Unassociated Document

UNITED STATES
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): August 31, 2004


ARGAN, INC.
(Exact Name of Registrant as Specified in Charter)



Delaware
001-31756
13-1947195
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(IRS Employer Identification No.)

One Church Street, Suite 302, Rockville, MD
20850
(Address of Principal Executive Offices)
(Zip Code)



Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

 
Registrant's Telephone Number, including area code: (301) 315-0027

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
      o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)
      o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)
 

 
     
 

NOTE: Argan, Inc. (AI or Company) is amending its Form 8-K (date of report - August 31, 2004) filed September 7, 2004 to include financial statements of businesses acquired and related pro forma financial information.

Item 9.01 Financial Statements and Exhibits

(a)   Financial Statements of Businesses Acquired
Audited balance sheets of Vitarich Laboratories, Inc. as of August 30, 2004, December 31, 2003 and 2002 and related statements of income, stockholders’ equity and cash flows for the eight months ended August 30, 2004 and for the years ended December 31, 2003 and 2002.



                                        

 Contents Page   
Vitarich Laboratories, Inc. Financial Statements - August 30, 2004 and
    
Independent Auditors’ Report
3
  
     
Vitarich Laboratories, Inc. Financial Statements - December 31, 2003 and
    
Independent Auditors’ Report
18
  
     
Vitarich Laboratories, Inc. Financial Statements - December 31, 2002 and
    
Independent Auditors’ Report
31
  

 
 
     
 


Vitarich Laboratories, Inc.
Financial Statements
And
Independent Auditors’ Report
August 30, 2004

 

 

     
 

Independent Auditors’ Report


To the Director and Stockholder of
Vitarich Laboratories, Inc.
Naples, FL

We have audited the accompanying balance sheet of Vitarich Laboratories, Inc. as of August 30, 2004 and the related statements of income, changes in stockholders’ equity, and cash flows for the eight months then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitarich Laboratories, Inc. as of August 30, 2004, and the results of its operations and its cash flows for the eight months then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Davidson & Nick CPA’s

Naples, Florida


October 15, 2004

 
 

     
 



 
Vitarich Laboratories, Inc.
Balance Sheet
August 30, 2004
 
ASSETS
      
       
Current Assets:
        
Cash
  
$
105,708
  
Accounts receivable, net of allowance
of $218,000 for doubtful accounts
    
1,470,429
 
Inventory
    
3,247,177
 
Other Receivables
    
8,451
 
Other Pre-Paid Assets
    
45,794
 
Deposits on Inventory
    
224,000
 
Deferred Taxes
    
42,785
 
     
5,144,344
 
Property & Equipment:
        
         
Machinery & Equipment
    
1,117,968
 
Office Furniture & Fixtures
    
101,694
 
Leasehold Improvements
    
184,682
 
     
1,404,344
 
Less accumulated depreciation
    
(340,704
)
     
1,063,640
 
         
Loan Receivable - Shareholder
    
34,889
 
Other Deposits
    
58,332
 
         
Total Assets
  
$
6,301,205
  
         
Liabilities and Stockholder's Equity
        
         
Current Liabilities:
        
Bank Overdraft
  
$
161,604
  
Accounts Payable
    
2,319,628
 
Accrued Payroll & Payroll Taxes
    
66,407
 
Accrued Income Taxes
    
424,561
 
Accounts Payable - Affiliated Corporation
    
68,170
 
Accrued Expenses and Other Current Liabilities
    
275,687
 

The accompanying notes are an integral part of the financial statements.


 
     
 


Vitarich Laboratories, Inc.
Balance Sheet
August 30, 2004
(Continued)
  
       
 
Loan Payable -Shareholder
    
515,618
 
Current Portion of Notes Payable
    
574,281
 
Current Portion of Obligations under Capital Leases
    
100,505
 
     
4,506,461
 
Other Liabilities
        
Notes Payable, net of Current Portion
    
54,808
 
Obligations Under Capital leases, net of Current Portions
    
317,571
 
Deferred Taxes
    
192,561
 
     
   
  
     
564,940
 
         
Stockholder's Equity
        
Common Stock, $1 Par Value,
        
    100 shares authorized, 93 issued, and outstanding
    
93
 
Additional Paid -in-Capital
    
77
 
Retained Earnings
    
1,229,634
 
     
1,229,804
 
         
Total Liabilities and Stockholder's Equity
  
$
6,301,205
  
         
The accompanying notes are an integral part of the financial statements.
         
         
         


 
 

     
 


 
 
Vitarich Laboratories, Inc.
Statement of Income
For the Eight Months Ended August 30, 2004
  
       
Sales, Net of Discounts
  
$
10,891,005
  
Cost of Sales
    
8,017,092
 
Gross Profit
    
2,873,913
 
         
Operating Expenses:
        
General & Administrative
    
1,267,876
 
Selling Expenses
    
208,204
 
         
Total Operating Expenses
    
1,476,080
 
         
Income From Operations
    
1,397,833
 
         
Other Income (Expenses)
        
Interest Expense
    
(62,233
)
Interest Income
    
481
 
Capital Gain/Loss on Disposition of Fixed Assets
    
(14,649
)
Other (Expense)
    
( 76,401
)
         
Income Before Income Taxes
    
1,321,432
 
         
Provision for Income Tax
        
Current Taxes
    
455,561
 
Deferred Taxes
    
34,176
 
Total Income Taxes
    
489,737
 
         
Net Income
  
$
831,695
  
         
         
The accompanying notes are an integral part of the financial statements.





 
     
 



Vitarich Laboratories, Inc.
Statement of Changes in Stockholder’s Equity
For the Eight Months
Ended August 30, 2004



   
Number of Common Stock Shares Outstanding
Common
Stock Par Value
Additional
Paid-In Capital
Retained Earnings
  
                   
Beginning Balance
    
100
  
$
100
  
$
77
  
$
1,097,932
  
                           
Net Income
                      
831,695
  
 
                          
Acquisition of Treasury Stock
    
( 7
)
  
( 7
)
        
( 699,993
)
                           
Ending Balance
    
93
  
$
93
  
$
77
  
$
1,299,634
  

The accompanying notes are an integral part of the financial statements

 
 

     
 

Vitarich Laboratories
Statement of Cash Flows
For the Eight Months Ended August 30, 2004
Cash Flows from Operating Activities
      
       
Net Income
  
$
831,695
  
         
Adjustments to reconcile net income to
net cash provided by operations
        
Depreciation
   
123,158
 
Loss on Disposal of Fixed Assets
    
14,649
 
Deferred Income Tax
    
34,176
 
Bad Debt Recoveries
    
(248,000
)
Write off of Loan Receivable - Affiliated Corporation
   
17,229
  
Loan Payable - NFLL Charge
    
(109,959
)
Changes in Assets and Liabilities
        
Decrease in Accounts Receivables
    
1,180,797
 
Increase in Inventory
    
(2,233,002
)
Increase in Other Receivable
    
(8,457
)
Decrease in Prepaid Assets
    
102,798
 
Increase in Deposit on Inventory
    
(92,331
)
Decrease in Other Deposits
    
7,750
 
Increase in Bank Overdraft
    
161,604
 
Increase in Accounts Payable
   
432,106
 
Decrease in Accrued Payroll & Payroll Taxes
    
(94,466
)
Increase in Accrued Income Taxes
    
372,561
 
Increase in Accounts Payable-Affiliated Corporations
    
9,645
 
Increase in Accrued Expenses & Other Current Liabilities
    
72,010
 
     
 
Net Cash provided by Operating Activities
    
573,963
 
     
 
Cash Flows from Investing Activities
        
 
        
Purchases of Fixed Assets
    
(536,711
)
Loan Receivable-Shareholder
    
(34,889
)
         
Net cash used by Investing Activities
    
(571,600
)
         
Cash Flows from Financing Activities
        
Payments on Loan Payable-Affiliated Corporation
    
(8,105
)
Proceeds from Loan Payable-Shareholder
    
2,274
 

The accompanying notes are an integral part of the financial statements.
 

