,248
investing activities
Cash Flows from Financing Activities:
Repayments of debt (409,870) (167,149) (171,870) (174,778)
Proceeds from debt - - 204,683 621,394
--------- --------- --------- ---------
Net cash provided by (used in) (409,870) (167,149) 32,813 446,616
financing activities --------- --------- --------- ---------
Net Change In Cash 151,038 (135,448) (135,448) 135,448
Cash, beginning of period - 135,448 135,448 -
--------- --------- --------- ---------
Cash, end of period $ 151,038 $ - $ - $ 135,448
========= ========= ========= =========
Supplemental Cash Flow Information:
Cash paid for interest $ 60,615 $ 160,107 $ 294,649 $ 268,075
========= ========= ========= =========
Supplemental Non-Cash Investing
and Financing Activities:
Building improvements financed with note $ - $ 162,081 $ 210,000 $ -
payable ========= ========= ========= =========
</TABLE>
See accompanying notes to these financial statements
F-14
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
------------------------------------------------
Organization and Nature of Operations - Ash Corp. (the "Company") was
-------------------------------------
incorporated in the state of Mississippi on September 12, 1995. The Company
manufactures over-the-counter pharmaceuticals, including aspirin, antacid,
laxatives, diaper powder, and ointments.
Inventories - Inventories consist of raw materials, work in process, and
-----------
finished goods. Inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out method, net of an estimated
amount for slow-moving and/or obsolete items.
Property and Equipment - Property and equipment is stated at cost, less
----------------------
accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets ranging from 3 to 39
years. Major improvements are capitalized; minor replacements, maintenance
and repairs are charged to current operations.
Long-Lived Assets - The Company reviews for the impairment of long-lived
-----------------
assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss would
be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying
amount. The Company has not identified any such impairment losses.
Income Taxes - The Company accounts for income taxes on the liability method
------------
under which the amount of deferred income taxes is based upon the tax
effects of the differences between the financial and income tax bases of the
Company's assets and liabilities at the balance sheet date based upon
existing laws.
Comprehensive Income (Loss) - Comprehensive income (loss) is defined as all
--------------------------
changes in stockholders' equity (deficit), exclusive of transactions with
owners, such as capital investments. Comprehensive income includes net
income or loss, changes in certain assets and liabilities that are reported
directly in equity such as translation adjustments on investments in foreign
subsidiaries, and certain changes in minimum pension liabilities. The
Company's comprehensive income (loss) was equal to its net income (loss) for
the years ended December 31, 1998 and 1997 and the nine months ended
September 30, 1999.
1. Organization and Significant Accounting Policies (continued)
------------------------------------------------
Unaudited Interim Information - The accompanying financial information as of
-----------------------------
F-15
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and for the nine-month periods ended September 30, 1999
and 1998 has been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments, consisting of normal recurring
accruals which are, in the opinion of management, necessary to fairly
present such information in accordance with generally accepted accounting
principals.
Use of Estimates - The preparation of these financial statements in
----------------
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
2. Inventories
-----------
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Packaging materials $ 666,068 $ 595,640 $463,542
Raw materials 450,033 403,516 256,754
Work in process 119,535 110,353 88,907
Finished goods 515,746 212,236 95,519
---------- ---------- --------
Total 1,751,382 1,321,745 904,722
Less: reserve for slow-moving and obsolete (78,377) (78,377) (50,000)
---------- ---------- --------
$1,673,005 $1,243,368 $854,722
========== ========== ========
</TABLE>
3. Property and Equipment
----------------------
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Land $ 150,124 $ 150,124 $ 150,124
Furniture, fixtures, equipment 1,908,515 1,873,573 1,831,954
Building and improvements 1,101,779 1,052,190 730,978
----------- ---------- ----------
3,160,418 3,075,887 2,713,056
Accumulated depreciation (1,029,965) (815,340) (531,869)
----------- ---------- ----------
</TABLE>
F-16
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
$ 2,130,453 $2,260,547 $2,181,187
=========== ========== ==========
</TABLE>
Depreciation expense of $276,111 and $250,430 was recorded for the years
ended December 31, 1998 and 1997, respectively, and $214,622 for the six
months ended June 30, 1999.
4. Notes Payable
-------------
Notes payable consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Notes payable to bank (a) $ 1,747,828 $ 1,747,828 $ 1,746,394
Note payable to bank (b) 1,468,721 1,531,465 1,603,024
Notes payable to bank (c) 71,224 181,677 -
Note payable to a customer (d) 246,702 500,000 500,000
Other 51,338 34,713 113,452
----------- ----------- -----------
Total notes payable 3,585,813 3,995,683 3,962,870
Less: current portion (2,200,017) (1,075,777) (2,396,650)
----------- ----------- -----------
$ 1,385,796 $ 2,919,906 $ 1,566,220
=========== =========== ===========
</TABLE>
4. Notes Payable (continued)
-------------
On June 14, 1999 the Company entered into a Workout, Renewal and Extension
Agreement (the "Agreement") with its bank (the "Bank"). The Agreement
requires the Company to repay the notes listed above under the following
terms:
(a) Two notes originally due in 1998, now due in six monthly installments of
$22,028, including interest at 8.75%, beginning December 14, 1999 with
the remaining balance due July 14, 2000.
