Chairman's report

 

Dear Shareholder

THE YEAR IN REVIEW

The directors of A2 Corporation Limited (“A2C” or “the Company”) are pleased to present this report and the audited financial statements for the year ended 31 March 2007. Now in its third year of operations as an NZAX listed company A2C can report that it has successfully made the transformation from a start up Biotech Company, whose primary activity was the licensing of intellectual property, to an international fast moving consumer goods (FMCG) company. This transformation is reflected in the now established and growing operations in Australia and the United States (US) where the Company has material involvement in the commercialisation of its technology by way of joint venture associate companies. Collectively referred to as the “Group”.

As highlighted in previous reports to shareholders, it has been identified that the most effective method of commercialising A2C’s technology in overseas markets is through direct means, without relinquishing control of its core assets, and ultimately its future, to third parties. Although this  involves the initial upfront contribution of resources and capital, this approach of direct  commercialisation ensures greatermedium to long term benefits for the Company and its shareholders. 

Furthermore, the strategy also provides the ability to maintain, via joint ventures, the quality control and consistent management of operations and product promotion in rapidly growing and diverse international markets.

FINANCIAL RESULTS

For the year ended 31 March 2007, A2C posted a Group pre-tax consolidated loss of $5.082 million (last year $925,847). Group consolidated operating revenue increased by 518 percent to $7.590 million (last year $1.228 million) largely as a result of the A2 Australia Pty Ltd (A2A) business repurchase in May 2006 and the sales associated with that. Increased expenditure by the Group was primarily owing to a combination of the investment in the a2 Milk™ launch in the US market as well as resuming control of the important Australian business operation.

A2C’s investment back into key parts of its operations will in the long term benefit the expansion of the Group, although in the short term it has resulted in a higher loss for the year. Nonetheless we are confident that investing in the growth of the business and establishing a presence in key markets that will yield ongoing revenue  streams is critically important at this stage of the Company’s development.

The Company’s US Joint Venture company A2 Milk Company LLC (“A2MCo”) will continue to expand its operations on the back of the launch of a2 Milk™ into the Midwest states. While this will require more resources, we are certain that the return on investment will be significant as the market and consumer appetite for our premium milk increases. The Group Statement of Financial Position includes that of A2A on a consolidated basis.

BOARD AND MANAGEMENT

In February as part of the A2C’s natural evolution, the Board appointed FMCG executive Anthony Lawler as CEO to manage Group interests under the revised company structure. The goal of the restructure was to develop an organisation that is correctly placed to further commercialise its core assets into a rapidly scalable and successful international FMCG business. Mr Lawler brings a wide range of FMCG skills to the Group, skills that when coupled with his extensive knowledge and experience in valued added functional foods, will prove invaluable to the future success of the Company.

Richard Le Grice, former joint CEO (International) was appointed as an Executive Director of the Company. The Board of A2C is also extremely pleased to be able to retain Dr Andrew Clarke as an Executive Officer where his responsibilities include overseeing the Operations and Science activities of the Group. Both Mr Le Grice and Dr Clarke have contributed tremendous management, commercial skills, and scientific knowledge to the Company. In particular, Dr Clarke was instrumental in successfully developing A2C from a bio-tech start-up into a FMCG company. The ongoing contribution of these two former joint CEO’s, working closely with Mr Lawler, will play a significant role in the future of A2C.

KEY HIGHLIGHTS

The past financial year saw A2C focus strongly on the consolidation of its business operations in Australia, and market development work in the United States through its 50 percent owned associate company A2MCo. Following the consolidation of the Company’s Australian operations, as recently  disclosed to the market and shareholders, A2C entered into a joint venture partnership with ASX listed Freedom Nutritional Products (FNP) to expand the Australian market and develop exports into the Japanese market.

The US market development was a process that involved detailed and comprehensive consumer and market research and analysis. Subsequently it required the formation of a US commercialisation strategy and the implementation of its initial stages leading to the recently announced product launch throughout the Mid-Western states which is discussed in further detail below.

AUSTRALIA 

In April 2006 A2C announced the repurchase of A2 Australia Pty Ltd (A2A) as part of a planned strategy to have a controlling or equal interest in all of its worldwide markets. Thus in line with this strategy, A2C initiated discussions with F&N Dairy Investments Limited, a subsidiary of Fraser and Neave Limited (SGX: FNN), for the repurchase of the business and assets of A2A.