 
     
 

Vitarich Laboratories
Statement of Cash Flows
For the Eight Months Ended August 30, 2004
(Continued)
Proceeds from Note Payable
    
398,017
 
Payments on Notes Payable
    
(34,133
)
Proceeds from Obligations Under Capital Leases
    
364,905
 
Payments on Obligations Under Capital Leases
    
(95,394
)
Acquisition of Treasury Stock
    
(700,000
)
     
    
  
Net cash used by Financing Activities
    
(72,436
)
         
         
Net decrease in cash and cash
equivalents for the period
    
(70,073
)
Cash and Cash Equivalents at the beginning
of the period
    
175,781
 
Cash and Cash Equivalents at the end of the period
  
$
105,708
  
         
Supplemental Disclosure of Cash Flows
        
         
Cash paid during the period for interest expense
  
$
60,573
  
         
Cash paid during the period for income taxes
  
$
83,000
  
         
The accompanying notes are an integral part of the financial statements.
         
         
         
         
         

The accompanying notes are an integral part of the financial statements.

 
     
 

Vitarich Laboratories, Inc.
Notes to the Financial Statements
August 30, 2004

Note 1- Organization

Vitarich Laboratories, Inc. (the Company) is in the business of formulating, packaging and distributing whole food dietary, herbal and nutritional supplements and related products, which are marketed globally to retail, wholesale and private label customers, including network marketing companies, health food stores, mass merchandisers, drug stores, food stores, internet and mail-order companies. The Company operates a manufacturing, warehousing, and laboratory facility in Naples, Florida. The Company was incorporated August 14, 1998.

Note 2 - Summary of Significant Accounting Policies

Basis of Accounting - The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.

Cash and Cash Equivalents - Cash is defined to include money market investment funds.

Revenue Recognition - Sales are recognized when items are shipped to customers in accordance with supporting sales terms.

Accounts Receivable - The Company uses the allowance method to account for uncollectible accounts receivable. The allowance for doubtful accounts is based on management’s analysis of possible bad debts. Trade receivables are analyzed through an aging of the accounts and an allowance is developed for individual doubtful accounts. Aging and status of accounts is based on how recently payments have been received. Unknown doubtful accounts have been allowed for by increasing the allowance account determined under the aging method by 4% of trade receivables. As of August 30, 2004 management had established an allowance of $ 218,000. Accounts are charged off when management specifically identifies such accounts as uncollectible after significant collection efforts. The Company does not currently charge interest on its trade receivables.

Inventory - Inventories are stated at the lower of cost or market, using the first in, first out method. The cost of shipping and handling is included in cost of sales.

Property & Equipment - Property & Equipment are stated at cost. Depreciation is provided using the straight -line method. Estimated lives are as follows:

 
Machinery & Equipment
5 to 7 years
Office Furniture and Fixtures
5 to 7 years
Leasehold Improvements
20 years

Total depreciation and amortization of property and equipment, including leasehold improvements and assets held under capital leases for the eight months ended August 30, 2004 was $ 123,158.

Income Tax - Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to depreciable assets (using accelerated depreciation method for income tax purposes) and recognition of bad debt expense (using direct write off method for tax purposes). The Company’s provision for income taxes does not differ from applying the statutory US federal income tax and State of Florida income tax rate to income before income taxes by more than 1%, as the only reconciling item, meals and entertainment expense, is less than 1% of income before income taxes.


 
     
 

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results may differ from those estimates.

Advertising Costs - Advertising costs are expensed as incurred. Total advertising costs for the eight months ended August 30, 2004 was $17,861 and is included in selling expense.

Interest Expense - Interest costs are expensed as incurred. Interest expense was $62,233 for the eight months ended August 30, 2004.

Note 3 - Inventory


   
 
   
Inventory consists of the following:
     
 Raw Materials  
$
2,950,102
 Work in Process    
106,162
 Finished Goods    
190,913
   
$
3,247,177

Raw materials are those that are in the original conditions as when purchased, work in process consists of those items which the Company has started to process but has not completed as of August 30, 2004. Finished goods are completed units ready for delivery to customers.

Note 4 - Accrued Expenses and Other Current Liabilities

Accrued expenses and other liabilities consist of the following:


        
Accrued Interest
  
$
1,660
  
Obligation to Fund Inventory Deposit
    
109,000
  
Accrued Vacation Pay
    
40,685
  
Other Accrued Expenses
    
124,342
  
   
$
275,687
  

Note 5 - Notes Payable

Notes Payable as of August 30, 2004 consists of the following:
 
Term Loan - Wachovia National Bank - The Company borrowed $ 80,873 in order to finance the acquisition of machinery and equipment. The term loan is payable in 84 monthly installments of $ 1,229 beginning October 11, 1998. The interest on the term loan is a variable rate calculated at Wall Street Journal “Prime Rate” plus .25% per annum. The loan is secured by specified machinery and equipment. The interest rate was 4.75% at August 30, 2004.

Equipment Note - First Florida Bank - This note was used to fund the acquisition of diagnostic lab equipment which cost $115,000 The note provides for 60 monthly installments of $2,310 per month beginning November 10, 2002. The interest rate is 7.50% per annum.


 
     
 

Term Loan - Key Bank - Company borrowed $148,111 in order to finance the company’s liability insurance. The term loan is payable in December 2004 with interest only payments thru term. Interest rate was 5% as of August 30, 2004.

Key Bank Line of Credit - In early 2004 Key Bank issued a line of credit for $400,000. This was used for the purchase of additional inventory products. The interest rate was 5% at August 30, 2004.

Summary of Notes Payable



Term Loan Wachovia Nat. Bank
  
$
13,970
  
Equipment Note First Florida Bank
    
77,816
  
Term Loan Key Bank
    
139,286
  
Key Bank Line of Credit
    
398,017
  
   
$
629,089
  
Current Portion
    
574,281
  
Notes Payable
    
54,808
  
 
        
   
$
629,089
  


Notes Payable is expected to mature as follows for the years ending August 30:
 

2006
  
$
24,080
  
2007
    
26,155
  
2008
    
4,573
  
   
$
54,808
  


NOTE 6 - Operating Leases

The Company leases each of its five operational buildings for remaining terms ranging from 2 months to 60 months. The monthly lease payments for each of these leases range from $1,733 to $10,600. The specific terms of each lease is as follows:

Property Leased From Controlling Shareholder -

4327 Building - property is currently leased from controlling shareholder for $5,500 per month. Current lease expires in April 2007 with no proposed renewal or purchase option.

4206 Building - property is currently leased from controlling shareholder for $6,625 per month. Current lease expires in August 2009 with no proposed renewal or purchase option. Lease agreement provides for significant improvements to be made to the property and increase the rent to $13,250 per month. Management expects this to occur within the next 12 months.

Property Leased from Unrelated Parties -

4365 Building - property is currently leased for $10,600 per month. Current lease expires in April 2005 and has an option for 2 one year renewal terms, and no option to purchase. Monthly lease amount is expected to increase to $11,248 during this period.


 
     
 

4405 Building - property is currently leased for $3,433 per month. Current lease is verbal and expires in November 2004.

4344 Building- is currently leased for $1,733 per month and originally expired August 31, 2004 but was extended for two months.

The total rent for the five properties was $167,038, of which $44,122 was paid to the controlling shareholder, for the eight months ended August 30, 2004. Future minimum lease payments for each of the five succeeding years and in the aggregate are:

      Controlling
Shareholder
Leases 		 Other
Leases 		 Total   
12 months ended August 30, 2005
  
$
145,500
  
$
140,966
  
$
286,466
  
12 months ended August 30, 2006
    
145,500
    
129,744
   
275,244
  
12 months ended August 30, 2007
    
123,500
    
132,336
    
255,836
  
12 months ended August 30, 2008
    
79,500
    
134,976
    
214,476
  
12 months ended August 30, 2009
    
79,500
    
-
   
79,500
  
Subsequent Years
    
-
    
-
    
-
  
Total
  
$
573,500
  
$
538,022
  
$
1,111,522
  

 

NOTE - 7 - Stockholder Equity

Common stock, $1 par value; authorized 100 shares; issued and outstanding 93 shares.

Pursuant to and prior to the merger discussed elsewhere within the footnotes, the Company reacquired 7 shares of stock from the minority stockholder for $700,000 on August 26, 2004.

Retained earnings was reduced by the excess paid per share over the par value of the stock in the Statement of Changes in Stockholder’s Equity for the Eight Months Ended August 30, 2004.


NOTE - 8 - Risk Concentrations

A substantial portion of the company’s business is conducted with eleven of its customers. For the eight months ended August 30, 2004, sales to these customers were 93.3% of total sales. At August 30, 2004, Accounts Receivable from these customers before allowance for bad debts totaled $1,545,915, which is unsecured. These customers sell whole dietary and nutritional supplements via wholesalers, retailers, and specialized multi-level marketing methods. The majority of these customers operations are within North America.