(b) Note in the original amount of $1,750,000, bearing interest at 8.75%,
due October 10, 2010 in monthly installments of $17,620, including
interest.
(c) Two notes originally due March 23, 1999 and October 26, 1999, bearing
interest at 9.5% and 9.75%. These two notes and all past due amounts
under (b)($105,719), now due in 20 weekly installments of $20,000,
beginning June 30, 1999. These
F-17
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
payments are required to be automatically deducted from the Company's
cash account. Any excess payments above the principal balances will then
be applied to the principal balance of the notes described in (a) above.
(d) Note payable to the Company's largest customer was renewed in October
1998, accruing interest at 8%, payments due monthly beginning June 1999;
one payment of $42,277 and six payments of $83,333 including interest,
final payment due December 1999. The payments will be made as a
reduction of the monthly reimbursement of "fixed manufacturing expenses"
(see note 6). The note is collateralized by land and building and is
subordinate to the bank debt.
The above notes are collateralized by substantially all of the Company's
assets and the Bank notes are personally guaranteed by two of the Company's
stockholders.
The Bank notes have two financial covenants which limit the amount of
officers' compensation and requires the Company to maintain a minimum
balance of $25,000 in its cash account.
4. Notes Payable (continued)
-------------
The following summarizes the future payments on the above related notes as
provided in the Agreement and with the customer:
Years Ending
December 31,
-------------
1999 $1,075,777
2000 1,550,307
2001 92,322
2002 100,857
2003 110,181
Thereafter 1,066,239
----------
Total $3,995,683
==========
5. Income Taxes
------------
The Company has net operating loss ("NOL") carryforwards of approximately
$2,300,000, expiring in various amounts through 2019. The ability of the
Company to utilize the
F-18
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
carryforwards is dependent upon the Company generating sufficient taxable
income in the future.
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
September 30, ------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
NOL carryforwards $ 781,000 $ 915,000 $ 732,000
Financial basis of assets in excess of tax (180,000) (145,000) (80,000)
basis
Valuation allowance (601,000) (770,000) (652,000)
--------------- --------------- ---------------
Net deferred tax balance $ - $ - $ -
=============== =============== ===============
</TABLE>
6. Commitments and Contingencies
-----------------------------
Supplier Agreement
------------------
The Company has an agreement with a significant pharmaceutical company (the
"Customer") to exclusively manufacture certain products. The Customer pays
standard cost, which must be approved by the Customer. Standard costs are
adjusted annually to reflect anticipated costs for the next year. The
Customer also pays $83,333 monthly for "fixed manufacturing expenses." The
Company's sales to the Customer totaled approximately $6,582,000 and
$7,393,000 for the years ended December 31, 1998 and 1997, respectively, and
$4,365,000 and $3,206,000 for the six months ended June 30, 1999 and 1998,
respectively. This customer has the right to offset amounts owed by the
Company with amounts owed to the Company.
In 1997 the Company was to receive $1,000,000 ($83,333 per month) from the
Customer for fixed manufacturing expenses. However, in January of 1997, the
Company discounted the 12 payments by $150,000 and received a lump sum of
$850,000.
The agreement with the Customer expires October 10, 2000.
Litigation
----------
In 1998, two stockholders filed a lawsuit against the Company and the two
majority stockholders. This lawsuit was settled in January 1998, and the
Company was released
F-19
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
from any and all liability. The majority stockholders agreed to pay $460,000
to resolve these claims which amount is secured by a promissory note given
by the majority stockholders. The settlement agreement also required the
Company to guarantee this promissory note. The stockholders that filed the
lawsuit returned their stock certificates for cancellation and were reissued
20% of the outstanding common stock of the Company. The majority
stockholders' ownership percentage was increased to 80% as a result of this
settlement. The majority stockholders also were required to pledge their
stock in the Company as additional security. As of December 31, 1998 and
September 30, 1999, the Company had paid $70,000 and $120,000 related to
this guarantee which is included in shareholder receivables.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
6. Commitments and Contingencies (continued)
-----------------------------
Product Liability
-----------------
As of December 31, 1998, the Company was corresponding with a significant
customer regarding a potential customer claim brought about by shipment of
defective product. The Company intends to defend its position that its
product was not defective; however, at December 31, 1998 and September 30,
1999, the Company has accrued $150,000 as a contingency reserve related to
this matter.