Within the Australian market, F&N had done an excellent job of producing and marketing a2 Milk™, with the product being made available in over 600 supermarkets in the Queensland, NSW, Victoria and South Australian markets. Australian operations were further consolidated in December 2006 with the repurchase of the licence rights previously granted to Fairbrae Milk Co Pty Ltd (“Fairbrae”), who were based in Lismore, New South Wales and had limited rights with regards to supply and distribution. The Fairbrae repurchase resulted in the Company’s wholly owned subsidiary, A2A, as the sole licensee in Australia selling a2 Milk™ and a2 Milk™ products.

At the time of this report, a2 Milk™ can now be found across most Australian states and in more than 1,000 leading retail stores such as Coles, Woolworths, Bilo, Metcash and Drakes.  The consolidation of A2C’s business in Australia is another indication that the Company is

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A2C are of the firm view that the joint venture with FNP will bring several market advantages including adding significant dairy industry knowledge, retail grocery expertise, and extensive management experience to our Australian operations. The Perich Family, the majority shareholder in FNP, is a diversified food, agribusiness and property development group, and the relationship with A2C will provide access to a significant supply of fresh milk for the Australian market. The CEO of FNP Geoff Babidge (a former Managing Director of National Foods Dairy Division) believes that the partnership with A2C will be beneficial to both parties not only in Australia but Asia as well. “We’re delighted to be partnering with A2C and will bring significant value to the a2 Milk™ business in Australia. The a2 Milk™ brand has a natural synergy with our existing functional foods and beverage brands such as So Natural and Freedom Foods. We also believe that consumers for both A2C’s and FNP’s brands are seeking healthy food options and therefore a2 Milk™ is a natural fit for the FNP product portfolio.

achieving its strategic goals. Again this strategy involves the direct involvement in the production and sale of a2 Milk™ and a2 Milk™ products, as opposed to previously only licensing these rights to outside parties. In late 2006 the Company was approached by Freedom Nutritional Products Limited (ASX: FNP) (“FNP”) with the proposal that FNP would purchase 50 percent of A2A. FNP saw the potential of a2 Milk™ and believed that they have the management expertise to accelerate the growth plans of A2A. The joint venture with FNP was finalised in May 2007.

FNP has as its majority shareholder the Perich family led by Michael Perich, CEO of the Leppington Pastoral Company. The Perich family owns the largest dairy farming operation in NSW with the third generation dairy family having 3,000 cows on their farm near Sydney’s south west Campbelltown. The Leppington Pastoral Company has also diversified into property, mining and soy milk and A2C’s relationship with the Perich family will provide access to a significant supply of fresh milk in the Australian market as required. 

FNP and A2C signed a JV agreement whereby the joint venture company was granted rights for the production and sale of a2 Milk™ products in Australia as well as Japan. Accordingly, the Company’s existing Australian operations were transferred into the new entity called A2 Dairy Products Australia Pty Ltd (“A2DP”), taking effect  on 1 June 2007. A2C are of the firm view that the joint venture withFNP will bring several market advantages including adding significant dairy industry knowledge, retail grocery expertise, and extensive management experience to our Australian operations. 

Moreover, A2C will also benefit from the joint venture by accessing FNP’s milk supply through its majority shareholder. In addition, FNP currently distributes an extensive range of functional foods including the brands Freedom and So Natural, with exclusive rights to the ‘Thorpedo’ brand of food and nutritional products which are widely distributed in Japan. FNP’s business in Japan is operated through a relationship with the major functional dairy group Yakult Honsha. A2C is excited about the potential that access to one of Asia’s largest markets might bring for the growth of its premium milk products, and this does present a significant opportunity to accelerate the expansion and growth of the Company’s business in the wider Asia-Pacific region.

A long established participant in soy and rice beverages in Australia with a prime focus on whole  bean soy products FNP is highly regarded as a contract packer to the liquid beverages and foods industry. FNP supplies packaged product to all the major retailers and a number of blue-chip marketing companies. FNP is also active in the canned seafood market through its leading Australian canned salmon business, Paramount Seafoods, and strategic alliance with Bumble Bee Seafoods, the world’s largest full line canned seafood group, as well as Brunswick Seafoods. 