Sales directly to foreign sources are less than 5% and purchases from foreign sources are approximately 10%.

The Company’s policy is to monitor risk based on each customer’s qualifications.

The Company occasionally maintains deposits in excess of federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. As of August 30, 2004 the balance in excess of federally insured limits was $0.


 
     
 

NOTE 9 - Related Party Transactions

Loan Receivable - Shareholder              $34,889
Balance represents amounts due to the Company for reimbursement of expenditures. Loan is unsecured and non-interest bearing.

Loan Payable- Shareholder                  $515,618
Loan payable consists of funds advanced to the company by the shareholder on a short term basis. Interest rate is 6% and loan was paid off during September 2004. Interest expense recognized was $20,301 for the eight months ended August 30, 2004.

 Accounts Payable - Biotech Analytical Laboratories, Inc.   $ 10,300  
 Accounts Payable - Vitarich Farms, Inc.     57,870  
 Accounts Payable - Affiliated Corporations   $ 68,170  
       
           
               

Vitarich Farms, Inc. (farms) harvests and processes powdered vegetable grasses (wheat, barley, and hydrilla). During the eight months ended August 30, 2004, the company purchased 19,950 kilos of product for a total of $176,468. Management estimates the purchase of each product was at fair market value. The majority shareholder of Farms is also the controlling shareholder of the Company.

Biotech Analytical Laboratories, Inc. is owned by the controlling shareholder of the Company and provides laboratory testing services to the Company. The Company incurred $94,086 of expenses for these services for the eight months ended August 31, 2004.

Loan Receivable Affiliated Corporation as of December 31, 2003 the balance recorded for net advances from the Company to Farms was $17,229. As a result of the pending merger discussed in Note 13, management estimated that this balance is no longer collectible and was written off during the eight months ended August 30, 2004.

NOTE 10 Loan Payable Nutrition for Life, LLC

Prior to December 31, 2003 management had elected to, write off $1,295,559 of accounts receivable from Nutrition for Life, LLC (NFLL). NFLL filed for Chapter 7 bankruptcy on July 18, 2003.

As of December 31, 2003, NFLL also owed the Company $109,959. As a result of progress with the bankruptcy case, management estimates this debt will not be enforced and recognized the credit against general and administrative expenses during the eight months ended August 30, 2004.

Additionally, Bactolac Pharmaceuticals, Inc., the vendor which provided the majority of the product which was sold to NFLL also agreed to reduce its accounts payable balance $96,000 as of August 30, 2004 as a result of the activities described above. Management also charged the credit against general and administrative expense for the eight months ended August 30, 2004.

NOTE 11 Capital Leases


The company leases certain equipment under capital leases. The economic substance of these leases is that the Company is financing the acquisition of the equipment through the leases and accordingly, the equipment is recorded as assets and the leases are recorded as liabilities.                                  


 
     
 

The following is an analysis of the leased assets included in property and equipment:
 Equipment Under Capital Leases   $ 429,006  
 Less: Accumulated Depreciation     130,687  
    $ 298,319  
                   

Future minimum lease payments under capital leases as of August 30, 2004 for each of the remaining years and in aggregate are as follows:

 Year ended August 30, 2005    $ 134,470  
 Year ended August 30, 2006     134,470  
 Year ended August 30, 2007     97,285  
 Year ended August 30, 2008     89,724  
 Year ended August 30, 2009     41,834  
    $ 497,783  
 Less: Amount representing interest   $ 79,707  
 Present value of minimum lease payments   $ 418,076  
         
                          

NOTE 12 Income Taxes

The deferred tax asset of $42,785 as of August 30, 2004 is a result of the temporary difference of accounting for bad debt expense. No valuation allowance has been created for the deferred tax assets as management estimates it to be fully realized in subsequent periods. The deferred tax liability of $192,561 as of August 30, 2004 is a result of the temporary difference of accounting for depreciation expense.

Income tax expense consists of the following:
 

 
  
Current
  
Deferred
  
Federal
  
$
387,503
  
$
29,021
  
State of Florida
    
68,058
    
5,155
  
 
  
$
455,561
   $ 34,176  

Accrued income taxes as of August 30, 2004 consist of the following:

Accrued federal income taxes
  
$
362,503
  
Accrued state income taxes
    
62,058
  
   
$
424,561
  

The Company does not have any available tax loss carry forward or tax credit carry forward as of August 30, 2004.


NOTE 13 - Merger with Argan, Inc        

Effective August 31, 2004 the sole director and shareholder of the Company agreed with Argan, Inc. (Argan) for Argan to acquire the Company by means of a merger of the Company with AGAX/VLI Acquisition Corporation (AGAX), a wholly owned subsidiary of Argan.

Consideration will be based on 5.5 times earnings before income taxes, interest expense, depreciation, amortization, shareholders compensation and other non-recurring expenses for the twelve months ending February 28, 2005. Per the terms of the merger, such consideration is expected to consist of approximate equal components of cash and Argan stock and may not be less than $12,443,750.

For purposes of determining the number of shares of stock to be issued a value of $7.75 per share of Argan stock was utilized. As of October 15, 2004 Argan, Inc. was trading at $5.66 on the Bulletin Board.

Subsequent to the merger and with proceeds provided by Argan, the Company paid off all of its shareholders loans, long term debt and obligations under capital leases, with the exception of two capital leases which had a combined principal balance of $334,755 at August 30, 2004.



 
     
 



Vitarich Laboratories, Inc.
Financial Statements
And
Independent Auditors’ Report
December 31, 2003

 

     
 


Independent Auditors’ Report


To the Board of Directors and Stockholders of
Vitarich Laboratories, Inc.
Naples, FL

We have audited the accompanying balance sheet of Vitarich Laboratories, Inc. as of December 31, 2003 and the related statements of income, changes in stockholders’ equity, and cash flows for the twelve months then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitarich Laboratories, Inc. as of December 31, 2003, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Davidson & Nick CPA’s

Naples, FL

February 16, 2004

 

 
     
 



Vitarich Laboratories, Inc.
Balance Sheet
December 31, 2003
  
       
ASSETS
      
       
Current Assets:
      
Cash
  
$
175,781
  
Accounts receivable, net of allowance of $466,000 for doubtful accounts
    
2,403,226
  
Inventory
    
1,014,175
  
Other Pre-Paid Assets
    
148,592
  
Deposits on Inventory
    
131,669
  
     
3,873,443
  
         
Property & Equipment:
        
Machinery & Equipment
    
656,058
  
Office Furniture & Fixtures
    
104,708
  
Leasehold Improvements
    
184,682
  
     
945,448
  
Less accumulated depreciation
    
(280,717
)
     
664,731
  
         
Loan Receivable Affiliated Corporation
    
17,229
 
Other Deposits
    
66,080
 
         
Total Assets
  
$
4,621,483
  
         
Liabilities and Stockholders' Equity
        
         
Current Liabilities:
        
Accounts Payable
  
$
1,887,521
  
Accrued Payroll & Payroll Taxes
    
160,873
 
Accrued Income Taxes
    
52,000
 
Accounts Payable - Affiliated Corporation
    
58,525
 
Accrued Expenses and Other Current Liabilities
    
203,677
 
Loan Payable - Affiliated Corporation
    
8,105
  
Loan Payable -Shareholder
    
513,344
  
Current Portion of Notes Payable
    
161,573
  
Current Portion of Obligations under Capital Leases
    
63,507
  
     
3,109,125
  
The accompanying notes are an integral part of the financial statements.
        



 
     
 

Vitarich Laboratories, Inc.
Balance Sheet
December 31, 2003
(Continued)


 
Other Liabilities
      
Notes Payable, net of Current portion
    
213,591
  
Obligations Under Capital Leases, net of Current portions
    
85,058
  
Deferred Tax
    
115,600
  
     
414,249
  
         
Stockholders' Equity
        
Common Stock, $1 Par Value,
        
    100 shares authorized, issued, and outstanding
    
100
  
Additional Paid-in-Capital
    
77
  
Retained Earnings
    
1,097,932
 
     
1,098,109
 
         
Total Liabilities and Stockholders' Equity
  
$
4,621,483
  
         
The accompanying notes are an integral part of the financial statements.
        