Operating Leases
----------------
The Company leases equipment under non-cancelable operating leases. The
leases expire in 1999. Total minimum lease payments due in 1999 are
approximately $2,700. Rent expense for the year ended December 31, 1998 and
1997 was approximately $5,400 and $8,400, respectively. Rent expense for the
nine months ended September 30, 1999 and 1998 was approximately $10,000 and
$40,000, respectively.
7. Concentrations of Credit Risk
-----------------------------
F-20
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company performs ongoing credit
evaluations as to the financial condition of its customers. Generally, no
collateral is required. Two customers made up approximately 99% and 82% of
accounts receivable balances at December 31, 1998 and 1997, respectively.
One customer accounted for approximately 77% of accounts receivable at
September 30, 1999.
8. Revenues from Major Customers
------------------------------
A summary of the Companies' revenues from major customers is as follows
(rounded to thousands):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
----------------------------------- -----------------------------------
1999 1998 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A $6,580,032 $4,513,087 $ 6,582,000 $ 7,393,000
Customer B 1,236,873 1,875,745 2,204,000 630,000
Customer C 815,960 949,095 1,055,000 932,000
Others 580,420 886,372 693,000 1,439,000
---------- ---------- ----------- -----------
Totals $9,213,285 $8,224,299 $10,534,000 $10,394,000
========== ========== =========== ===========
</TABLE>
9. Management Plans
-----------------
The Company's losses for the years ended December 30, 1998 and 1997 amounted
to approximately $214,000 and $888,000, respectively. As a result of these
losses, the Company's working capital position has deteriorated, and its
ability to generate sufficient cash flows from operations to meet its
operating and capital requirements is uncertain. In addition, the Company
was unable to make principal payments on its debt subsequent to December 31,
1998; however, it was able to renegotiate and extend the debt with its bank
in June 1999 (see note 4). These matters raise substantial doubt about the
Company's ability to continue as a going concern. In addition to the
revision of the debt terms, the Company believes it will be successful in
its ability to continue as a going concern by pursuing various financing
alternatives, including a sale of the Company's stock or assets; however,
there are no assurances any of the various alternatives will occur and be
successful.
F-21
<PAGE>
ASH CORP.
NOTES TO FINANCIAL STATEMENTS
Subsequent to September 30, 1999, the stockholders of the Company sold all
of their shares in Ash Corp. to a holding company in exchange for an
ownership interest in a publicly traded company. This transaction is an
integral part of the consolidation of three established companies, one of
which is Ash Corp.
10. Profit Sharing Plan
-------------------
The Company has a 401(k) profit sharing plan (the "Plan"). Eligible
employees may make voluntary contributions to the Plan that are limited as
specified in the Plan. The Company makes no matching contributions under the
Plan.
11. Year 2000
---------
The Company has begun to address possible remedial efforts in connection
with computer software that could be affected by the Year 2000 problem. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure
or miscalculations. The Year 2000 problem may impact or be impacted by other
entities with which the Company transacts business.
F-22
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Bactolac Pharmaceutical Inc.
We have audited the accompanying balance sheets of Bactolac Pharmaceutical
Inc. as of December 31, 1998 and 1997, and the related statements of earnings,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Bactolac Pharmaceutical Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
October 20, 1999
F-23
<PAGE>
Bactolac Pharmaceutical Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1997 1998 1999
---------- ---------- --------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 90,902 $ 379,590 $ 141,004
Accounts receivable - trade, less allowance for
doubtful accounts of $75,000, $75,000 and $100,000 1,204,040 1,598,381 2,841,982
Inventory 657,450 996,476 832,828
---------- ---------- ----------
Total current assets 1,952,392 2,974,447 3,815,814
PROPERTY AND EQUIPMENT - net 73,094 147,498 202,053
OTHER ASSETS 8,341 23,662 30,772
---------- ---------- ----------
$2,033,827 $3,145,607 $4,048,639
========== ========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C> <C> <C>
Accounts payable $ 858,859 $1,102,840 $1,586,459
Secured customer advance - 140,000 -
Accrued expenses 22,708 52,496 64,064
---------- ---------- ----------
Total current liabilities 881,567 1,295,336 1,650,523
LOAN PAYABLE TO STOCKHOLDER 2,800 - -
---------- ---------- ----------
Total liabilities 884,367 1,295,336 1,650,523
COMMITMENTS - - -
STOCKHOLDER'S EQUITY
Common stock, par value $1 per share; authorized, issued
and outstanding 100 shares 100 100 100
Additional paid-in capital 4,852 4,852 4,852