Accordingly, the Board of A2C has the strong belief that there is a natural fit between A2C and FNP’s focus on functional and nutritional products. FNP’s strategy is to build a leading position in functional and nutritional foods in Australia and targeted international markets through a concentration on brand development, product innovation, sales, marketing and distribution. FNP also sees the joint venture with A2C representing a significant step in its strategy to invest in unique and specialised nutrition segments identified for future growth, as well as strengthening their Australian and potentially Japanese presence. Importantly, both A2C and FNP share the view that this partnership will help expand the distribution of a2  Milk™ into further Australian states and cities, as well as the development of new product lines and export initiatives.

NORTH AMERICA

A2C continues to view North America to be one of the most important markets for the Company and in the financial period in review we saw significant progress made. The commercialisation of A2C’s technology in North America is conducted through associate company A2MCo, a 50:50 joint venture with IdeaSphere Incorporated (ISI). ISI is a manufacturer and distributor of over 200 nutrition products including tablets, capsules, powder drink mixes, nutritional snacks and bars as well as high-quality, ready-for-sale natural and organic vitamins, and nutrients. 

This includes the Twinlab business, an internationally recognised leader in the health and wellness industry. Twinlab is a 35-year old brand comprised of time tested, high quality daily health and conditionspecific nutritional products. ISI also is closely affiliated with Rebus, a leader in health education and publishing. ISI has a leading management team including Executive Chairman and CEO Bill Nicholson, President and COO Mark Fox and Anthony J. Robbins – Vice Chairman and Chief Marketing Officer. Bill Nicholson previously spent nine years as CEO of Alticor Inc., then known as Amway Corporation, where he led the company’s revenue growth from less than $1.0 billion to over $5.0 billion. Prior to Alticor, he served as White House Appointments Secretary to President Ford. 

He serves on the advisory board of Houston’s M.D. Anderson Cancer Center, one of the nation’s most prominent cancer research hospitals, and is a member of a variety of other corporate and civic boards. Mark Fox is a leader in the health and wellness sector, having developed business strategy and new ventures for leading companies in the health care sector, such as DuPont and WebMD. He is treasurer of the board of the  International AIDS Trust, a global initiative cochaired by Presidents Clinton and Mandela. Meanwhile, Mr. Robbins is a leader in the psychology of peak performance and personal, professional and organisational turnaround and was listed in 2002 as one of the world’s Top 50 Business Thinkers. He pioneered the life coaching industry 25 years ago. Following extensive research and several years of preparatory work, A2MCo announced in April 2007

“Naturally, the US holds tremendous potential for revenue growth and for expanding our business as it remains one of the largest and wealthiest consumer and beverage markets in the world.” Our joint venture partner in the US is ISI, a manufacturer and distributor of over 200 nutrition products including tablets, capsules, powder drink mixes, nutritional snacks and bars as well as high-quality, ready-for-sale natural and organic vitamins, and nutrients. Mark Fox, President and COO of IdeaSphere Inc., says that the a2 milk™ positioning in the US market through the distribution with Original Foods and Hy-Vee is just the right springboard for the company to move its products to even bigger markets. “The launch of a2 milk™ in the US has been a real success with the product resonating with consumers from Nebraska, Iowa, Kansas, Illinois, Missouri, South Dakota, to Minnesota. We have no doubt that this has already created significant momentum for the brand and product that will drive ongoing sales and revenue for A2 Milk LLC in the US. Furthermore we are particularly excited by the potential a2 milk™ offers in other food forms such as milk powders and baby formulas as they represent high value opportunities.”

A2 CEO, Anthony Lawler in a Hy-Vee store in Des Moines, Iowa. the inaugural launch of its premium a2 Milk™ into the US market through an exclusive arrangement with Hy-Vee, a leading supermarket chain which ranks among the top 15 supermarket chains in the US. The a2 Milk™ launch into the US is a major platform for growth and will allow the Company to take key learnings and expand the A2C proposition into other geographic regions of USA. A2MCo, in partnership with Original Foods Company LLC, launched a2 Milk™ product into Hy-Vee stores throughout the key US Mid-Western states comprising Nebraska, Iowa, Kansas, Illinois, Missouri, South Dakota, and Minnesota. 