         
         


 
     
 




Vitarich Laboratories, Inc.
Statement of Income
For the Year Ended December 31, 2003
  
       
Sales, Net of Discounts
  
$
14,067,294
  
Cost of Sales
    
10,252,403
 
         
Gross Profit
    
3,814,890
 
         
Operating Expenses:
        
Selling Expenses
    
445,312
 
General & Administrative Expenses
    
2,912,213
 
         
Total Operating Expenses
    
3,357,525
 
         
Income From Operations
    
457,366
 
         
Other Income (Expenses)
        
Interest Income
    
1,470
 
Interest Expense
    
(16,268
)
Gain/Loss On Sale and Disposal of Fixed Assets
    
1,673
 
         
Income Before Income Taxes
    
444,241
 
         
Provision for Income Taxes
        
Current Taxes
    
119,900
 
Deferred Taxes
    
50,431
 
         
Total Taxes
    
170,331
 
         
Net Income
  
$
273,910
  
         
         
The accompanying notes are an integral part of the financial statements.



     
 

Vitarich Laboratories, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2003



   
Number of
  
Common
  
Additional
          
   
Common Stock
  
Stock
  
Paid-In
  
Retained
      
   
Shares Outstanding
  
Par Value
  
Capital
  
Earnings
  
Total
  
Beginning Balance
    
100
  
$
100
  
$
77
  
$
824,022
  
$
824,199
  
                                 
Net Income
                      
273,910
    
273,910
  
                                 
Shareholder Distributions
                                
                                 
Ending Balance
    
100
  
$
100
    
77
  
$
1,097,932
  
$
1,098,109
  



The accompanying notes are an integral part of the financial statements.



 
     
 

Vitarich Laboratories, Inc.
Statement of Cash Flows
For the Twelve Months Ended December 31, 2003

Cash Flows from Operating Activities
      
       
Net Income
  
$
273,910
  
         
Adjustments to Reconcile net income to net cash provided by operations
        
         
Depreciation
    
142,642
 
Gain on Disposal of Fixed Assets
    
(1,673
)
Deferred income Tax
    
50,431
 
Provision for Bad Debt Expense
    
41,512
 
Change in assets and liabilities
        
Increase in Accounts Receivable
    
(1,263,613
)
Increase in Inventory
    
(492,973
)
Increase in Other Prepaid Assets
    
(105,463
)
Increase in Inventory Deposit
    
(131,669
)
Decrease in Prepaid Taxes
    
51,002
 
Increase in Other Deposits
    
(50,480
)
Increase in Accounts Payable
    
921,977
 
Decrease in Accrued Payroll & Payroll Taxes
    
(205,419
)
Increase in Accrued Income Taxes
    
52,000
 
Increase in Accounts Payable-Affiliated Corporations
    
13,786
 
Increase in Accrued Expenses & Other Current Liabilities
    
9,837
 
         
Net cash provided by operating activities
    
(694,193
)
         
Cash flows from investing activities
        
Loan receivable-affiliated corporation
    
109,444
 
Proceeds from sale of fixed assets
    
113,303
 
Purchase of fixed assets
    
(265,854
)
         
Net cash used by Investing Activities
    
(43,107
)
         
Cash flows from financing activities
        
 
        
 Proceeds from Loan Payable- Shareholder
    
500,230
 
Proceeds from Notes Payable
    
150,000
 
Payments on Notes Payable
    
(32,918
)
Proceeds from Capital Leases
    
89,108
 
Payments on Capital Leases
    
(26,013
)
         
Net cash used by financing activities
    
680,407
 
         
Net decrease in cash and cash equivalents for the period
    
(56,893
)
Cash and Cash Equivalents at the beginning of the year
    
232,674
 
Cash and Cash Equivalents at the end of the year
  
$
175,781
  
         
Supplemental Disclosure of Cash Flow Information
        
Cash paid during the period for interest expense
  
$
16,268
  
         
Cash paid during the period for income taxes
  
$
119,900
  
         
         
The accompanying notes are an integral part of the financial statements.

 
 
     
 


Vitarich Laboratories, Inc.
Notes to the Financial Statements
December 31, 2003

Note 1- Organization

Vitarich Laboratories, Inc. (the Company) is in the business of formulating, packaging and distributing whole food dietary, herbal and nutritional supplements and related products, which are marketed to retail, wholesale and private label customers, including network marketing companies, health food stores, mass merchandisers, drug stores, food stores, and Internet mail-order companies. The Company operates a manufacturing, warehousing, and laboratory facility in Naples, Florida. The Company was incorporated August 14, 1998.

Note 2 - Summary of Significant Accounting Policies

Basis of Accounting - The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.

Cash and Cash Equivalents - Cash is defined to include money market investment funds.

Revenue recognition - Sales are recognized when items are shipped to customers in accordance with supporting sales terms.

Accounts Receivable - The Company uses the allowance method to account for uncollectible accounts receivable. The allowance for doubtful accounts is based on management’s analysis of possible bad debts. Trade receivables are analyzed through an aging of the accounts and an allowance is developed for individual doubtful accounts. Aging and status of accounts is based on how recently payments have been received. As of December 31, 2003 management had established an allowance of $466,000. Accounts are charged off when management specifically identifies such accounts as uncollectible after significant collection efforts. The Company does not currently charge interest on its trade receivables.

Inventory - Inventories are stated at the lower of cost or market, using the first in, first out method. The cost of shipping and handling is included in cost of sales.

Property & Equipment - Property & Equipment are stated at cost. Depreciation is provided using the straight -line method. Estimated lives are as follows:

Machinery & Equipment
3 to 10 years
Office Furniture and Fixtures
5 to 7 years
Leasehold Improvements
40 years

Total depreciation and amortization of leasehold improvements and capital leases for the year ended December 31, 2003 was $ 142,642.

Income Tax - Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to depreciable assets (using accelerated depreciation method for income tax purposes). The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate, and State of Florida income tax rate to income before income taxes. The primary differences result from deducting certain expenses for financial statement purposes but not for federal tax purposes. The Company’s provision for income taxes does not differ from applying the statutory US federal income tax and State of Florida income tax rate to income before income taxes by more than 1%, as the only reconciling item, meals and entertainment expense, is less than 1% of income before income taxes.


 
     
 

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results may differ from those estimates.

Advertising Costs - Advertising costs are expensed as incurred. Total advertising costs for the Year ended December 31, 2003 was $112,643 and is included in general and administrative expenses.

Interest Expense - Interest costs are expensed as incurred. Interest expense was $16,268 for the year ended December 31, 2003.

Note 3 - Inventory

Inventory consists of the following:
    
 
Raw Materials
  
$
845,849
  
 
Work in Process and Finished Goods
    
168,326
  
     
$
1,014,175
  

Raw materials are those that are in the original conditions as when purchased. Finished Goods are completed units ready for delivery to costumers. Work in process consists of those items which the Company has started to process but has not been completed as of December 31, 2003.

Note 4 - Accrued Expenses and Other Current Liabilities

 
Accrued Vacation Pay
  
$
40,948
  
 
Other Accrued Expenses
    
162,729
  
     
$
203,677
  

 
Note 5 - Notes Payable

Notes Payable as of December 31, 2003 consists of the following:

 Nutrition for Life International Inc. - On July 20, 1998, the Company and Nutrition for Life International, LLC. (NFLL), a customer of the Company, entered into an agreement which required NFLL to lend the Company $ 400,000 and established a formula for determining future orders to allow the Company to purchase raw materials to fill orders from NFLL. The initial term of the agreement was for 3 years. During the third and fourth years, NFLL is not required to make further deposits and the Company is required to issue a credit for 10% of each purchase order placed by NFLL. The monies provided by NFLL are secured by all of the Company’s inventory and accounts receivable. Credits were issued by the Company to NFLL in the amount of $ 0 during 2003 the balance of the note at December 31, 2003 is $109,959. Management is currently disputing the validity of this debt as NFLL has defaulted on significant accounts receivable.


 
     
 

Term Loan - Wachovia National Bank - The Company borrowed $ 80,873 in order to finance the acquisition of machinery and equipment. The term loan is payable in 84 monthly installments of $ 1,229 beginning October 11, 1998. The interest on the term loan is a variable rate calculated at Wall Street Journal “Prime Rate” plus .25% per annum. The interest rate was 5% at December 31, 2003. The loan is secured by specified machinery and equipment.