Retained earnings 1,144,508 1,845,319 2,393,164
---------- ---------- ----------
Total stockholder's equity 1,149,460 1,850,271 2,398,116
---------- ---------- ----------
$2,033,827 $3,145,607 $4,048,639
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
Bactolac Pharmaceutical Inc.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ----------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $1,406,339 $5,002,113 $7,364,203 $5,886,424 $6,296,615
Cost of sales 1,135,492 3,802,153 6,003,291 4,863,892 5,409,447
---------- ---------- ---------- ---------- ----------
Gross profit 270,847 1,199,960 1,360,912 1,022,532 887,168
Selling, general and
administrative expenses 74,621 246,224 293,172 166,605 220,117
---------- ---------- ---------- ---------- ----------
Operating income 196,226 953,736 1,067,740 855,927 667,051
Other income, net 4,902 4,913 11,587 10,258 4,839
---------- ---------- ---------- ---------- ----------
Net earnings $ 201,128 $ 958,649 $1,079,327 $ 866,185 $ 671,890
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
Bactolac Pharmaceutical Inc.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Additional Retained Total
Number of paid-in earnings stockholder's
shares Amount capital (deficit) equity
--------- ------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 100 $100 $4,852 $ (2,427) $ 2,525
Net earnings - - - 201,128 201,128
--- ---- ------ ---------- ----------
Balance at December 31,
1996 100 100 4,852 198,701 203,653
Net earnings - - - 958,649 958,649
Distributions - - - (12,842) (12,842)
--- ---- ------ ---------- ----------
Balance at December 31,
1997 100 100 4,852 1,144,508 1,149,460
Net earnings - - - 1,079,327 1,079,327
Distributions - - - (378,516) (378,516)
--- ---- ------ ---------- ----------
Balance at December 31,
1998 100 100 4,852 1,845,319 1,850,271
Net earnings (unaudited) - - - 671,890 671,890
Distributions (unaudited) - - - (124,045) (124,045)
--- ---- ------ ---------- ----------
Balance at September 30,
1999 (unaudited) 100 $100 $4,852 $2,393,164 $2,398,116
=== ==== ====== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-26
<PAGE>
Bactolac Pharmaceutical Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ------------ ----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 201,128 $ 958,649 $1,079,327 $ 866,185 $ 671,890
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation 45,564 44,344 39,057 25,932 71,651
Loss on disposal of property and equipment - - 5,376 - -
Provision for doubtful accounts - 75,000 - 10,000 25,000
Changes in assets and liabilities
Increase in accounts receivable (219,024) (1,052,749) (394,341) (1,437,316) (1,268,601)
(Increase) decrease in inventory (188,024) (469,426) (339,026) (271,197) 163,648
(Increase) decrease in other assets 160 (7,754) (15,321) (20,233) (7,110)
Increase in accounts payable 280,382 573,180 383,981 1,184,113 343,619
Increase in accrued expenses 3,747 14,504 29,788 35,423 11,568
--------- ----------- ---------- ----------- -----------
Net cash provided by operating activities 123,933 135,748 788,841 392,907 11,665
Cash flows from investing activities
Acquisition of property and equipment (130,534) (32,468) (118,837) (35,219) (126,206)
Cash flows from financing activities
Repayment of loan to shareholder - - (2,800) - -
Distributions paid to stockholder - (12,842) (378,516) (301,442) (124,045)
--------- ----------- ---------- ----------- -----------
Net (decrease) increase in cash (6,601) 90,438 288,688 56,246 (238,586)
Cash at beginning of period 7,065 464 90,902 90,902 379,590
--------- ----------- ---------- ----------- -----------
Cash at end of period $ 464 $ 90,902 $ 379,590 $ 147,148 $ 141,004
========= =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Description of Business
-----------------------
Bactolac Pharmaceutical Inc. (the "Company") was incorporated in the state of
New York on March 29, 1995. The Company manufactures and markets a variety of
vitamin and nutritional supplement products, primarily from natural products.
The products are primarily produced for specific customer orders, with the
Company's customers consisting of a broad range of distributors and direct
marketing organizations.
2. Revenue Recognition
-------------------
Revenues are recognized as products are shipped.
3. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to concentration of
credit risk consist of trade receivables. The Company's business activities
are conducted with customers in the United States.
4. Cash Concentration
------------------
The Company maintains its cash balances primarily in one financial institution,
which at times, may exceed federally insured limits. The Company has not
experienced any losses in such account and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
5. Allowance for Doubtful Accounts
-------------------------------
The Company maintains an allowance for doubtful accounts based upon the
estimated collectibility of all accounts receivable.
6. Inventory
---------
Inventory consists of herbs and vitamin supplements in the raw material,
blended and processed stages and is stated at the lower of cost or market with
cost being determined on a first-in, first-out basis.