Hy-Vee has sales of more than US$4.6 billion and over 200 retail stores across the seven important Mid-Western states. A2C is very pleased that it has established a foothold with its brand and milk product in the US market. The Mid-West states were an ideal first base from which A2MCo plans to expand its distribution in other states and regions throughout the US. Naturally, the US holds tremendous potential for revenue growth and for expanding our business as it remains one of the largest and wealthiest consumer and beverage markets in the world.

A2C now understands the US beverages market in detail via consumer and market studies as well as in depth discussions conducted with producers, distributors and retailers. These discussions have  served to raise the awareness of the potential offered by a2 Milk™, and this was underscored by the presentation of a2 Milk™ and its associated technologies to the International Dairy Foods Association (IDFA) conference held in Denver in June 2007. We look forward to extending a2 Milk™ beyond the initial select market of the Mid-West into other parts of the US which presently provides the best opportunity in the world to grow our product.

ASIA

The Company has continued to explore potential markets in the Asian region, with the establishment of an export subsidiary, A2 Exports Limited (A2E) to concentrate on this regions capacity for growth in the premium dairy beverage category. Key partnerships are in the process of formalisation and A2E is putting in place a supply chain and the logistics required to meet pending expressions of interest. Furthermore as discussed earlier, the joint venture with FNP will assist with opening up opportunities in markets in which FNP already have a presence through their existing businesses, such as Thorpedo nutritional products.

SCIENCE AND INTELLECTUAL PROPERTY

The Company has continued the development and registration of its key patents and wider intellectual property portfolio. This is in line with the intellectual property strategy of A2C, which will continue to provide protection and thus an advantage in commercial activities in growing new international markets. In addition, the Company has continued its programme of basic and commercial research and development (R&D) with the goal of further supporting the concepts from which a2 Milk™ stems. a2 milk™ on the shelf in a Hy-Vee store in Des Moines, Iowa. 

Further to last year’s report, A2C has initiated R&D programmes that serve to support the belief that a2 Milk™ allows the consumer to further realise the benefits that are imparted by the many components of milk. The outcomes of such programmes will be submitted for peer review and publication in international journals. Some of these outcomes will be directly applied to product development and commercial processes associated with the commercialisation of a2 Milk™ and a2 Milk™ products. In the past financial year the Company was granted a further US patent relating to the testing and breeding of a2 Milk™ producing animals, as well as patent rights in Asian territories that relate to the production and application of a2 Milk™.

Additionally, market and consumer research in the US led to the design and adopting of a new trademark for that market which will be tested and applied to existing and future markets. Patents and trademarks are regarded as highly significant factors in establishing the a2 Milk™ brand which play an immeasurable role in the successful commercialisation of our products in global markets. In addition, A2C is also actively pursing new product opportunities other than liquid milk particularly in the area of powders where the Company believes there is significant potential for a2 Milk™.

a2 Milk™ is an extendable product and so can be used in a wide array of functional milk-based applications such as infant formula, protein powders and dietary supplements. Moreover, these additional opportunities will enable A2C to launch shelf stable, high margin products, which will provide consumers  worldwide with the premium benefits of a2 Milk™.

CAPITAL RAISING

A2C has previously indicated that it was likely that a capital raising would be undertaken in the first half of the 2008 financial year. The Company will soon be in a position to advise the market about the approach A2C intends to  take following completion of an assessment of capital requirements based on the various projects currently under way or under investigation. Looking ahead, A2C is going to use the positive momentum from the last 12 months to invest additional capital to rapidly expand the business in the Australian, United States and Asian markets. 

LOOKING AHEAD

We pay tribute to the Board, management and staff of A2C for the tremendous commitment and service that they have given the Company in the last 12 months. While there is a still a lot to achieve on the journey to becoming a significant player in the premium beverages market, A2C is now more than ever clearly established on a robust platform from which it can grow its business across and into multiple markets. Where new opportunities and markets present themselves we are now better placed than ever to act quickly to realise and benefit from them. We also thank our loyal shareholders for staying with us on the journey and hope we can continue to report on ever more positive market developments over the following 12 months.

CLIFF COOK ANTHONY LAWLER

CHAIRMAN CEO

4 JULY 2007 4 JULY 2007