Equipment Note - First Florida Bank - This note was used to fund the acquisition of diagnostic lab equipment which cost $115,000. The note provides for 60 monthly installments of $2,310 per month beginning November 10, 2002. The interest rate is 7.50% per annum.

Term Loan - Key Bank - Company borrowed $148,111 in order to finance the Company’s liability insurance. The term loan is payable in May 2004 with interest only payments thru term. The interest rate was 5% at December 31, 2003.

Summary of Notes Payable
 

NFLI Note Payable
  
$
109,959
  
Term Loan Wachovia Nat. Bank
    
25,158
  
Equipment Note First Florida Bank
    
91,936
  
Term Loan Key Bank
    
148,111
  
   
$
375,164
  
         
Less Current portion
    
161,573
  
Total Notes Payable
    
213,591
  
   
$
375,164
  

Notes Payable is expected to mature as follows for the years ending December 31:

2005
  
$
88,264
  
2006
    
74,178
  
2007
    
43,219
  
2008
    
7,930
  
   
$
213,591
  

NOTE 6 - Lease Commitments

The Company was obligated under a month to month verbal agreement for the current plant facility. The agreement was with the Company’s controlling stockholder. The building was sold by the shareholder in 1999, and a five year lease agreement with a two year renewal option was initiated with the new owner commencing on April 25, 2000. The lease commitment ranges from $9,245 to $10,608 per month.

An additional storage unit was rented to store boxes, caps and bottles, at a cost of $1,100 per month. The commitment for the lease is month to month. This storage was vacated October 2003. The building adjacent and West of the above property was rented November 1, 2001 for additional storage. The monthly rent is $3,333. There is no signed lease and it is month to month. Additionally, the building adjacent and East of the above property was purchased by the Controlling Shareholder in May of 2002. A five year lease was signed and the monthly rent is $5,500 per month with no provision in the lease for an increase.


 
     
 

Future minimum lease payments for each of the five succeeding years and in the aggregate are:
    
   
Controlling
  
Other
  
   
Shareholder
  
Leases
  
   
Leases
      
2004
  
$
66,000
  
$
118,460
  
2005
    
66,000
    
122,400
  
2006
    
66,000
    
126,064
  
2007
    
27,500
    
42,432
  
2008 and Subsequent years
    
0
    
0
  
   
$
225,500
  
$
409,356
  
A total of $243,086 was paid for plant facility rent in 2003, of which $69,960 was paid to the Controlling Shareholder.

NOTE - 7 - Stockholder Equity

Common stock, $1 par value; authorized 100 shares; issued and outstanding 100 shares.

NOTE - 8 - Risk Concentrations

A substantial portion of the Company’s business is conducted with seven of its customers for the year ended December 31, 2003; sales to these customers were 88.16% of the total sales. At December 31, 2003, Accounts receivable from these customers before allowance for bad debts totaled $2,647,466, which is unsecured. These customers sell whole dietary and nutritional supplements via wholesalers, retailers, and specialized multi level marketing methods. The majority of these customers’ operations are within North America.

The Company’s policy is to monitor risk based on each customer’s qualifications.

The Company occasionally maintains deposits in excess of federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. As of December 31, 2003 the balance in excess of federally insured limits was $ 7,266.

NOTE 9 - Related Party Transactions

Loan Receivable- Affiliated Corporation                     $17,229
This is the balance due from Vitarich Farms inc. (Farms) for net advances to Farms. Loan is unsecured and non-interest bearing.
Loan Payable- Shareholder                   $513,344
Loan payable consists of funds advanced to the company by the shareholder on a short term basis. Loan is expected to be paid off during 2004.

Accounts Payable - Vitarich Farms, Inc.           58,525
Accounts Payable - Affiliated Corporations                  $58,525

Farms harvests and processes powdered vegetable grasses (wheat, barley, and hydrilla). 12 months ended December 31, 2003 the company purchased 23,615 kilos of product for a total of $213,695. Management estimates the purchase of each product was at fair market value. The majority shareholder of Farms is also the shareholder of the Company.


 
     
 

Biotech Analytical Laboratories, Inc. is owned by the controlling shareholder of the Company and provides laboratory testing services to the Company. The Company incurred $12,000 of expenses for these services for 2003.

NOTE 10 - Income Taxes

The deferred tax liability of $115,000 is a result of the temporary differences in accounting for depreciation.

Income tax expense consists of the following:


   
Current
  
Deferred
Federal
  
$
101,000
  
$
43,371
State of Florida
    
18,900
    
7,060
   
$
119,900
  
$
50,431

Accrued income taxes as of December 31, 2003 consist of the following:

Accrued federal income taxes
  
$
36,000
  
Accrued State of Florida income taxes
    
16,000
  
   
$
52,000
  


The Company does not have any available tax loss carryforward or tax credit carryforward as of December 31, 2003.


 
     
 





Vitarich Laboratories, Inc.
Financial Statements
And
Independent Auditors’ Report
December 31, 2002

 


 
     
 


Independent Auditors’ Report


To the Board of Directors and Stockholders of
Vitarich Laboratories, Inc.
Naples, FL

We have audited the accompanying balance sheet of Vitarich Laboratories, Inc. as of December 31, 2002 and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitarich Laboratories, Inc. as of December 31, 2002, and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Davison & Nick CPA’s

Naples, FL

July 1, 2003




 
     
 







Vitarich Laboratories, Inc.
Balance Sheet
December 31, 2002
 
       
ASSETS
      
       
Current Assets:
      
Cash
  
$
232,674
  
Accounts receivable, net of allowance
of $460,839 for doubtful accounts
    
1,154,819
 
Inventory
    
521,202
 
Prepaid Income Taxes
    
51,002
  
Other Pre-Paid Assets
    
43,129
 
     
2,002,826
 
         
Property & Equipment:
        
         
Machinery & Equipment
    
614,160
 
Office Furniture & Fixtures
    
75,936
 
Leasehold Improvements
    
164,299
 
     
854,395
 
Less accumulated depreciation
    
(201,246
)
     
653,149
 
         
Loan Receivable - Affiliated Corporation
    
126,673
  
Other Deposits
    
15,600
 
         
Total Assets
  
$
2,798,248
  
         
Liabilities and Stockholder's Equity
        
         
Current Liabilities:
        
Accounts Payable
  
$
965,544
  
Accrued Payroll & Payroll Taxes
    
366,292
 
Accounts Payable - Affiliated Corporation
    
44,739
 
Loan Payable - Affiliated Corporation
   
8,105
  
Accrued Expenses and Other Current Liabilities
    
193,840
 
Loan Payable -Shareholder
    
13,114
  
Current Portion of Notes Payable
    
27,666
  
Current Portion of Obligations under Capital Leases
    
24,002
  
     
1,643,302
  
 
The accompanying notes are an integral part of the financial statements.
 


 
     
 

Vitarich Laboratories, Inc.
Balance Sheet
December 31, 2002
(Continued)



 
      
       
Other Liabilities
      
Notes Payable, net of Current Portion
    
230,416
 
Obligations Under Capital leases, net of Current Portions
    
61,468
 
Deferred Taxes
    
38,863
 
     
330,747
 
         
Stockholder's Equity
        
Common Stock, $1 Par Value,
        
    100 shares authorized, 100 issued, and outstanding
    
100
 
Additional Paid -in-Capital
    
77
 
Retained Earnings
    
824,022
 
     
824,199
 
         
Total Liabilities and Stockholder's Equity
  
$
2,798,248
  
         
The accompanying notes are an integral part of the financial statements.
 

 
     
 

Vitarich Laboratories, Inc.
Statement of Income
For the Year Ended December 31, 2002

 

 
      
       
Sales, Net of Discounts
  
$
14,340,620
  
Cost of Sales
    
10,106,498
  
     
 
Gross Profit
    
4,234,122
  
         
Operating Expenses:
        
Selling Expenses
    
306,149
  
 General & Administrative Expenses
    
3,576,138
  
 
Total Operating Expenses
    
3,882,287
  
 
Income From Operations
    
351,835
  
 
Other Income (Expenses)
        
Interest Income
    
11,207
  
Interest Expense
    
(42,602
)
Gain/Loss On Sale and Disposal of Fixed Assets
    
11,360
  
         
Income Before Income Taxes
    
331,800
  
Provision for Income Taxes
        
Current Taxes
    
83,000
  
Deferred Taxes
    
24,219
  
         
Total Taxes
    
107,219
  
         
Net Income
  
$
224,581
  
The accompanying notes are an integral part of the financial statements.