F-28
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
7. Property and Equipment
----------------------
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the assets,
generally seven years, using primarily accelerated methods. Expenditures for
major additions or improvements which extend the useful lives of assets are
capitalized. Minor replacements, maintenance and repairs which do not improve
or extend the life of such assets are charged to operations as incurred.
Management evaluates these costs for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
Impairment would be recognized if the carrying amounts of such costs cannot be
recovered by the net cash flows they will generate.
8. Income Taxes
------------
The Company, with the stockholder's consent, has elected to be taxed as an S
corporation since it began operations. Accordingly, taxable results of the
Company are passed through and taxed to the stockholder. The accompanying
financial statements do not contain any provision for, nor any current or
deferred liability relating to income taxes. The difference between the
financial statement and income tax bases of assets and liabilities consist
primarily of the allowance for doubtful accounts receivable.
9. Financial Instruments
---------------------
The Company's financial instruments consist of cash, accounts receivable and
accounts and notes payable. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
10. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
F-29
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
11. Recent Accounting Pronouncements
--------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). The Company is required to
adopt SFAS 133 in the year ended December 31, 2000. SFAS 133 established
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
To date, the Company has not entered into any derivative financial instruments
or hedging activities.
12. Unaudited Interim Information
-----------------------------
The financial information for the nine months ended September 30, 1998 and 1999
has not been audited by independent certified public accountants. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the unaudited interim financial
information. In the opinion of management of the Company, the unaudited
financial information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the respective full years.
13. Reclassifications
-----------------
Certain amounts in prior financial statements have been reclassified to conform
to the 1998 financial statement presentation.
NOTE B - INVENTORY
Inventory consists of the following as at December 31,:
1997 1998
-------- --------
Finished products $125,643 $ 96,957
Work in process 132,991 294,060
Raw materials 398,816 605,459
-------- --------
$657,450 $996,476
======== ========
F-30
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows as at December 31,:
Estimated
useful lives
in years 1997 1998
------------ --------- ----------
Machinery and equipment 7 $150,161 $ 226,322
Furniture and fixtures 5-7 12,841 21,069
Leasehold improvements 15 - 3,579
Vehicles 3 - 20,869
-------- ---------
163,002 271,839
Accumulated depreciation (89,908) (124,341)
-------- ---------
$ 73,094 $ 147,498
======== =========
NOTE D - SECURED CUSTOMER ADVANCE
During July 1998, a customer advanced $200,000 to the Company to fund raw
material purchases, under a written Advance Agreement. The Agreement is non-
interest bearing, is repayable at the rate of $15,000 per month, and is
collateralized by accounts receivable and inventory.
NOTE E - LEASE COMMITMENTS
The Company leases its manufacturing facilities as well as various equipment.
The equipment leases are generally short-term (six month) agreements with
month-to-month provisions at maturity. The facility leases have original terms
of two to three years expiring through June 2001. The agreements contain
options to renew each lease for an additional two year term and the agreements
require the following minimum rental commitments as of December 31, 1998:
Year ending
December 31, Amount
------------------ --------
1999 $ 80,800
2000 77,400
2001 16,500
--------
$174,700
========
The Company incurred rent expense in the amount of $47,562, $45,373 and $70,024
during each of the years ended December 31, 1996, 1997 and 1998.
F-31
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE F - MAJOR CUSTOMERS
Sales to principal customers which were in excess of 10% of total net revenues
in either 1996, 1997 or 1998, are shown below:
Year ending December 31,
---------------------------
Customer 1996 1997 1998
---------- -------- -------- -------
A* (a) 16% 36%
B (a) 24% 10%
C 20% (a) (a)
D 17% (a) (a)
E 11% (a) (a)
F 10% (a) (a)
G (a) (a) 12%
(a) less than 10%.
* The Company has a receivable of approximately $880,000 at December 31,
1998.
As of December 31, 1997 and 1998, respectively, the two major customers totaled
59% of accounts receivable, and the three major customers totaled 60% of
accounts receivable.
NOTE G - RELATED PARTY TRANSACTIONS
The Company sells products to, and purchases products from, an entity in which
the stockholder of the Company holds a 20% ownership interest. Transactions
between the Company and this entity are summarized as follows as of December
31,:
Customer 1996 1997 1998
- ------------------------------------ ------- ---------- --------
Products sales to related party $84,246 $1,213,121 $731,438
Product purchases from related
party - 459,790 660,481
Period ending balance in:
Accounts receivable from
related party 54,749 452,231 128,025
Account payable to related
party - 44,509 341,058
As of December 31, 1997, the Company had a loan payable to its stockholder in
the amount of $2,800 which was repaid during 1998.
F-32
<PAGE>
Bactolac Pharmaceutical Inc.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - SUBSEQUENT EVENT (UNAUDITED)
In August, 1999, the Company and its stockholder entered into a Letter of
Intent providing for the merger of the Company with Advanced Nutraceuticals,
Inc., which in turn was being merged into Nutrition for Life International,
Inc., a publicly traded entity.