     
 

Vitarich Laboratories, Inc.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2002





   
Number of Common Stock Shares Outstanding
  
Common Stock Par Value
  
Additional Paid-In Capital
  
Retained
Earnings
  
Total
  
                       
Beginning Balance
    
100
  
$
100
  
$
77
  
$
599,441
  
$
599,618
  
                                 
Net Income
                      
224,581
    
224,581
  
                                 
Shareholder Distributions
                                
                               
Ending Balance
    
100
  
$
100
  
$
77
  
$
824,022
  
$
824,199
  
 
The accompanying notes are an integral part of the financial statements.

 
     
 

Vitarich Laboratories, Inc.
Statement of Cash Flows
For the Twelve Months Ended December 31, 2002
  
Cash Flows from Operating Activities
      
Net Income
  
$
224,581
  
         
Non cash (income) expense included in net income:
Depreciation and amortization
 Provision for bad debt expense, net of direct write-off
 Deferred income tax
    
76,801
122,044
24,219
  
         
Change in assets and liabilities
(Increase) decrease in trade receivables
(Increase) decrease in inventory
(Increase) decrease in other assets
Increase (decrease) in accounts payable
Increase (decrease) in accrued expenses
    
406,923
26,964
(128,753)
(334,793)
186,282
  
         
Net cash provided by (used in) Operations
    
604,268
  
         
Cash Flows from Investing Activities
  Purchases of property and equipment
   
(409,320
)
Net cash provided by (used in) investing activities
    
(409,320
)
         
Cash Flows from Financing Activities
        
Proceeds from Loan Payable Shareholder
Long Term Debt
    
(331,358
(3,146
)
)
Net cash provided by (used in) financing activities
    
(334,504
)
         
Net Increase (Decrease) in Cash
    
(139,557
)
         
Summary
        
Cash Balance at End of Period
Cash Balance at Beginning of Period
   
232,674
372,231
  
 
        
Net Increase (Decrease) in Cash
  
$
(139,557
)
         
Supplemental Disclosure of Cash Flows
Interest Paid
  
$
46,602
  
Income Taxes Paid
  
$
225,000
  
         

The accompanying notes are an integral part of the financial statements.

 
     
 

Vitarich Laboratories, Inc.
Notes to the Financial Statements
December 31, 2002

Note 1- Organization

Vitarich Laboratories, Inc. (the Company) is in the business of formulating, packaging and distributing whole food dietary, herbal and nutritional supplements and related products, which are marketed to retail, wholesale and private label customers, including network marketing companies, health food stores, mass merchandisers, drug stores, food stores, and Internet mail-order companies. The Company operates a manufacturing, warehousing, and laboratory facility in Naples, Florida. The company was incorporated August 14, 1998.

Note 2 - Summary of Significant Accounting Policies

Basis of Accounting - The Company prepares its financial statements in accordance with generally accepted accounting principles. This basis of accounting involves the application of accrual accounting; consequently, revenues and gains are recognized when earned, and expenses and losses are recognized when incurred.

Cash and Cash Equivalents - Cash is defined to include money market investment funds.

Revenue recognition - Sales are recognized when items are shipped to customers in accordance with supporting sales terms.

Accounts Receivable - The Company uses the allowance method to account for uncollectible accounts receivable. The allowance for doubtful accounts is based on management’s analysis of possible bad debts. Trade receivables are analyzed through an aging of the accounts and an allowance is developed for individual doubtful accounts. Aging and status of accounts is based on how recently payments have been received. As of December 31, 2002 management had established an allowance of $460,839. Accounts are charged off when management specifically identifies such accounts as uncollectible after significant collection efforts. The Company does not currently charge interest on its trade receivables.

Inventory - Inventories are stated at the lower of cost or market, using the first in, first out method. The cost of shipping and handling is included in cost of sales.

Property & Equipment - Property & Equipment are stated at cost. Depreciation is provided using the straight -line method. Estimated lives are as follows:


Machinery & Equipment
3 to 10 years
Office Furniture and Fixtures
5 to 7 years
Leasehold Improvements
40 years
                   

Total depreciation and amortization of leasehold improvements and capital leases for the year ended December 31, 2002 was $ 76,801.

Income Tax - Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The differences relate primarily to depreciable assets (using accelerated depreciation method for income tax purposes). The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate, and State of Florida income tax rate to income before income taxes. The primary differences result from deducting certain expenses for financial statement purposes but not for federal tax purposes. The Company’s provision for income taxes does not differ from applying the statutory U.S. federal income tax and State of Florida income tax rate to income before income taxes by more than 1%, as the only reconciling item, meals and entertainment expense, is less than 1% of income before income taxes.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results may differ from those estimates.

Advertising Costs - Advertising costs are expensed as incurred. Total advertising costs for the year ended December 31, 2002 was $120,141 and is included in general and administrative expenses.

Interest Expense - Interest costs are expensed as incurred. Interest expense was $42,602 for the year ended December 31, 2002.

Note 3 - Inventory

Inventory consists of the following:



Raw Materials
  
$
432,700
  
Work in Process and Finished Goods
    
88,502
  
   
$
521,202
  

Raw materials are those that are in the original conditions as when purchased. Finished Goods are completed units ready for delivery to costumers. Work in process consists of those items which the Company has started to process but has not been completed as of December 31, 2002.

Note 4 - Accrued Expenses and Other Current Liabilities

Accrued expenses and other liabilities consist of the following:


Accrued Vacation Pay
  
$
43,840
  
Other Accrued Expenses
    
150,000
  
   
$
193,840
  


Note 5 - Notes Payable

Notes Payable as of December 31, 2002 consists of the following:

Nutrition for Life International Inc. - On July 20, 1998, the Company and Nutrition for Life International, LLC. (NFLL), a customer of the Company, entered into an agreement which required NFLL to lend the Company $ 400,000 and established a formula for determining future orders to allow the Company to purchase raw materials to fill orders from NFLL. The initial term of the agreement was for 3 years. During the third and fourth years, NFLL is not required to make further deposits and the Company is required to issue a credit for 10% of each purchase order placed by NFLL. The monies provided by NFLL are secured by all of the Company’s inventory and accounts receivable. Credits were issued by the Company to NFLL in the amount of $74,500 during 2002. The balance of the note at December 31, 2002 is $109,959.


 
     
 

Term Loan - Wachovia National Bank - The Company borrowed $ 80,873 in order to finance the acquisition of machinery and equipment. The term loan is payable in 84 monthly installments of $ 1,229 beginning October 11, 1998. The interest on the term loan is a variable rate calculated at Wall Street Journal “Prime Rate” plus .25% per annum. The interest rate was 4.5% at December 31, 2002. The loan is secured by specified machinery and equipment.

Equipment Note - First Florida Bank - This note was used to fund the acquisition of diagnostic lab equipment which cost $115,000. The note provides for 60 monthly installments of $2,310 per month beginning November 10, 2002. The interest rate is 7.50% per annum.

Summary of Notes Payable


NFLL Note Payable
  
$
109,959
  
Term Loan Wachovia Nat. Bank
    
38,859
  
Equipment Note First Florida Bank
    
109,264
  
   
$
258,082
  
         
Less Current portion
    
27,666
  
Notes Payable
    
230,416
  
   
$
258,082
  

Notes Payable is expected to mature as follows for the years ending December 31:
 
2004
  
$
33,556
  
2005
    
28,859
  
2006
    
29,782
  
2007
    
27,259
  
2008 and subsequent years
    
110,960
  
   
$
230,416
  

NOTE 6 - Lease Commitments

The company was obligated under a month to month verbal agreement for the current plant facility. The agreement was with the Company’s controlling shareholder. The building was sold by the shareholder in 1999, and a five year lease agreement with a two year renewal option was initiated with the new owner commencing on April 25, 2000. The lease commitment ranges from $9,245 to $10,608 per month.

An additional storage unit was rented to store boxes, caps and bottles, at a cost of $1,100 per month. The commitment for the lease is month to month. The building adjacent and West of the above property was rented November 1, 2001 for additional storage. The monthly rent is $3,333. There is no signed lease and it is month to month. Additionally, the building adjacent and East of the above property was purchased by the Controlling Shareholder in May of 2002. A five year lease was signed and the monthly rent is $5,500 per month with no provision in the lease for an increase.

Future minimum lease payments for each of the five succeeding years and in the aggregate are:


   
Controlling
  
Other
  
   
Shareholder
  
Leases
  
   
Leases
      
2003
  
$
66,000
  
$
113,900
  
2004
    
66,000
    
118,460
  
2005
    
66,000
    
122,400
  
2006
    
66,000
    
125,884
  
2007 and Subsequent years
    
27,500
    
42,432
  
   
$
291,500
  
$
523,076
  

A total of $212,950 was paid for plant facility rent in 2002, of which $40,810 was paid to the Controlling Shareholder.

NOTE - 7 - Stockholder Equity

Common stock, $1 par value; authorized 100 shares; issued and outstanding 100 shares.

NOTE - 8 - Risk Concentrations

A substantial portion of the Company’s business is conducted with seven of its customers for the year ended December 31, 2002; sales to these customers were 91% of the total sales. At December 31, 2002, accounts receivable from these customers before allowance for bad debts totaled $1,464,048, which is unsecured. These customers sell whole dietary and nutritional supplements via wholesalers, retailers, and specialized multi level marketing methods. The majority of these customers’ operations are within North America.

The Company’s policy is to monitor risk based on each customer’s qualifications.

The Company occasionally maintains deposits in excess of federally insured limits. The risk is managed by maintaining all deposits in high quality financial institutions. As of December 31, 2002 the balance in excess of federally insured limits was $132,674.

NOTE 9 - Related Party Transactions

Loan Receivable- Affiliated Corporation                $126,673
This is the balance due from Vitarich Farms inc. (Farms) for net advances to Farms. Loan is unsecured and non-interest bearing.
Loan Payable- Shareholder                       $13,114
Loan payable consists of funds advanced to the company by the shareholder on a short term basis. The majority shareholder of Farms is also the shareholder of the Company.
 
Accounts Payable - Vitarich Farms, Inc.                $44,739

Farms harvests and processes powdered vegetable grasses (wheat, barley, and hydrilla). In 2002, the Company purchased 22,222 kilos of product for a total of $241,894. Management estimates the purchase of each product was at fair market value.
 

Advertising Cost - Included in advertising is $100,000 of advertising cost to a company owned by the Company’s controlling shareholder.


 
     
 

NOTE 10 - Income Taxes

The deferred tax liability of $38,863 is a result of the temporary differences in accounting for depreciation.

Income tax expense consists of the following:


   
Current   
  
Deferred
  
Federal
  
$
71,000
  
$
20,718
  
State of Florida
    
12,000
    
3,501
  
   
$
83,000
  
$
24,219
  

Prepaid income taxes as of December 31, 2002 consist of the following:


Prepaid federal income taxes
  
$
50,616
  
Prepaid State of Florida income taxes
    
386
  
   
$
51,002
  
The Company does not have any available tax loss carry forward or tax credit carryforward as of December 31, 2002.

NOTE 11 Capital Leases

The Company leases certain equipment under capital leases. The economic substance of these leases is that the Company is financing the acquisition of the equipment through the leases and accordingly, the equipment is recorded as assets and the leases are recorded as liabilities.

The following is an analysis of the leased assets included in property and equipment:


Equipment Under Capital Leases
  
$
119,260
  
Less: Accumulated Depreciation
    
29,284
  
   
$
89,976
  

Future minimum lease payments under capital leases as of December 31, 2002 for each of the remaining years and in aggregate are as follows:


Year ended December 31, 2003
  
$
31,692
  
Year ended December 31, 2004
    
31,692
  
Year ended December 31, 2005
    
34,298
  
Year ended December 31, 2006
    
0
  
   
$
97,682
  
         
Less: Amount representing interest
    
12,212
 
         
Present value of minimum lease payments
  
$
85,470
  

 
 
     
 


(b)   Pro Forma Financial Information
Unaudited condensed pro forma combined statements of income for the fiscal year ended January 31, 2004 and for the six months ended July 31, 2004. Unaudited condensed pro forma combined balance sheet as of July 31, 2004.

The accompanying unaudited condensed pro forma combined statements of income present the results of operations of AI and VLI as if the acquisition of VLI had occurred as of February 1, 2003. The pro forma information reflects the total consideration paid.
 
VLI reports its results of operations using a calendar year end. In preparing the pro forma information, the Company utilized VLI’s December 31, 2003 and June 30, 2004 results of operations in the unaudited condensed pro forma combined statements for the year ended January 31, 2004 and the six months ended July 31, 2004. AI used VLI’s June 30, 2004 balance sheet in the unaudited condensed pro forma combined balance sheet as of July 31, 2004. No material events occurred subsequent to VLI’s December 31, 2003 and June 30, 2004 financial reporting periods which would require adjustment to the Company’s unaudited condensed pro forma combined statements of income and unaudited condensed pro forma combined balance sheet. The pro forma data is not necessarily indicative of what the results would have been if the acquisition had occurred on the dates indicated.
 
 

     
 


Unaudited Condensed Pro Forma Combined
Statement of Income for the Year Ended January 31, 2004

   
AI as
VLI as
Pro Forma
Consolidated
Reported (A)
Reported (B)
Adjustments
Pro Forma
Net sales
  
$
6,780,000
  
$
14,067,000
    
--
  
$
20,847,000
  
Cost of goods sold
    
5,184,000
    
10,252,000
    
--
    
15,436,000
  
Gross Profit
    
1,596,000
    
3,815,000
          
5,411,000
  
Selling, general and
administrative expenses
    
1,912,000
    
3,358,000
    
(1,389,000)(1)
400,000(2)
833,000(3)
360,000(4)
 
 
 
  
5,474,000
  
(Loss) income from
operations
    
(316,000
)
  
457,000
    
204,000
   
(63,000
)
Interest expense
    
47,000
    
16,000
    
--
    
63,000
  
Other income
    
51,000
    
3,000
    
--
    
54,000
  
(Loss) income from
continuing operations
before income taxes
    
(312,000
)
  
444,000
    
(204,000
)
  
(72,000
)
Income tax (benefit)
provision
    
(289,000
)
  
170,000
    
(82,000)(5)
 
  
(201,000
)
(Loss) income from
continuing operations
    
($23,000
)
$
274,000
    
($122,000
)
$
129,000
  
Earnings (loss) per share(6):
                          
Basic - continuing operations
   
($0.02
)
            
$
0.06
  
                           
Diluted - continuing operations
    
($0.02
)
            
$
0.06
  

Notes to unaudited condensed pro forma combined statement of income.

(A)   Report on Form 10-KSB filed on April 27, 2004.
(B)   Report of Independent Accountants see Item 9.01(a) herein.
(1)   To adjust for the post closing revision of contractual executive compensation program.
(2)   To adjust for the amortization of the purchase accounting valuation of $2.0 million for non- contractual customer relationships which is being amortized over five years.
(3)   To adjust for the amortization of the purchase accounting valuation of $2.5 million for proprietary formulas which is being amortized over three years.
(4)   To adjust for amortization for the purchase accounting valuation of $1.8 million for the non-compete agreement with the seller which is being amortized over the life of the five-year contract.
(5)   To reflect the tax impact, assuming an effective tax rate of 40% arising from the change in pretax income from net pro forma adjustments.
(6)   Assumes 825,000 shares issued in connection with the transaction were outstanding for the entire period in calculating consolidated pro forma earnings per share.

 
 

     
 

Unaudited Condensed Pro Form Combined
Statement of Income for the Six Months Ended July 31, 2004

   
AI as
 
Pro Forma
Consolidated
Reported (C)
VLI (D)
Adjustments
Pro Forma
  
Net sales
  
$
3,634,000
  
$
8,261,000
    
--
  
$
11,895,000
  
Cost of goods sold
    
3,214,000
    
6,013,000
    
--
    
9,227,000
  
Gross profit
    
420,000
    
2,248,000
          
2,668,000
  
Selling, general and
administrative expenses
    
1,478,000
    
953,000
  
$
(5,000)(1)
200,000(2)
417,000(3)
180,000(4)
 
 
  
3,223,000
  
Impairment loss
    
1,942,000
    
--
    
--
    
1,942,000
  
Loss from operations
    
(3,000,000
)
  
1,295,000
    
792,000
    
(2,497,000
)
Interest expense
    
30,000
    
27,000
    
--
    
57,000
  
Other income
    
55,000
    
68,000
    
--
    
123,000
  
Loss from continuing
operations before income taxes
    
(2,975,000
)
  
1,336,000
    
792,000
    
(2,431,000
)
Income tax benefit (provision)
    
(864,000
)
  
519,000
   
(317,000)(5)
 
  
(662,000
)
Loss from continuing
operations
    
($2,111,000
)
$
817,000
    
($475,000
)
  
($1,769,000
)
Basic and diluted loss per share(6):
                          
Basic and Diluted -
                          
continuing operations
   
($1.17
)
              
($0.67
)

Notes to unaudited condensed pro forma combined statement of income.