F-33
<PAGE>
<TABLE>
<CAPTION>
Nutrition For Life International, Inc.
Unaudited Pro Forma Combining Balance Sheet
September 30, 1999
(Amounts in thousands)
NFLI BPI ASH
-------- ------- -------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,395 $ 141 $ 151
Restricted cash 586 - -
Marketable securities 997 - -
Receivables 362 2,842 977
Inventories 8,434 833 1,673
Deferred tax asset, net 1,647 - -
Prepaid expenses and other assets 1,063 - 186
------- ------ ------
Total current assets 14,484 3,816 2,987
Property and equipment, net 6,038 202 2,130
Goodwill, net - - -
Other assets 1,719 31 8
------- ------ ------
Total assets $22,241 $4,049 $5,125
======= ====== ======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ - $ -
Accounts payable 2,517 1,587 2,603
Accrued expenses and other 2,730 64 1,047
Deferred income 826 - -
Current maturities:
Long-term debt 385 - -
Capital lease obligations 177 - -
Notes payable - - 2,200
Note payable to stockholder - - -
------- ------ ------
Total current liabilities 6,635 1,651 5,850
Defered tax liability 778 - -
Long-term debt 309 - 1,386
Long-term portion of capital lease obligation 171 - -
Purchase notes payable - - -
------- ------ ------
Total liabilities 7,893 1,651 7,236
------- ------ ------
Stockholders' Equity:
Preferred stock - - -
Common stock 59 1 10
Additional paid-in capital 11,837 4 -
Retained earnings (deficit) 3,110 2,393 (2,121)
Treasury stock and other (658) - -
------- ------ ------
Total stockholders' equity (deficit) 14,348 2,398 (2,111)
------- ------ ------
Total liabilities and stockholders' equity $22,241 $4,049 $5,125
======= ====== ======
</TABLE>
F-34
<TABLE>
<CAPTION>
Adj. Pro Forma Pro Forma
ANI Combined Ref. Adjustments Combined
-------- ------------ ------- ------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15 $ 1,702 $ (890) $ 812
Restricted cash - 586 - 586
Marketable securities - 997 - 997
Receivables - 4,181 - 4,181
Inventories - 10,940 - 10,940
Deferred tax asset, net - 1,647 - 1,647
Prepaid expenses and other assets - 1,249 1 (425) 824
---- ------- -------- --------
Total current assets 15 21,302 (1,315) 19,987
Property and equipment, net 3 8,373 1 7,926 16,299
Goodwill, net - - 1 8,351 8,351
Other assets - 1,758 1 180 1,938
---- ------- -------- --------
Total assets $ 18 $31,433 $ 15,142 $ 46,575
==== ======= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ - $ - $ -
Accounts payable 21 6,728 - 6,728
Accrued expenses and other 1 3,842 1 355 4,197
Deferred income - 826 - 826
Current maturities: -
Long-term debt - 385 1 944 1,329
Capital lease obligations - 177 - 177
Notes payable - 2,200 - 2,200
Note payable to stockholder - - 1 600 600
---- ------- -------- --------
Total current liabilities 22 14,158 1,899 16,057
Defered tax liability - 778 1 2,830 3,608
Long-term debt - 1,695 1 1,416 3,111
Long-term portion of capital lease obligation - 171 - 171
Purchase notes payable - - 1 3,000 3,000
---- ------- -------- --------
Total liabilities 22 16,802 9,145 25,947
---- ------- -------- --------
Stockholders' Equity:
Preferred stock - - 1 2 2
Common stock 2 72 1 (13) 59
Additional paid-in capital 3,945 15,786 1 2,329 18,115
Retained earnings (deficit) (3,951) (569) 1 3,679 3,110
Treasury stock and other - (658) - (658)
---- ------- -------- --------
Total stockholders' equity (deficit) (4) 14,631 5,997 20,628
---- ------- -------- --------
Total liabilities and stockholders' equity $ 18 $31,433 $ 15,142 $ 46,575
==== ======= ======== ========
</TABLE>
F-35
<PAGE>
Nutrition For Life International, Inc.
Unaudited Pro Forma Combining Statements of Operations
Year Ended September 30, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adj. Pro Forma Pro Forma
NFLI BPI ASH ANI Combined Ref. Adjustments Combined
-------------------------------------------- ---- -----------------------
Net sales $ 66,570 $ 7,774 $ 11,522 $ - $ 85,866 $ - $ 85,866
Cost of sales 44,742 6,549 9,126 - 60,417 2 435 60,852
-------------------------------------------- -----------------------
Gross profit 21,828 1,225 2,396 - 25,449 (435) 25,014
Operating expenses 22,330 346 2,004 20 24,700 3 99 24,799
Write-off off aborted offering expenses - - - 942 942 - 942
Goodwill amortization - - - - - 4 418 418
-------------------------------------------- -----------------------
Income (loss) from operations (502) 879 392 (962) (193) (952) (1,145)
Other income (expense):
Interest expense, net (21) - (381) - (402) - (402)
Interest expense, purchase debt - - - - - 5 (468) (468)
Other 232 6 (20) 7 225 - 225
-------------------------------------------- -----------------------
211 6 (401) 7 (177) (468) (645)
-------------------------------------------- -----------------------
Income (loss) before income tax expense (benefit) (291) 885 (9) (955) (370) (1,420) (1,790)
Income tax expense (benefit) 557 - - - 557 6 (432) 125
-------------------------------------------- -----------------------
Net income (loss) $ (848) $ 885 $ (9)$(955) $(927) $ (988) $ (1,915)
============================================ =======================
Net (loss) per share:
Basic and Diluted $ (0.15) $ (0.24)
======== ========
Shares used in computing
net (loss) per share -
Basic and Diluted 5,809 8,020
======== ========
</TABLE>
F-36
<PAGE>
Nutrition For Life International, Inc.
Pro Forma Consolidated Financial Information (Unaudited)
Explanatory Head Note
The accompanying unaudited pro forma consolidated financial statements give
effect to the acquisitions by Nutrition For Life International, Inc. ("the
Company" or "NFLI") of 100% of the outstanding common stock of Advanced
Nutraceuticals, Inc. ("ANI"), Bactolac Pharmaceutical Inc. ("BPI") and ASH Corp.
("ASH"), pursuant to Agreements between the parties. The unaudited pro forma
statements are based upon the estimates and assumptions set forth herein. The
unaudited pro forma information has been prepared utilizing the historical
financial statements and notes thereto, which for NFLI are incorporated by
reference herein and for the aforementioned acquired companies are included
herein. The unaudited pro forma financial data does not purport to be indicative
of the results which actually would have been obtained had the purchase been
effected on the dates indicated or of the results which may be obtained in the
future. The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements set forth herein.
Acquisition of Advanced Nutraceuticals, Inc.
Effective November 17, 1999, ANI was acquired in exchange for 75,000 shares
of convertible preferred stock.
Acquisition of Bactolac Pharmaceutical Inc.
Effective November 17, 1999, BPI was acquired in exchange for $2,500,000 in
cash, a 7% note payable in the amount of $ 2,500,000, and 96,831 shares of
convertible preferred stock. Additionally, up to 17,606 shares of convertible
preferred stock may be issued pursuant to an earnout agreement.
Acquisition of ASH Corp.
Effective December 1, 1999, ASH was acquired in exchange for $750,000 in
cash, a 7% note payable in the amount of $ 500,000, and 49,296 shares of
convertible preferred stock. Additionally, up to 105,634 shares of convertible
preferred stock may be issued pursuant to an earnout agreement.
Financing Agreement
Financing for the acquisitions was provided through a new financing
arrangement with General Electric Capital Corporation. The borrowing agreement
consists of a term loan and revolving credit facility, with interest on
outstanding balances at .5% over prime. The agreement is collaterialized by
substantially all of the assets of the Company.
The unaudited pro forma consolidated balance sheet assumes the acquisitions were
consummated at September 30, 1999. The accompanying unaudited pro forma
consolidated statement of operations assume the acquisitions were consummated at
October 1, 1998, and have been derived from the statements of operations for the
Company for the year ended September 30, 1999. The pro forma statements of
operations for the acquired companies for the twelve months ended September 30,
1999, have been derived from their respective financial statements, included
herein, by adding the results of each of their nine months ended September 30,
1999, to those of each of their three months ended December 31, 1998.
Nutrition For Life International, Inc.
Notes to Pro Forma Consolidated Financial Statements
(In thousands, except per share amounts)
(1) Effective November 17, 1999 NFLI acquired BPI in exchange for consideration
of $ 7,750 (comprised of $ 2,500 in cash, $ 2,500 in Purchase Notes and $ 2,750
in Convertible Preferred Stock) and ANI in exchange for consideration of $2,130
in Convertible Preferred Stock. Effective December 1, 1999 NFLI acquired ASH in
exchange for consideration of $ 2,650 (comprised of $ 750 in cash, $ 500 in
Purchase Notes and $ 1,400 in Convertible Preferred Stock) Additional shares may
be issued in the future to the selling stockholders of BPI and ASH pursuant to
earn-out agreements. The Convertible Preferred Stock, issuable for that portion
of the purchase price was computed under the terms of the Agreements as of the
date of closing at the equivalent value per Common Share ($2.84). In connection
with the transaction NFLI also incurred approximately $ 600 in transaction
expenses directly related to the acquisitions as well as $180 in fees associated
with the credit facility. Collectively the above acquisitions are referred to as
the "Acquired Companies" or the "Acquisitions". For accounting purposes the
Acquisitions are accounted for under the purchase method of accounting.