(C)   Report on Form 10-QSB filed on September 14, 2004.
(D)   VLI unaudited internally prepared results of operations are for the six months ended June 30, 2004.
(1)   To adjust for the post closing revision of contractual executive compensation program.
(2)   To adjust for the amortization of the purchase accounting valuation of $2.0 million for non-contractual customer relationships which is being amortized over five years.
(3)   To adjust for the amortization of the purchase accounting valuation of $2.5 million for proprietary formulas which is being amortized over three years.
(4)   To adjust for the amortization of the purchase accounting valuation of $1.8 million for the non-compete agreement with the Seller which is being amortized over the life of the five year contract.
(5)   To reflect the tax impact, assuming an effective tax rate of 40%, arising from the change in pretax income from net pro forma adjustments.
(6)   Assumes 825,000 shares issued in connection with the transaction were outstanding for the entire period in calculating consolidated pro forma basic and diluted loss per share.


 
 

     
 

Unaudited Condensed Pro Forma Combined
Balance Sheet as of July 31, 2004

   
AI as
 
Pro Forma
Consolidated
Reported (E)
VLI (F)
Adjustments
Pro Forma
  
CURRENT ASSETS:
                
($6,050,000)(1)
 
      
Cash and cash equivalents
  
$
6,704,000
  
$
202,000
    
(600,000)(2)
 
$
256,000
  
Accounts receivable
    
1,035,000
    
2,109,000
          
3,144,000
  
Escrowed cash
    
601,000
    
--
          
601,000
  
Estimated earnings in excess
of billings
    
538,000
    
--
          
538,000
  
Inventory
    
--
    
2,712,000
          
2,712,000
  
Prepaid expenses and other current
assets
    
345,000
    
69,000
          
414,000
  
TOTAL CURRENT ASSETS
    
9,223,000
    
5,092,000
    
(6,650,000
)
  
7,665,000
  
Property and equipment, net
    
1,779,000
    
1,072,000
          
2,851,000
  
Contractual customer
relationships
    
616,000
    
--
          
616,000
  
Non-contractual customer
relationships
                
2,000,000(3)
 
  
2,000,000
  
Proprietary formulas
                
2,500,000(4)
 
  
2,500,000
  
Non-compete agreement
                
1,800,000(5)
 
  
1,800,000
  
Trade name
    
224,000
    
--
          
224,000
  
Goodwill
    
940,000
    
--
    
6,086,000(6)
 
  
7,026,000
  
TOTAL ASSETS
  
$
12,782,000
  
$
6,164,000
  
$
5,736,000
  
$
24,682,000
  
CURRENT LIABILITIES:
                          
Accounts payable
  
$
374,000
  
$
1,994,000
        
$
2,368,000
  
Billings in excess of estimated
earnings
    
2,000
    
--
          
2,000
  
Accrued expenses
    
308,000
    
713,000
          
1,021,000
  
Deferred income tax liability
    
181,000
    
--
          
181,000
  
Line of Credit
    
--
    
495,000
          
495,000
  
Current portion of long-term debt
    
894,000
    
487,000
          
1,381,000
  
TOTAL CURRENT LIABILITIES
    
1,759,000
    
3,689,000
          
5,448,000
  
Deferred income tax liability
    
202,000
    
116,000
    
(2,520,000)(7)
 
  
2,838,000
  
Long-term debt
    
62,000
    
443,000
          
505,000
  
STOCKHOLDERS’ EQUITY
                          
Common stock par value $.15
per share 12,000,000 shares
authorized - 1,806,046 issued at
July 31, 2004 and January 31,
2004 and 1,802,813 shares
outstanding at July 31,
2004 and January 31, 2004
    
270,000
    
--
    
(124,000)(1)
 
  
394,000
  
Warrants outstanding
    
849,000
    
--
    
   
849,000
  
Additional paid-in capital
    
14,121,000
    
--
    
(5,008,000)(1)
 
  
19,129,000
  
Accumulated deficit retained earnings
    
(4,448,000
)
  
1,916,000
    
1,916,000(1)
 
  
(4,448,000
)
Treasury stock at cost: 3,233
shares at July 31, 2004 and
January 31, 2004
    
(33,000
)
  
--
    
--
    
(33,000
)
TOTAL STOCKHOLDERS EQUITY
    
10,759,000
    
1,916,000
    
(3,216,000
)
  
15,891,000
  
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY
  
$
12,782,000
  
$
6,164,000
    
($5,736,000
)
$
24,682,000
  
 


 
     
 
Notes to unaudited condensed pro forma balance sheet.

 (E)

   Report on Form 10-QSB filed on September 14, 2004. 

 (F)

   VLI’s unaudited internally prepared balance sheet is as of June 30, 2004. 

 (1)

   To adjust for the purchase of VLI using cash of $6,050,000 and 825,000 shares issued for an aggregate purchase price of $11,183,000. 

 (2)

   To record estimated costs associated with legal, accounting and other fees incurred to consummate the acquisition of VLI. 

 (3)

   To adjust for the purchase accounting valuation of $2.0 million for non-contractual customer relationships.  

 (4)

   To adjust for the purchase accounting valuation of $2.5 million for proprietary formulas.  

 (5)

   To adjust for the purchase accounting valuation of $1.8 million for non-compete agreement.  

 (6)

   To adjust for the purchase accounting valuation of $6,086,000 for goodwill.  

 (7)

   To adjust for deferred tax liabilities related to the purchase accounting valuation of non-contractual customer relationships, not-to-compete agreement and proprietary formulas. A rate of 40% is assumed.  

          

     
 

Exhibit No.    Description

2.1 Agreement and Plan of Merger, dated as of August 31, 2004, by and between Kevin J. Thomas, Vitarich Laboratories, Inc., Argan, Inc. and AGAX/VLI Acquisition Corporation (exhibits and schedules to the Agreement and Plan of Merger are omitted from this filing, but will be filed with the Commission supplementally upon request)

Incorporated by reference herein to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.1 Registration Rights Agreement, dated as of August 31, 2004, by and among Argan, Inc. and Kevin J. Thomas

Incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.2 Employment Agreement, dated as of August 31, 2004, by and between AGAX/VLI Acquisition Corporation and Kevin J. Thomas

Incorporated by reference herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.3 Third Amendment to Financing and Security Agreement, dated as of August 31, 2004, by the among Argan, Inc., Southern Maryland Cable, Inc., and AGAX/VLI Acquisition Corporation, as borrowers, and Bank of America, N.A., as lender

Incorporated by reference herein to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.4 Amended and Restated Revolving Credit Note, dated August 31, 2004, in the amount of $3,500,000, by Argan, Inc., Southern Maryland Cable, Inc., and AGAX/VLI Acquisition Corporation, as borrowers, in favor of Bank of America, N.A., as lender

Incorporated by reference herein to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.5 First Amendment to Term Note, dated as of June 29, 2004, by and among Argan, Inc., and Southern Maryland Cable, Inc., as borrowers, and Bank of America, N.A., as lender

Incorporated by reference herein to Exhibit 10.5 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

10.6 Additional Borrowers Joinder Supplement, dated as of August 31, 2004, by and among Argan, Inc., the other Existing Borrowers (as such term is defined in the agreement) and AGAX/VLI Acquisition Corporation, as borrowers, and Bank of America, N.A., as lender

Incorporated by reference herein to Exhibit 10.6 to the Company’s Current Report on Form 8-K dated August 31, 2004, filed on September 7, 2004

23.01    Consent of Davidson and Nick, CPA’s


 
     
 

99.1 Press Release of Argan, Inc., dated September 1, 2004, announcing the acquisition of Vitarich Laboratories, Inc.

Incorporated by reference herein to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated August 31, 2004 filed on September 7, 2004



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 hereunto duly authorized.
 
     
  ARGAN, INC.
 
 		  
 		  
 
Date: November 12, 2004    By:    /s/ Rainer H. Bosselmann
 
Rainer H. Bosselmann
 
Chairman of the Board and
Chief Executive Officer