F-37
<PAGE>
Following is a summary of the allocation of the Acquired Companies purchase
price:
<TABLE>
<CAPTION>
BPI ASH ANI Totals
------- ------- ------- --------
<S> <C> <C> <C> <C>
Consideration:
Cash (a) $ 2,500 $ 750 $ - $ 3,250
Purchase Notes (b) 2,500 500 - 3,000
Transaction expenses (c) 310 290 - 600
Convertible Preferred
Shares (Computed
Equivalent Common
share value of $2.84
per share) (d) 2,750 1,400 2,130 6,280
------- ------- ------- --------
Totals $ 8,060 $ 2,940 $ 2,130 $ 13,130
======= ======= ======= ========
</TABLE>
(a) - The cash portion was financed under a credit facility, of which $2,360 was
drawn under the long-term portion of the agreement, repayable over a
thirty-six month period. The balance of the cash purchase price ($890) was
paid out of NFLI funds.
(b) - The Purchase Notes bear interest at 7% and are payable $1,200 in 2000,
$1,200 in 2001 and $600 in 2002.
(c) - $425 of the transaction expenses had been paid at September 30, 1999,
leaving $175 to be accrued for in addition to the $180 credit facility
fee.
(d) - Pro forma equity adjustment is net of $283 in historical net assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Purchase Price Allocation:
Historical net assets (e) $ 1,798 $ (2,111) $ (4) $ (317)
Consideration 8,060 2,940 2,130 13,130
--------- --------- -------- ---------
Excess 6,262 5,051 2,134 13,447
Adjust property and equipment to
fair market value 75 7,851 - 7,926
Adjustment to deferred tax liability (30) (2,800) - (2,830)
--------- --------- -------- ---------
Balance to excess of cost over
net assets acquired $ 6,217 $ - $ 2,134 $ 8,351
- ----------------------------------------------====== ========== ======== =========
</TABLE>
(e) - BPI historical net assets are adjusted for a $600 dividend paid to its
stockholder prior to closing and loaned back to the company, with a
maturity date of April 15, 2001.
(2) Records depreciation of additional value assigned to property and
equipment, computed as follows:
<TABLE>
<CAPTION>
Average Value Annual
Description Life Assigned Depreciation
(years)
<S> <C> <C> <C>
Land - $ 1,445 $ -
Buildings 30 2,100 70
Machinery and equipment 12 4,381 365
------- -----
Totals $ 7,926 $ 435
------- -----
- -----------------------------------------------------------------
</TABLE>
(3) Adjusts management compensation amounts of the Acquired Companies, from
the actual historical amounts paid, to the levels as provided for in
the terms of the of the acquisition Employment Agreements.
(4) Records amortization of excess of cost over net assets acquired, over a
twenty year amortization period on a straight line basis. Additional
shares potentially issuable under earnout Agreements would result, if
issued, in additional intangible assets to be amortized.
(5) Reflects interest expense on Purchase Notes at 7% and on advances under
General Electric Capital Corporation at an average rate of 8.4%, on
the debt used to fund the closing of the transaction. Additionally,
reflects the amortization of the credit facility fee over its three
year life.
(6) Records income taxes (benefits) on the operations of the Acquired
Companies, which previously were not subject to income taxes, as well
as the pro forma expense adjustments, exclusive of goodwill which is
not deductible for income tax purposes. An effective tax rate of 40%
is used.
F-38
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated November 10, 1999, accompanying the
financial statements of Advanced Nutraceuticals, Inc. contained in the Nutrition
for Life International, Inc. Form 8-K/A. We hereby consent to the incorporation
by reference of said report in the Registration Statement of Nutrition for Life
International, Inc. on Form S-8 (File No. 333-99366, effective December 5,
1995).
GRANT THORNTON LLP
Houston, Texas
January 28, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion of our report dated July 16, 1999,
accompanying the financial statements of Ash Corp. contained in the Nutrition
For Life International, Inc. Form 8-K/A.
HEIN + ASSOCIATES LLP
Houston, Texas
January 31, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We have issued our report dated October 20, 1999, accompanying the
financial statements of Bactolac Pharmaceutical, Inc. contained in the
Nutrition For Life International, Inc. Form 8-K/A. We hereby consent to the
incorporation by reference of said report in the Registration Statement of
Nutrition For Life International, Inc. on Form S-8 (File No. 333-99366,
effective December 5, 1995).
GRANT THORNTON LLP
Houston, Texas
January 28, 2000
